In-house counsel play an important role in ensuring their clients exercise appropriate corporate governance — “appropriate” being the operative word. Applying big company practices holus bolus to start-ups and small- to medium-sized enterprises can be as inappropriate as shooting from the hip and ignoring tried and true governance practices which have benefited companies as they have scaled.
In-house counsel should look critically at the role a board of advisers can and should play, and ensure if advisers are retained that the interaction between the senior management team and those advisers are managed to achieve the purposes for which the advisers were hired in the first place.
Advisers, unlike directors, do not have a fiduciary duty nor do they have a duty of care towards the corporation. Advisers are (or should be) typically hired after a skills assessment. Advisers primarily provide coverage where companies do not have the requisite skills or experience amongst their executives, directors or consultants. They can sometimes act as vested mentors, and they almost invariably are expected to provide introductions to potential investors, hires, customers, suppliers, etc.
We know that in practice SMEs are time challenged and resource starved. Executives and the rest of the organization are typically running flat out focusing on critical path items and removing obstacles in their growth path. Having to prepare monthly or quarterly “reports” to submit to the advisers, and ensuring they are received well in advance for a regularly schedule call to ensure proper “soaking time” is an additional burden which is sometimes not worth taking on.
Anecdotal evidence suggests advisers are listened to but their recommendations are not often accepted because the issues SMEs often grapple with are very situational.
The relative value of having a formal board of advisers can easily be overstated. Experienced investors doing due diligence can see through the list of impressive names on the board of advisers. They appreciate that advisers are usually very busy, juggling multiple roles and responsibilities, and that their net benefit to the organization will likely be in the form of introductions they provide, rather than mentorship or organizational support.
It is challenging for advisers to remain abreast of the day-to-day management of the company. In my experience advisers over promise and under deliver so their importance should be kept in perspective.
Meetings are difficult to schedule and often cancelled at the last minute, often written materials sent to the advisers are read half an hour before the call starts, if at all. Advisers are often too far removed from the details of the company to be much help.
It may be more prudent, at least early on, to have a set of informal advisers for the company to turn to on an ad hoc basis (i.e. resourceful people who are willing to invest their time, in the hope that they will be brought on as formal advisers (under contract) as the company grows).
Of course if the advisers are not used wisely and not kept adequately in the loop, there is a real risk they will feel disjointed from the organization and may drift away. Turning to the advisers often enough to ensure they feel engaged, and tapping into them when they can realistically provide support, is surely a balancing act.
An added benefit of turning to advisers on an ad hoc basis, at least initially, is that it affords the SME and the advisers an opportunity to develop a working relationship prior to entering into a formal adviser agreement in return for consideration. There is nothing worse than signing up an adviser, giving away a percentage of the company, and realizing that adviser is not up to snuff.
It is prudent to enter into adviser agreements with a fixed duration of say one or two years and then expire unless they renew. It is much more palatable to not renew an agreement than to have to terminate the agreement both from an internal and an external perspective.
Whether the relationship is ad hoc or formalized, it should be made clear exactly why the adviser is being brought on board, what is expected of him or her, as well as what is not expected. Advisers never have a say regarding the day-to-day management of the company.
Very few companies pay advisers cash. SME advisers are typically offered between 0.10 per cent of the company’s equity up to a maximum of two per cent. In an early-stage start-up, they are usually offered 1.5 per cent to two per cent because as other investors are brought on board the advisers will suffer dilution.
There is usually more work to be done with an early-stage start-up so the options granted tend to be on the higher end of the scale. The percentage should also reflect the contribution the adviser is expected to provide. In other words, the greater the contribution and roles assigned to the adviser the higher the stake and vice versa.
The structure of the compensation varies widely. The stock typically vests over two years, on a monthly basis, with a one-year cliff.
For a small start-up the ideal number of advisers is three — two advisers will try and find common ground, as will four, and five is much larger than most start-ups need (unless they are predicting explosive growth), and much too time consuming and unwieldy.
Determining whether to have a board of advisers, and if so whether the relationship should be formalized and how, are critical questions which in-house counsel need to participate in.
In practice, SMEs may be forced to create a board of advisers sooner than they would like to. Investors and government funding institutions may require the organization have an independent group of advisers as a pre-condition to funding. Even then, in-house counsel can ensure that advisers are used to the company’s advantage rather than becoming a burden by helping to define expectations, provide advice on renewals, expectations, and ensuring that the level of “reporting” is adequate for the company’s purpose, and not a drag on future growth.
