How Startups Can Best Leverage Their Strategic Advisors and Investors

Rebecca Mitchem -

No matter whether you’re the founder of a seed- or Series D-stage company, you’re probably interested in finding quality strategic advisors and/or strategic investors. While these relationships can have meaningful benefits for your company, they can also create disappointment or future headaches.

Before we get into the advantages and potential pitfalls of these relationships, let’s better define strategic advisor and strategic investor for the purposes of our discussion.

Getting on the Same Page

For our discussion, a strategic advisor is an individual champion who a startup can leverage for expertise or access to a specific network—generally a customer network. Strategic advisors are commonly either 1) experienced entrepreneurs who’ve sold to similar customer bases or 2) a senior executive at an existing or prospective customer who is a strong advocate of your technology.

A strategic investor is a firm that is a likely customer of the startup and could potentially acquire the startup to fill a strategic product or technical need. For example, if your startup sells into the automotive industry, a strategic investor for you may be Tesla, Volvo or GMC. A strategic investor may also be Amazon or other large tech giants who have offerings related to automotive technology.

There are many potential benefits of these relationships. For example, a strategic advisor can provide warm introductions to potential customers in their network, can lend their specific expertise to the company or can introduce the startup to potential talent. A strategic investor can also add value to the startup, including providing credibility to other potential investors and customers or by providing financial backing that may ultimately turn into an acquisition of the startup. These advantages are generally well-known. In contrast, the pitfalls of these relationships are less obvious.

Structuring Relationships With Strategic Advisors

There is some important context to keep in mind regarding strategic advisors. On average, these people are very busy, often having a full-time job elsewhere and also potentially advising multiple companies at the same time. They’re likely time-constrained, and while progressing your company is the most important objective for you, it falls in a list of other priorities for them. This doesn’t mean that they cannot be valuable, but it does mean that you should structure your agreement with them thoughtfully.

Here are a few best practices to ensure the relationship operates smoothly and that your company benefits as intended.

• Always have a term limit for your strategic advisors (e.g., 12 months). You can always extend if they are providing real value; however, it’s very difficult to “fire” a strategic advisor who isn’t performing for you. If you have an open-ended engagement, you often find they’re on your payroll for much longer than expected because you don’t want to hurt the relationship by terminating the arrangement. Different types of advisors are needed at varying stages, and it’s OK to set the expectation of a term limit ahead of beginning your engagement.

• Instead of solely paying someone or granting equity based on time served, try to tie compensation to a success-based metric. For example, the advisor gets paid or equity based on customer introductions or customer contracts closed. If this isn’t an option, try to spell out more specifically how much of their time you expect to receive. For example, you will have at least one 60-minute meeting each month they are an advisor.

Something else to keep in mind is that having a strategic advisor as a potential customer may mean they must recuse themselves from decisions relating to purchasing your product. If it’s more valuable to have them in the room advocating for you, it may make sense to hold off on a formal arrangement.

Best Practices to Consider With Strategic Investor Relationships

The potential pitfalls are a bit different with strategic investors.

Before diving in, it’s important to note that, often, the strategic investing group is completely separate from the group you partner with commercially. These two groups may or may not have strong working relationships, and, generally, the investing team has little to no influence on the ultimate decision to buy your product or expand your commercial relationship. Set your expectations accordingly with regard to the investing team’s influence on business decisions.

As with strategic advisors, there are a few best practices to consider when bringing a strategic investor onto your cap table.

  • If you’re going to bring on one strategic investor, try to bring two to three instead. If you only allow one to invest, it may discourage others from building strong relationships with you because they are worried about your closer ties to one of their competitors. In other words, it may create an optics problem for you.
  • Limit strategic investors to information rights only regarding company performance and objectives. Where absolutely necessary, consider giving them a board observer seat but not a voting board seat. If you have a strategic investor on your board, it can make board meetings and board management more difficult. The investor will need to recuse themselves from many strategic initiative conversations concerning themselves and/or their competitors.
  • A strategic investor may ask for certain M&A rights. For example, they may ask for 30 or 60 days to match or beat any M&A offer the company receives. Giving away these rights can muddy the waters for later M&A discussions. More specifically, giving away these rights may 1) delay any future M&A outcomes and/or 2) discourage strategic investors who don’t have preemptive rights from putting in an offer because they may ultimately do all of the work and lose out to the one who does have those rights.

All in all, both strategic advisors and investors have an important place in the startup ecosystem and can be strong champions of your company. It is important, though, to thoughtfully approach these relationships to set expectations appropriately and set up the relationship for success.

A version of this article originally appeared on Forbes