There is a lot to say about #startup Advisory Boards. It has become a very frequent topic of conversation with the founders that I meet. I wrote about this subject in 2013. Here is an updated version because the 12 points seem just as crucial today:
The Big Picture
- Advisory Boards can not only give startups great advice and access, but they can also serve as resources that are always “there for you”. But, in the vein of “take advice, don’t follow advice”, a Founder/CEO should balance the information they get from their Advisory Board, using their own expertise and the confidence they have in both, their own and their team’s abilities. The point is that you don’t want to put blind faith or be seen to be too reliant on your Advisory Board.
Advisory Board Basics
- You can have an Advisory Board at any stage.
They can add value to the smallest startup as the same to large public companies.
- The Board part of the title can be a misnomer. The reason is because many Advisory Boards rarely meet as a collective entity. They mostly maintain one on one bilateral relationships with the CEO. Communications tend to be exclusive with perhaps monthly preset check-in calls but with a verbal understanding at the very early stage; transitioning to written expectations of time commitments at a later stage, like frequency of meetings and hours per month. However, in my experience, there are startups that get the most benefit from the Advisory Boards and try to get them together in person 2 to 3 times a year. Meetings can help keep all the members on the same page, allow you to benefit from them, help obtain sparking ideas off each other, and essentially (assuming you have a cool group) help make for an enjoyable/stimulating experience for them that will keep them engaged.
Structure and Benefits
- Vanity Advisory Boards are a very bad idea. What I mean is having lots of names of “important” people on your website that do very little for you. So if investors (or actual/potential customers in a B2B context) ask to talk to your Advisory Board members, as part of their due diligence, it will become clear that they have no meaningful role, which will send a pretty bad signal. Particularly, this is the case if you put those names with a pitch you’re delivering to investors. By representing them as being part of your team when they aren’t . . . well, let’s just say that you should be more accurate with the truth. You should have an Advisory Board that really does work for you, or just don’t have one at all.
- A CEO/company who establishes a strong functioning Advisory Board has multiple wins. First, it’s obvious that you get advice from folks who are consistently involved and add value in areas that are key to the CEO and the business, which also sends positive signals to potential investors (and customers) to the effect that, in addition to that valuable advice: a) You can identify and engage with experienced individuals relevant to your business, which says something about your people skills and judgment. b) The fact that those people are willing to commit time to support you and your business is a form of social validation in itself.
- A well-constructed Advisory Board is composed of people with diverse skills/experience that are relevant to the CEO/founding team. This means that they can support the company’s progress in clearly defined areas like finance, customer acquisition, marketing, scaling, technology, and more; or for example, those who have broader experience, like a former CEO in the space who has scaling experience. How do you find these wonderful people is a key question in my view; in other words, don’t start with the easy wins of people you know but rather define what attributes you want on your advisory team, so you can draw up an aspirational list of people that fit those attributes; people who you likely don’t know but can be accessible, so you can try to hunt them down.
- It’s better to have 3-6 strong engaged players than 7+ not very engaged people. Since startups are ultra-time starved, work with a small number of committed partners who can give you time and add value and avoid everyone else! By having too many members, a CEO will make declining engagement a self-fulfilling prophecy, simply because she/he will not have the time to interact with all the Advisors at a meaningful level. (See 4. above.)
- Advisory Board members should expect, and be used, for their full network; no matter what role they fill. Use each Advisory Board member to the fullest. The person who has a clear role as your financial expert may have valuable connections to the media, to other domain experts and so on. One thing to be cautious of is having a known active investor as an advisor, but who is not him/herself an investor in your company because it can also send a bad signal for obvious reasons; not in my view, since that individual’s personal investing can be clearly focused on another area of domain knowledge or expertise.
Formal vs Informal
- These boards are usually pretty informal at the early seed stage, so at and shortly after friends and family financing. What this means is that Advisor relationships are based on a verbal understanding of time commitment and responsibilities. I see no issue with this; it’s best to avoid red tape at all costs.
- By heading to the A stage and beyond, they become more formal. This too makes sense in my view. Having written Advisory Board contracts is the way to go as the business develops. Law firms can provide standard versions of contracts, which should have specified time commitments (at a minimum), include legal language on confidentiality, and can include written details of what each Advisory Board member is expected to contribute.
Compensation
- Advisory Board positions are typically not compensated at the very early stage. This plays a part of the informality mentioned above. There are willing supporters who do it for a single reason; they do it because they have faith in the founding team and want to support it.
- At the Advisory Board contract stage, compensation will start to make sense. The business will advance you up the level of professionalism in all areas; this should also include Advisors. Advisory Board compensation is a matter of agreement, but I begin from a position that early stage full Board members (who are not founders/VCs) typically get 1% of equity through options vesting over 3-4 years. An Advisory Board member will have less time to commit and no trusting responsibility, so it’s logical that he or she should get paid less. How much less? A minimum of 0.10%/year seems fair enough; maybe more, even much more, depending on the member’s contribution. Again, this is a matter of agreement and also the size of the expected benefit to the company. You should note that this is not a fee for “showing up” or answering the email/phone from time to time. Optimally, the compensation should be tied to specific deliverables and with the options being granted on appointment, but not vesting until a later date, like one year. There’s typically no cash component, except for reasonable expense reimbursement. The best recompense for Advisory Board members is through direct connection to the value creation process.
Image credit: CC by Landscape100
