The complete guide to forming and managing an advisory board
Building a successful business is really hard. So you should do everything you can to improve your likelihood of success. Startup advisors often play an important role in improving the speed and outcomes for the startups they advise. This article explores what advisors are, what they do, and how to get the most out of them.
Startup advisors help management teams make better decisions, move faster, and improve outcomes. Examples of the sorts of things advisors often help with include:
Advice on business model strategy and positioning
Advice on key areas of the business (e.g., user acquisition, product architecture)
Honing your pitch decks and presentations
Introductions to potential investors
Introductions to key customers
Help identify and recruiting talent
Acting as a sounding board for organizational and people issues
Advisors are almost always experienced business people or domain experts who know things or have relationships the startup management team doesn’t.
What advisors are not
Advisors are not mentors, at least in our lexicon. Mentors offer personal support and advice to entrepreneurs, not to the broader company. Advisors work on behalf of the company and all of its shareholders.
By definition, advisors are not employees. To the extent they formally engage (the relationship is often informal), they are independent contractors.
Legally and practically, advisors are not board directors. Directors also advise and support the company, but the context is quite different. Board directors have a legal status that comes with certain rights and duties that don’t accrue to advisors. Directors have the right to contribute to decisions about the strategy and operations of the company, and a right to be informed about the company. They also have a fiduciary duty to act on behalf of the interests of all the company’s shareholders, ensure they remain suitably informed about the company, and a duty of care in performing their duties. Advisors have no such duties or rights outside those expressed in a written advisory agreement.
Because advisors are not employees or directors, they often act more like mentors—meaning they emphasize the interests of the management team over the other shareholders. For that reason, in many cases entrepreneurs find they can be more open with advisors and more easily avoid conflict with them when dealing with high stress situations.
Do advisors invest in the company?
Advisors may invest in your company as well. Many of them are wealthy, and if they’re interested enough in what you’re doing and believe enough in you to actively help, it shouldn’t come as a surprise when they ask to invest.
But there are many reasons why advisors might not be able or willing to invest. Some simply don’t have the cash. Others might have external constraints that make it too difficult, for example corporate employer policies on equity holdings, or venture capitalists who have to avoid even the appearance of conflict for LPs and partners. Frankly when you’re early on, many advisors are waiting to see where you get before they decide to push any cash your way.
It’s trite to say (as some do) that entrepreneurs shouldn’t engage advisors who aren’t willing to put some money into the company. There’s almost always a point on a company’s path when it’s interesting enough for some advisor attention, but still too uncertain for them to risk cash on it. Cash is emotionally and practically different from time, particularly for non-entrepreneur advisors who may not have as much experience with risk capitalization.
Advisors who do invest are very often more engaged and attentive, so it’s almost always a good thing when they do. One potential downside is that advisors who invest sometimes begin to feel that you have an obligation to listen to their advice, or even an obligation to heed it.
My advice generally is to first focus on the value contributions and working relationship you have with advisors. Any conversations about investment should flow naturally, and should be viewed in the context of their advice more than their money—unless of course they are sophisticated investors with enough capital to really move the needle for you. And don’t exclude promising advisors just because they won’t invest. In the end, there are no hard and fast rules here, and you should constantly seek to optimize for a faster, better outcome.
Are advisors important?
In a word: yes. The right advisors engaged in the appropriate way can dramatically speed progress, reduce risks, and increase your likelihood of success. Changing the way things work (e.g., creating a new business model), inherently involves a level of complexity that requires diverse expertise and difficult problem-solving. Advisors can offer operating experience and insights into areas of expertise that you’re very unlikely to have available on your early stage team. Those insights can have a fundamental impact on your company.
One of the most important things a good advisor will do is force you to reconsider your assumptions. It seems intuitive that diversity improves decision-making by bringing to bear differing perspectives. That’s true, but it doesn’t tell the entire story. Research out of Kellogg School of Management demonstrated that:
“Diverse groups outperformed more homogeneous groups not because of an influx of new ideas, but because diversity triggered more careful information processing that is absent in homogeneous groups.”
Real world examples
The product did too good of a job
In 2008, I was doing a startup turnaround as CEO of a recruiting technology venture portfolio company. I had no experience in recruiting at the time, hadn’t been part of making the original investment, and stepped in as a venture capitalist on behalf of my firm to try to fix a company that was quickly headed in a bad direction.
We made a seemingly impossible turnaround on the product in six weeks (the product team I brought in was amazing). But we were surprised that the recruiters targeted by our product were ambivalent about it. It was one of our advisors who pointed out a perspective that seemed alien to us: our product was doing too good of a job. Recruiters report their value to their bosses in part by filtering thousands of resumes into a much smaller set of good candidates. Our product automated a lot of that work for them, giving them more time to be good at the parts of their job only a human could perform. But because it made them feel left out of the loop, they felt threatened and diminished by it.
The solution was fairly quick and easy; we built in more participation and choices on their part, and ensured all the reporting showed the scale and complexity of the applicant funnels they were managing. Their satisfaction immediately improved.
As performance-driven entrepreneurs without an insider perspective we would likely have remained blind to the recruiter concerns until it was too late. Score one for advisors.
Near premature scaling
A number of years ago I was on the advisory board of a startup operating a two-sided marketplace connecting small businesses and consumers. Registered user growth was strong, and CPAs (Cost Per Acquisition) were in line with industry averages. Unit margins were good, and NPS (Net Promoter Score) was great. It was early and low scale, but the founder was convinced things were working well enough to ramp up growth by increasing spending on acquisition.
However, I was concerned the acquisition model wouldn’t scale—it relied too heavily on street marketing by the team, which I believed was artificially skewing the CPAs down. I also was concerned that the CAC (Customer Acquisition Cost) was higher than it should be because consumer geographic demand had to match the small business supply geography, which often didn’t occur. In other words, newly registered users often couldn’t convert into a paying customer due to lack of local coverage. And finally, I thought they should factor in the cost of acquiring the other side of the market (their small businesses) into the equation because it was very costly, and the volume per business location was too small to justify the volume they generated on the consumer side.
I recommended a strategy of focusing intensely on each geographic area to create a sustainable cycle instead of trying to scale more broadly. At first, the team pushed back. But as they looked further into it, they saw the risk of premature scaling. They paused a planned funding round, and refocused on achieving sustainable metrics. Within a year the business was humming, and they later sold to an acquirer. But things could have gone a very different direction had they attempted to scale before resolving the core unit economic elements of the business.
Scale can sneak up on you, too
This next example shows the other side of the scaling dilemma. This founding team was purchasing goods at Costco for resale to their corporate customers. It was intended to be temporary: an expedient way to learn what worked without too much up front cost and complexity. Their instincts were right, but they hadn’t done the math or thought through the implications of switching their process too late. We pointed out to them that:
Their volume was low, but growth seemed to be reaching an inflection point
The time and energy to set up wholesale sources would be very painful if the transition occurred when they were already at scale
The payment timing for Costco (immediate, or at least 30 days on a credit card) was generally worse than they could get working with a wholesale provider
Costco shopping wouldn’t scale (nor would their credit card)
Costco prices at scale would significantly impair their working capital cycle
The limited choices at Costco constrained their ability to effectively test demand
Thankfully, the team listened to us and acted quickly. Within a few weeks we had them set up with wholesale vendors who extended them credit based on our relationships with them. It was disruptive, but manageable at their then current scale. The result was a significant improvement in margins and cash flow cycles, as well as further increases in growth because the founders could spend more time selling—and less shopping. If they hadn’t made this change, they would have quickly run into a wall where their working capital was insufficient to support continued growth, but it would have happened without enough warning for them to raise the capital needed to support continued operations. Thankfully they avoided that existential threat, and continued on to grow 11x in top line revenue over the next 12 months. Cash flow was really tight, but they made it happen.
Examples like the above are probably why startups with helpful advisors raise so much more money than ones that don’t. The Startup Genome Report shows that average funding raised by stage was dramatically higher for startups with helpful advisors.
Funding raised is a reasonable proxy for startup success and progress. The findings from the Startup Genome Report imply that beyond validation stage in particular, startup advisors add tremendous value. In fact, it appears that startups that “don’t have helpful mentors” don’t raise any money at scaling stage—another way of saying that most never get there.
It’s all about REAL advisors
Unfortunately, many founders seem to think of advisors as more of a checklist or branding exercise than a real resource. We regularly see advisors listed in pitch decks only to find later that the advisors have virtually no interaction with the team.
Starting up is hard, lonely, and often frustrating. It often feels like the world just doesn’t understand the potential for what you’re working on. That’s probably why so many founders treat advisors as a sort of endorsement or validation, particularly early on. “Take me seriously, look at my advisors!” or “You know I’ll be successful with advisors like this!”
The problem is that advisors do no good unless they’re actively engaged. What sort of endorsement is it to have a headshot in a pitch deck, but the advisor isn’t willing to take the time to actually help? And what good will an amazing advisor do by merely appearing in a pitch deck and taking a call or two?
That’s why having inactive advisors in a pitch deck is a form of vanity that at best offers no real benefit, and at worst reflects very poorly on founders. Venture capitalists are very likely to check in with your advisors—we certainly do—and it’s quite awkward for entrepreneurs when we find that the advisor almost never speaks to the team. We occasionally find that the advisors don’t even recall the company or the team and is confused as to why we’re asking about them. That’s a sure-fire way to eliminate your fundraising prospects with that VC.
The lesson here is simple: have (and list) only real, engaged advisors.
What to look for in advisors
Founders too often look for obvious or flashy advisors rather than focusing on finding the ones who will add the most value to the business. Another common mistake is settling for the most readily accessible people instead of taking the time to identify and cultivate relationships with the most valuable advisors.
As we said previously, flashy but uninvolved advisors aren’t helpful. Poorly suited advisors can be even worse. That’s why I recommend a thoughtful and planned approach to identifying and recruiting advisors. I recommend looking for advisors who:
At least understand the realities of running a startup (some should be seasoned startup executives)
Have a deep understanding of the domains that touch upon your business (e.g., technology, industry)
See the world differently from you and from each other
Know people, particularly people you don’t know who might be useful
Aren’t afraid to challenge you and ask tough questions
Have the time to focus and actually help
Share your passion and are inspired by your vision
And don’t forget about actively incorporating diverse perspectives. It can be incredibly eye-opening (and value creating) to witness a very different perspective being laid out before you.
Some checkboxes you should probably be able to check in terms of advisors:
Someone who has successfully built a company with a similar business model and customer (e.g., enterprise SaaS)
A veteran of your target industry who knows the prevailing attitudes and many key players personally
A customer meta-expert: someone who really understands how your target customer thinks, feels, and behaves, and preferably is also one of them
A serial entrepreneur who knows the ins and outs of building startup teams, operations, and cultures
A technology or product expert, preferably with experience building teams
Forming your advisory team
Attracting advisors is similar to seeking funding; you have to inspire them with excitement about the vision for what you’re doing. Transactional advisor relationships are unlikely to work well. After all, startups are highly risky and unpredictable. Convincing an uninspired advisor to help—and potentially expose her brand and network to risk—via transaction is unlikely to happen. Vision is a critical component of a successful entrepreneurial venture. You’ll definitely have to bring it out to attract quality advisors.
It also often takes personal interactions over an extended period of time to instill a sense of excitement in potential advisors and to identify the ones who can actually help you. That’s why I recommend building your advisory team gradually over time. Building gradually helps avoid bringing on poorly fitting advisors and enables you to avoid the clutter imposed by unnecessary advisor interactions. Time is precious, and you certainly want to avoid too much management overhead in the formation and maintenance of your advisory team.
Evolution of your advisory team
I tend to think of advisors existing at three distinct levels:
I also tend to think about forming your advisory team in the context of slowly building from level 1 to level 3 above.
Your advisory network comes first. It’s a relatively broad set of people who have an expressed or at least implied willingness to offer advice and assistance to you. How do you find these people? I recommend constantly asking people for advice. Invite the smart ones to your advisory group.
Probably the best way to interact with this network is via regular (quarterly) emails supplemented with targeted asks depending on needs and advisor capabilities. The regular emails should keep the advisors abreast of what’s going on to keep them engaged and reduce friction when you do get around to making asks of them. These regular communications can also incorporate your most important general asks. On top of the regular emails you can reach out directly to appropriate members of the advisory network as needed.
As I mention later in this article, your advisor network members shouldn’t be compensated, and shouldn’t be asked to sign advisory agreements or NDAs. It’s just not worth the cost and complexity for you or for them. If there’s something you’re worried about sharing with them (you probably shouldn’t be), then be careful sharing it or tone down the details.
Your advisory network is most likely to offer fairly passive and infrequent contributions such as pointing out interesting companies, a few introductions, and general ideas and feedback. When members of the network come to you with more specific contributions, consider moving them to an advisor role.
One minor risk that’s worth pointing out is that if you have an advisor who engages too deeply, and starts to feel that she has made meaningful intellectual property contributions to the company, you could find yourself in a legal dispute about IP absent an advisory agreement. That’s one more reason to consider pushing someone to advisor status if they’re becoming more active in helping you.
Your advisors should form naturally from your advisory network. These will be the people who provide the most value to you, both because their capabilities match your needs and because they reliably offer assistance—and come through with it.
Advisors may or may not be compensated, as mentioned later in this article. In many—in my experience most—cases advisors are doing it because they like to help, not in the hopes of compensation. But in the end, I recommend compensating your advisors for reasons discussed in later.
As you get to know your advisors you will start to identify a few who can stand out for their advice and assistance. It tends to happen naturally due to the nature and direction of your business. That’s when you might consider adding an advisor to your advisory board.
Your advisory board should be formed of key advisors who agree to engage on a regular cadence for a specified tenure. This board should have a regular call and meeting schedule—perhaps monthly calls with once quarterly in-person meetings. The board should be small enough to be nimble, but large enough to offer the key expertise and experience that you need during any given time period. That usually means between 2-4 people.
The tenure of members of your advisory board should map to likely evolutions in the needs of your business. I strongly advise an explicit tenure (e.g., not open-ended) for several reasons:
Your needs for advice and assistance are likely to evolve over time
It sets expectations in advance, and makes it much easier to transition people off as needed without offending them
It constrains their commitment, making it more likely for busy people to accept the role
Terms should probably be for one to two years. If you have a near-term need that’s unlikely to persist, one year might work. Otherwise, two years probably makes more sense because things always seem to take longer than you think, but two years probably offers enough time to get a lot of value out of an advisor.
As I mentioned previously, you should generally expect to compensate your advisors with some equity. I do not advise offering equity to your advisory network; presumably they will accept this light level of engagement without an expectation of compensation. It would also be hard to justify the cost in both equity and time (and legal costs) of offering equity to a fairly broad set of people in an advisory network.
Your advisors, and certainly your advisory board, however, will probably expect some equity. And even if they don’t, there are good reasons you may want to give it to them. Offering equity allows you to require an advisory agreement, which can clarify expectations and offer important intellectual property protections for the company. If you have an advisor who’s clearly adding value and appears to be a level-headed, reasonable person, you probably don’t have to worry about getting her under contract. But less sophisticated or rational people should probably be under contract—or maybe shouldn’t be advising you at all.
How much equity do advisors get?
Advisor equity commonly ranges between 0.10% and 0.25% for a (typical) two-year engagement. In unusual circumstances it can be much higher: 1% or more. Generally I think it’s a bad sign if an advisor expects too much equity. It implies she doesn’t assign too much value to the company, and likely means she isn’t particularly passionate about your vision.
The amount of equity that’s appropriate depends on several factors:
Stage / value of the company
Level of effort
Expected contribution of the advisor
On the other side of the coin, this isn’t a time to be an equity skinflint. I’ve already pointed out how much value an advisor can generate. So instead of thinking about how much equity you’re giving away, I’d recommend thinking about how much net value their participation will add to your company. If you give away $25,000 worth of equity, but see a $100k increase in enterprise value, you’ve made a good deal for everyone involved.
Another way to think about it is that startups are extraordinarily unlikely to achieve a meaningful liquidity event. But when they do have meaningful exits, they’re often really (really) meaningful. As such, I advise optimizing more for the likelihood of a positive outcome rather than the amount of it you own at the time. One-hundred percent of nothing is—wait for it… nothing.
To put things in context, for a startup with a post-money valuation of $10 million, a 0.10% award is nominally worth $10,000. If an advisor allocates three hours a month on average over the course of two years, that’s $138.89 per hour—theoretically. For one thing, value is in the eye of the beholder and many startups are overvalued and advisors know it. For another thing, advisors are typically awarded common equity, which is worth less than preferred equity, so it’s not as simple as multiplying equity percentage by post-money valuation to get the equivalent value.
Advisor equity structure and vesting
In my opinion, advisor equity should be in the form of common stock options. There’s no reason to add complexity to your cap table and voting structure by offering preferred equity to advisors. And as long as the option strike prices are properly set (e.g., at a reasonable fair market value at the time of award), advisors can expect to defer any tax payments until the time of liquidity. As always, consult your tax and accounting professionals and pay attention to regulatory elements such as 83b elections.
All advisor equity should vest. The timeframe should map to the expected time horizon for value creation, which is typically one to two years. I recommend a three-month cliff because there’s always a risk that an advisor won’t work out. And if that happens it’s likely to be obvious fairly quickly. A cliff enables you to end the relationship with the advisor with the three month window without losing any equity, and without having to deal with a hard to explain entry on the cap table.
Advisor equity should feature 100% acceleration on single trigger. In other words, if you sell the company before they’re fully vested, they should get everything they would have gotten over the entire vesting period upon sale. After all, they probably did their job, and there shouldn’t be an expectation for them to hang around to advise the new owners.
You need an advisory agreement for any advisor who will receive equity. There are many reasons to put it in a legal document:
Putting expectations in writing ensures clarity and a “meeting of the minds” about the nature and level of contributions that can be expected
A contract makes it harder for them to skimp on their duties
It shows that both parties are serious and actually committed
Establish clearly that the advisor is not conflicted, and that she will inform you if she becomes conflicted
A properly constructed agreement protects intellectual property that you may expose from them, or even receive from them (e.g., patentable ideas that by law can lose protection in the absence of NDAs)
It provides an opportunity to vest advisor equity over time, which is an important tool for recapturing equity that wasn’t really earned
Some advisors will agree to an NDA, IP assignment, and even non-competition without complaint. Sophisticated ones will almost always balk at some or all of those provisions. Venture capitalists, for example, generally won’t sign any of these sorts of provisions. We see so many deals and so many ideas that it’s far too risky to expose ourselves to claims of infringement. Corporate executives are likely to balk as well, for similar reasons. If you do end up at an impasse about any provisions like these, I would recommend dramatically narrowing the scope of your requested protections. The risk that any of your advisors will take advantage of you is small. And it’s nothing compared to the value they might create for you. If you construct appropriately narrow provisions, then you can probably protect yourself against the actual bad actors without capturing the 99.99% of good actors in your net.
It’s generally a good idea to seek legal counsel when constructing important agreements. A good lawyer, for example, can play a critical role in negotiating an appropriately narrow agreement for an advisor who is concerned about your standard provisions.
Alternately, there are standard forms that might work if you’re really tight on capital. Here are two good ones worth considering:
It’s not enough to just find and recruit advisors. You have to take the initiative necessary to maximize the value of their contributions. For the most part your advisors will be very busy, and it will be up to you to ensure that you pull the most value from them.
Just as importantly, you ought to minimize the management overhead associated with your advisory team. Startups feature a crushing enough workload as it is.
I’ve seen advice to focus on transactional engagements with advisors to minimize overhead. I think that’s a poor idea. Instead, a regular and thoughtfully managed advisor system can ensure that your advisors remain informed about what’s going on with your business and the industry, so you don’t have waste cycles on reeducating them every time you interact with them.
And a properly managed advisory board can offer a very strong incentive for busy advisors to brush up on things and bring their A-game to advisory board meetings; the last thing they want to do is look like an idiot in front of their advisor peers. And it forces you to think through your needs and goals in advance, which is likely to lead to a more efficient and productive meeting.
Advisors also tend to have strong opinions and inherent curiosity. And for many (most?) advisors, their role helping you is a rare chance to indulge in things that interest them rather than having to be disciplined about their own affairs. As a result, it’s not unusual for them to barge into areas of the business where they’re uninvited and maybe even unhelpful. At least there is a risk they won’t focus on the areas where you need them most.
That’s why I recommend some best practices for working with advisors:
It’s best to set a regular cadence for core interactions with advisors. For example, I recommend monthly calls and quarterly in-person meetings with your advisory board. This ensures that they can plan ahead to be available, and makes it easier for them to maintain an awareness about what’s going on. If you let things stretch too long between engagements, they’re likely to forget context, requiring inefficient catch-up cycles and increased confusion. That’s not to say that you shouldn’t reach out to advisors on an as-needed basis as well. It’s just that your ad hoc requests should be on top of regularly established interactions.
Share information in advance
You should prepare advisor briefs in advance of advisory board meetings—something like a board deck. You should also try to do brief write-ups before every meeting or call with an advisor to give them context. This ensures that you can spend your time creating value rather than catching up. Experienced business people are accustomed to walking into meetings well-informed.
Focus on specific issues / asks
Most advisors help companies at least in part because they enjoy it. And because they’re not involved in the daily activities of the business, they are often curious about how things work, and may have ideas about directions the business could go. I would recommend listening to whatever it is they want to talk about, but balance that with the need to keep them focused on the task at hand. That’s why your write-ups and initial framing of conversations should be very specific. I recommend listing the specific area(s) where you’d like their help, and where possible describe the options you’re considering. Once you’ve framed the issue(s), you’re much more likely to cover the things that matter most to you.
Advisors can be a critical resource for startup teams. Yet many founders make strategic errors in assembling and managing their advisor group. Don’t assemble a fake or perfunctory advisor team. My advice is to treat it as an important initiative that will require time and energy to achieve full potential.
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