They save it for financings and want to control the business. Another cost consideration is the size of the board. In line with this research, the BDC Study found that advisory boards were an average size of five. For an established company, equity makes little sense since they can pay in cash.
However, a startup may be tempted to offer a few percentage points in exchange for access to big-name advisors. Founders should tread lightly here. It could be a red flag if an advisor insists upon a large stipend or a decent chunk of equity immediately. In situations involving equity, I recommend that advisor relationships start out in a honeymoon phase, with equity available only after the advisor has provided tangible value and vested upon specific milestones.
Given these supposedly generous terms, the advisor quickly agreed. However, issues arose when it was time to formalize the deal.
Alternatively, current employees, new hires, or third-party services could potentially get the job done better and faster. Therefore, advisory board members should possess an x-factor, such as an exceptionally valuable network or experience.
However, we can borrow from ROI frameworks used by companies considering customer advisory boards to engage with current and prospective customers. As such, analyzing ROI for advisory boards should be treated as analyzing any other project in corporate finance.
From the advisory board, the company hopes to receive: 1 three new distribution leads from the advisory board, 2 connections into influencers in the space, including social media influencers or simply those known in the industry, and 3 positive PR around the advisory board to drive website visits and social media engagement.
The board is set to meet five times in the next 18 months. In this example, the company would yield a significant ROI if the board lives up to its expectations. Costs are fixed and in the control of the company, whereas the upside can be exponential. If the company is hiring people for the new product line and is unsure about how to engage distribution channels, then an advisory board could prove valuable in ways not understood at the outset.
These can include introductions to highly qualified potential employees, insights on go-to-market strategy, and pricing and scalability recommendations. The following include situations where a company might benefit from an advisory board:. After performing the ROI analysis and deciding to move forward, use these steps to get the process moving. The first step in the plan needs to identify what the company needs to achieve with an advisory board. The more specific, the better—a measurable strategic outcome is ideal.
Figure out how these goals are tied to mission, vision, strategy, and milestones. You will also need to determine if the time and expense of organizing an advisory board can provide a substantial positive ROI. Next, the company needs to draft written profiles of ideal candidates. A highly functioning advisory board will have a diverse set of views where the advisors can learn from one another.
Once the profiles are written, then an advisory board job description can be drafted for recruiting and informing candidates on roles and expectations. This step is important since it lays the groundwork for finding who is needed versus already knowing a qualified candidate and reverse-engineering a profile to fit their background. With these documents prepared, it is time to identify candidates to fill the roles.
As mentioned previously, prospective board members should not have a pre-existing relationship with the company or its management team—these people are essentially already informal advisors! Like all good sales processes, the time is now. Utilize your candidate profile and job description to reach out to candidates and strike up a dialogue. Only after engaging with multiple candidates should a decision be made. For one, it allows the company to absorb some knowledge during the recruitment process.
Second, it ensures the right fit personality-wise. Make sure to thank the other candidates who were not selected and let them know that you would like to stay in touch.
These budding relationships may prove valuable someday. When candidates agree to join as advisors, it is important to have them sign a job description or a memorandum of understanding. While advisory boards can be informal, it is important to utilize formal documents to set the tone and demonstrate the seriousness of the board. The agreement can be a simple one-page document outlining compensation and a set of expectations around time commitment and participation.
The efficiency of the advisory board will be influenced by its size. If you appoint enough advisors to constitute an advisory board, we generally recommend that it not exceed five to eight members. An advisory board enables the company to create an independent forum to test ideas, discuss strategy and receive counsel and focused input from experts. This allows a company to enhance its reputation in the marketplace, show credibility with current and potential investors, increase customer confidence and attract talent.
The advisory board also has the potential to serve as a source for future members for the board of directors. Also, the advisory board can be an independent safe place to discuss the company's strategies and difficulties, helping the board of directors to think imaginatively and avoid groupthink. In other circumstances, advisory boards are used to incentivize well-networked thought leaders in a market segment to accelerate introductions to potential customers, suppliers, vendors, channel partners or talent pool.
We generally recommend that companies implement an advisory board during the good times. It is far easier to attract advisory board members when a company is not struggling. Moreover, this gives the advisory board members plenty of time to learn about your company without having to worry about putting out a fire. Having an advisory board well in place when the good times start to turn grey may help right the ship's course. Advisory boards are inherently flexible, so creating them is a fairly straightforward process.
I strongly advise an explicit tenure e. Terms should probably be for one to two years. 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.
Offering equity allows you to require an advisory agreement, which can clarify expectations and offer important intellectual property protections for the company. Advisor equity commonly ranges between 0. Another way to think about it is that startups are extraordinarily unlikely to achieve a meaningful liquidity event. 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. For one thing, value is in the eye of the beholder and many startups are overvalued and advisors know it. In my opinion, advisor equity should be in the form of common stock options. And as long as the option strike prices are properly set e. 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. 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.
You need an advisory agreement for any advisor who will receive equity. There are many reasons to put it in a legal document:. Sophisticated ones will almost always balk at some or all of those provisions.
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 vanishingly small.
If you construct appropriately narrow provisions, then you can probably protect yourself against the actual bad actors without capturing the 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. Here are two good ones worth considering:. 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.
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? For example, I recommend monthly calls and quarterly in-person meetings with your advisory board. 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.
Most advisors help companies at least in part because they enjoy it. 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.
Advisors can be a critical resource for startup teams. Yet many founders make strategic errors in assembling and managing their advisor group. My advice is to treat it as an important initiative that will require time and energy to achieve full potential. Register Now. What is an advisor Do advisors invest in the company? Why you need advisors Real life examples Helpful mentors dramatically increase fundraising success Why you need REAL advisors What to look for in advisors Forming your advisory team Advisor Compensation Advisor contracts Maximizing advisor contributions What is an advisor?
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. What advisors are not Advisors are not mentors , at least in our lexicon.
Do advisors invest in the company? Are advisors important? 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.
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