There will come a day when your startup needs an expert perspective that doesn’t exist within your core team. Whether it be a regulatory hurdle, technical matter, industry connection, key hire or inside scoop, having a well-constructed advisory board will help your startup break through barriers and get to the next level. But like every key decision a founding team makes, be careful about potential pitfalls. The entrepreneurs and VCs we talked to offer tips to help you build an advisory board that truly works for you.
-- Jake
Startup advisors can fill critical gaps
For entrepreneur Margot Schmorak, recruiting a circle of startup advisors has been key to the growth of Hostfully, the San Francisco-based property management and guest experience software company she co-founded more than three years ago.
“It has helped us move faster,” says Schmorak, who is Hostfully’s CEO. “Our advisors act as an extension of our team — sometimes there are these hard decisions when you need to talk only to people you trust. Advisors are really, really great for that.” They can also give you a “third-party” perspective, she adds.
Building an active startup advisory board can help startup founders fill expertise and experience gaps. But as Schmorak has learned, there are pitfalls to be avoided.
How is a startup advisor different from a mentor or a consultant?
The term “advisory board” is somewhat of a misnomer as advisors generally do not meet as a group regularly and don’t have the legal and fiduciary responsibilities of a board of directors.
Advisors:
Tend to consult one-on-one with founders and executives as needed
Sign agreements with startups specifying their roles
Typically get compensated with equity (more on that later)
In contrast:
Mentors are unpaid and act in an informal capacity
Consultants can play a similar role as advisors but most often are hired to perform one or more specific tasks or projects and are paid in cash
When to start finding startup advisors
As an attorney who counsels entrepreneurs, Peter Szymanski says that advisors can prove most useful when a startup begins hiring key staff or needs to ramp up sales and partnerships.
“Recruiting an operations person who has a wide network can help you can tap into outside vendors and potential employees,” says Szymanski, founder of Silicon Valley Counsel. “Other advisors with industry experience and connections can help with partnerships and revenue growth.”
Some startups may want to bring advisors on board to tackle distinct challenges. For instance, an electric scooter company that’s trying to break into a new city may need an expert who knows how to navigate around regulatory roadblocks in its target market. Or a medical device maker could benefit from an advisor with connections to top academic institutions and government regulators.
Bring advisors on board to tackle distinct challenges.
Advisors can also help startups understand the ins and outs of legacy industries like insurance. Kelly Fryer, program director for the Barclays Accelerator, powered by Techstars, remembers a portfolio company that was successfully paired with an industry veteran.
“The advisor filled the gaps in their knowledge of the industry and gave them credibility,” she says. “They were effective by taking a Socratic approach, helping them unpack the issues, asking questions, playing devil’s advocate, but ultimately giving the founders the space to make their own decisions.”
Finally, for startups in sectors that require deep subject-matter expertise, the right advisor can be invaluable.
“For a biotech company, bringing on board someone who is a physician or a researcher with deep knowledge for one hour a month could really change a company,” says Ash Rust, managing partner at Sterling Road, a Bay Area venture capital firm that invests in and advises seed-stage startups.
Advisors can also help startups understand the ins and outs of legacy industries.
How to find advisors for your startup
To find advisors, start with your network. Sometimes mentors can morph into formal advisors if they have proven particularly valuable, and you have formed a trusted relationship with them.
“It helps to have worked with someone in the past so there’s that connection,” says Szymanski.
Beyond personal networks, he recommends that founders use every meeting with a potential angel investor as an opportunity to secure possible advisor referrals.
“Ask if they know anyone in the industry who could accelerate your business,” Szymanski says. “Angel investors, even if they don’t invest, may introduce you to people who expand your network. It also gives you the chance to see the value of the angel investor as a contributor to your startup.”
Typically, VCs also have a network of professionals that are accessible for portfolio companies.
A founder may give me a call on their way to a meeting and talk through their strategy and get some talking points.
Screen your startup advisors carefully
As you think about tapping new advisors, avoid a common mistake: the temptation to give away equity for the sake of adding high-profile names to an advisory board to impress potential investors and customers.
“That big name is probably someone who is very busy, hard to access and isn’t there when you need them,” says Fryer.
Rust agrees. “The other side of this is that there is a whole market of people who collect advisory chairs and don’t do much work but retain stock,” he says. Oftentimes, startups' needs change quickly, so you shouldn’t hesitate to replace advisors as priorities shift. Indeed, you may want to audit your advisory board every six months to identify whether a member is no longer needed.
Schmorak says Hostfully almost always recruits advisors from its extended network and then vets them as if they were staff hires. That means interviews, reference checks and ensuring a prospective advisor does not have conflicts of interest because they’re advising another startup in the same industry.
“It’s a big trust exercise, and so much of recruiting advisors has to do with the right fit,” she says. “It’s easy as a founder to get wrapped up in this idea of your loyalty to your advisors,” she says. “But if you need to cycle someone out, you just have to do it.”
What a startup advisory agreement should contain
Once you’ve identified an advisor, you need a detailed agreement that includes a carefully crafted equity compensation arrangement. Whether your attorney drafts that agreement or you use a template, the document should include:
- Confidentiality and non-disclosure provisions for intellectual property and other proprietary information provided to the advisor
- Duties and responsibilities of the advisor
- Length of agreement
- Advisor compensation
While the duties will depend on the advisor and the nature of the startup, you should set benchmarks. “An advisor who is providing you with sales leads, you could make that 100% performance-based,” says Rust. “If they’re a scientist, you’re potentially buying access to their time.”
How much time a founder should expect from an advisor will also vary, but 12-15 hours a quarter is a good rule of thumb. Access is vital when an entrepreneur needs questions answered fast.
“The advisor should be available for a quick call or a quick idea bounce,” says Szymanski. “That happens quite a bit for me — a founder may give me a call on their way to a meeting and talk through their strategy and get some talking points.”
Startup advisory board compensation
One of the most important parts of any advisory agreement — and one that will affect the future of your company — is the compensation component. It can be tricky, as you’re essentially awarding a piece of your startup to an advisor who has yet to prove his or her value.
“You can’t always tell who will have enough time and not be a flake and work for the company in return for the potential equity they get,” says Szymanski.Your needs can change quickly so don't hesitate to replace advisors as priorities shift.
Founders should be especially cautious about awarding equity to advisors in a startup’s early days as over time they could end up owning a significant share of the company.
“That can become a problem later when you’re doing an option pool and trying to hire a high-profile executive,” says Rust. Schmorak concurs, “I would just be really mindful of how much equity you’re giving away at an early stage. Having the equity to give to employees can be much more meaningful.”
Vesting schedules and cliffs
An advisor may receive between 0.25% and 1% of shares, depending on the stage of the startup and the nature of the advice provided. There are ways to structure such compensation that ensures founders get value for those shares and still retain the flexibility to replace advisors, all without losing equity.
One option is a two-year vesting schedule with a six-month cliff, meaning that if the relationship doesn’t work out during the first six months and the advisor leaves, the company retains the equity.
How to recruit advisors
There are times when an advisor proves so valuable to a startup that founders will want them on staff. Schmorak says at least one of the company’s former advisors is “now a key member of our team.”
But she says founders considering such a shift must make sure that the advisor is willing to make the commitment required of a full-time employee.
“We've always treated these events uniquely because of different contexts,” Schmorak says. “The most important thing is to realign on career goals and make sure that the compensation that the person will get — and accrue, if formerly an advisor — makes sense with the goals of the company.”
Advisors bring value
Your startup needs will change over time, and you'll need to rely on an expert's perspective that your immediate team might lack. When a situation like this arises, that's the time you should look to your advisory board. Advisors are a valuable resource that can provide the right help at the right time for your startup. But, keep in mind that an advisory board is not about bragging rights. It’s about finding dedicated allies with specific skills who can help you reach major milestones and get to the next level. Running a startup is hard. Visit our Startup Insights for more on what you need to know at different stages of your startup’s early life. And, for the latest trends in the innovation economy, check out our State of the Markets report.
