Making the Most of Startup Advisors

22nd May, 2016 No Comments Fundraising , Startups , Venture Capital

As an investor in startups, I get a lot of questions about advisors.  Should we bring on this advisor or that one?  How do we compensate advisors?  What should I expect an advisor to do?  I’ll try to answer these and other questions in this post; I’ll direct my comments to the leaders of startups who might be thinking about adding advisor(s).

An advisor is someone who can and does help a company.  That help generally comes in the form of  introductions (to customers, investors, job candidates) or advice (on a particular function like marketing or on a sector such as advertising).  There are many ways that people with relevant experience or connections can help a new company; the key in bringing such people on as formal advisors is that they agree to help – to do something tangible that provides value to the company.

Advisors should not be names (even well-regarded ones) who have agreed simply to be associated with your company.  That kind of relationship is bound to backfire; if they are recognized as you hope they will be, someone (an investor, a new team member) will inevitably seek to understand the nature of the relationship.  If the advisor doesn’t know much about your or the company and isn’t bothering to spend time to help you, their endorsement is worthless and may undermine your credibility.

Even when you bring on advisors that are helpful, don’t overplay their role in your company.  Too often, founders will refer to advisors as “team members,” blurring the line between the management team and advisors with big reputations.  This approach, again, is likely to erode your credibility; experienced investors or would-be hires will see that you are trying to compensate for what you view as weaknesses with your management team.

You should be proactive about your advisors – seek out leaders who you know can help.  These might be people you know, or might be leaders in your sector to whom you are not initially connected directly.  Find a way to network to the leaders in the functional or industry sectors that are relevant to your needs.  If you are approached by someone seeking to be an advisor, you should measure their potential utility with the same yardstick you are using when reaching out to advisors you don’t know.  Don’t bring on an advisor just because s/he knows you and wants to help – make sure you believe they can really make a difference in your company’s success.

Once you find an advisor, you should strongly consider compensating them with equity.  You want their incentives to be aligned with yours.  Generally, advisors earn 1% or less of the stock in a company, depending on the maturity of the company and the value they provide.  That equity is earned over the time that they are expected to deliver value.  Shy away from paying an advisor with cash, unless you have a clear consulting agreement with them and your business is profitable and/or sitting on a lot of cash.

Finally, the economic arrangement, and the nature of the help the advisor will provide, should be memorialized in a formal agreement.  I like the Founder Institute’s Founder/Advisor Standard Template as a starting point; it includes a form agreement and a clear and useful way to think about determining how much equity to provide.

Many companies fail to make the most of advisors, but they can be a source of tremendous value when recruited and managed appropriately.

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