rom startups to midsize companies, to large corporations, companies of all sizes create advisory boards to gain access to third-party perspectives they can trust.
These groups serve as an important extension of a company’s leadership team and offer strategic insights and unbiased advice meant to drive business growth and innovation. They can also serve specific needs or challenges where technical, regulatory, or legal know-how is required.
While advisory boards as a standard business practice has its skeptics, founders should not be quick to label these groups as just another level of management and interference. When done right, investing in the right perspectives can have a high ROI for you and your startup.
What exactly is an Advisory Board?
An advisory board is a collection of subject matter experts who provide a company's leadership team with insight and guidance related to innovation, risk management, profitability, and of course the company’s vision. They shouldn’t be confused with mentors, who engage and advise members of a startup’s team in an informal capacity and without compensation. Nor are they consultants, who are contracted for their services in an area of specialization and tasked with specific, fixed-term projects.
While they do provide management with advice, they should also not be confused with a company’s board of directors (BOD).
Sitting as separate but parallel entities, advisory boards are the BOD’s less formal and more flexible counterpart. Unlike the BOD, an advisory board does not have a fiduciary duty—they are not legally obligated—to carry out specific duties or act in the company’s best interests.
However, this also means that they lack the right to vote on corporate matters or otherwise influence corporate governance. Without the burden of legal liability, advisors serve definite terms, and are brought on board and replaced as the company sees fit.
How can an Advisory Board help you?
While strengthening your brand by positively associating with some high-profile individuals can certainly capture the attention of potential investors or customers, the benefits of having a well-constructed advisory board should exceed whatever value there is in having recognizable names on your pitch deck.
A board of helpful advisors can also:
- Fill gaps in a team’s skills, expertise, and experience
- Help test products and sharpen customer profiles
- Ramp up sales and partnerships or help you break into new markets
- Expand your network reach with their own reservoirs of contacts
- Offer fresh perspectives that challenges a team’s assumptions
All of these contribute to a startup’s growth. This explains why average funding raised by stage, a corollary for startup success, is higher for teams with helpful advisors.
There are a number of significant decisions that, if taken incorrectly, can stunt a company’s growth. Teams have a much better chance of avoiding things like rolling out an insufficiently differentiated product, scaling prematurely or without the appropriate processes in place, hiring the wrong people for important roles, etc. when they can tap into their expert advisors’ seasoned wisdom.
How to Build Your Board of Advisors
If your company’s growth is at an inflection point or if your team is facing distinct challenges, and you have the resources (i.e. the time and equity) to spare, it might be time to bring on advisors.
But building an effective board requires taking a number of steps.
Identifying Your Needs
Each board can (and should) be as unique as the startup it serves and its needs. Before combing through your network for potential advisors, consider the kind of advice you are seeking first.
One of the biggest mistakes you can make when establishing your board is creating one that isn’t designed to serve a clear purpose. Where this is true, and where those asked to serve are unclear as to what their roles consist in, your team will get significantly less value per dollar (and hour) invested. Identifying your startup’s needs and setting a mandate that reflects the board’s purpose MUSTbe your first step.
So how do you identify your biggest needs?
A simple SWOT analysis can be helpful in identifying gaps that are not immediately apparent. An even more productive exercise consists in examining your company’s mission and vision, and breaking them down into achievable objectives.
After prioritizing these objectives (i.e. by time-sensitivity, magnitude, etc.), identify any gaps that may exist within your internal resources–this will determine the kinds of individuals that should populate your board.
This may be straightforward for those teams that have specific outcomes in mind, such as pivoting into a new market or perhaps raising capital. However, high-impact advisory boards are usually not built around immediate needs alone.
You should also be considering goals you have in the near future and those that are longer term, so that you may select advisors that can help you keep the big picture in mind when making decisions.
How will your Advisory Board operate?
It should also dictate how the advisory board will conduct its affairs. Consider how prospective advisors will need to be committed and what their responsibilities will be if they are to be an invaluable resource to your team.
When you’re building out your plan for the Advisory Board, it’s important to determine the following:
Size. Start small. You should only need 4 advisors to begin, and having just identified your needs and sharpened the board’s focus, you should prioritize these first few seats accordingly.
Over time, an advisory board can grow to have 6-8 members—though any bigger and you might find yourself with more feedback and/or engagements than your team can manage.
Level of engagement. Decide on the frequency of meetings, term lengths, and what the nature of your advisors’ involvement will be. There are no right or wrong answers. This will largely depend on your team’s objectives, workflow, and to some extent, how generous your advisors are with their time.
While advisors tend to consult one-on-one with founders and executives on an as-needed basis, giving the relationship some structure and informing your advisors about pivots and shifts in strategy in a timely manner ensures that they are well-positioned to help you.
You should also be careful to not solicit more feedback than you can manage.
Your advisors should feel as if their feedback is being put to good use, so when it comes to advice don’t bite off more than you can chew. How your company responds to and implements feedback during their term will shape their impression of your team. Also keep in mind, the impression you leave on your advisors is the impression you leave on their circles of influence.
Compensation. How you choose to compensate your advisors will depend on their value-add, level of participation and what stage your startup is in.
Stock options between 0.1% and 1.0% of company equity are typical for startups in the seed stage, and seen sometimes with early stage ventures. However, the upper bound tends to decrease as a company matures. The further a company progresses through development stages, the lower the fully-diluted amount an advisor will be granted.
Within this range, the highest awards go to the best advisors: those whose contributions are critical and frequent, and perhaps those pulling their weight when it comes to fundraising. High quality advisors can certainly get well over 1.0%, however, you should be weary of giving away too much too soon.
Once you’ve decided on the kind of equity you’d like to award (restricted stock agreements or non-qualified stock options are typical), you should also set a vesting schedule. Two year schedules vesting monthly are common, and three or six-month cliffs are sometimes used to ensure that you have the flexibility to replace advisors as needed without losing equity.
Finding the Right Advisors
Once you’ve decided on all of the terms above, draft a job description. There is no requisite background or experience that will make for a great advisor, so finding the right candidates will often require that you shop around.
Some teams choose to bring on serial entrepreneurs or seasoned startup leaders, technical experts, retired, high-caliber business executives with C-level management experience, industry professionals, university professors, and even thought leaders.
What they all have in common, and what you should really be looking for, is experience that indicates they have already achieved what you are looking to accomplish. In addition to having the expertise and network you’re looking for, advisors who are reliable and generous with their time make for the best additions to your team.
Having an advisor (or two) that has a track record of both helping others and giving back to the entrepreneurial community, and is familiar with the mechanics of advisory relationships may be especially helpful (though not essential) when starting out.
Sourcing and Recruiting Your Advisory Board
Best place to start? Your own network. Advisors will be kept informed on your company’s progress and strategy, which will require a certain level of trust; having a pre-existing relationship or mutual connection can be useful in this regard. Meetings with VCs and potential angel investors are also great opportunities to get advisor referrals.
Having found multiple candidates who meet the job description you have drafted, you must vet them as you would any other employee. Before giving away any equity you should vet the value you believe they have to offer by conducting interviews, soliciting references, and checking for conflicts of interest. You should of course also verify their fit with your startup’s team and culture.
Now that you have your advisors in hand, be sure to formalize the relationship contractually. Create a formal advisory agreement that outlines compensation and clearly states expectations for participation. Be sure this is signed prior to your first meeting.
Lastly, identify key performance indicators so that you have a way of quantifying the nature and level of contributions, and of measuring their impact when revisiting advisor agreements down the line.
To maximize their impact consider the following do’s and don’ts:
Use your board to balance out your team’s abilities. Use the opportunity to balance your technical team with business-oriented advisors, and vice versa.
Design a board that has a stated lifecycle, and that is outcome-driven.
Leverage your advisors to build the company you want. Bring on advisors who can shape your long-term vision and inspire your team to think big.
Under-communicate. Ensure that your advisors receive the information they need to help you in a timely manner.
Building your board based on the social capital to be gained alone.
Assemble a team of ‘yes men’. Your advisors should force you to look at things through the lens of their own successes and failures. Ensure that their insight challenges you.
Advisors can be a critical addition to your startup. However, a perfunctory board that merely takes equity without offering up comparable value can also be a liability.
Taking all the right steps to ensure that there is clarity surrounding the purpose of your advisory relationships and how they will function will ensure that you make the most of the advisors you choose for your startup.
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