Choosing an Advisory Board for Startups

We all need a sounding board to bounce off our thoughts and get good advice.  For startups it is a very valuable and powerful management tool, to have an experienced person who has ‘been there and done that’ to actually provide excellent counsel.  Some informal ways would be having friends, previous employer / boss who you would trust to offer advice.  But then, they might not be an expert who understands the landscape you might be operating in.

Who: A person who is experienced in your industry or specific function is beneficial. Depending on the needs of the business, you could have more than one Advisor and create an Advisory Board with diverse and complimentary skills. I also believe that the Advisor is for the CEO rather than ‘for’ the company.

An Advisor is different from a Director on the Board, since it is not a legal position and carries no  decision making powers, legal obligations, rights or duties.

Why: A trust worthy advisor is someone you can lean on for advice or critical feedback.  Choose the right advisor based on your need for the Advisor’s experience, opening doors for sales, building credibility, brand etc.  Think twice when you want to rope in a celebrity Advisor, they are high maintenance.

Engagement: Identify if you need an intense, hands-on help or an occasional discussion.  Also, if is in specific aspects of business or generic advice. This helps in setting expectations with the Advisor and time commitment. However, don’t expect the world of them.  This exercise also helps in deciding whether it has to be a formal engagement.   Ensure they are available and accessible when you really need them, otherwise it is just not worth the effort.

Compensation:  When you expect ad-hoc help, such as providing introductions or providing some quick inputs / opinions, an Advisor may be willing to spend the time in ‘helping’ without any compensation.  For deeper, meaningful engagements please have a discussion on the compensation expectations of the Advisor.

The compensation could be coffee/ dinner, covering their expenses, honorarium cash or equity, or a combination of these.  For a bootstrapping startup, the compensation is usually in the form of sweat equity either allotted in one go or at staggered intervals.   The equity typically ranges  between 2-5%.

How many is too many:  It is really upto you to reap the benefit of the Advisor’s knowledge.  You need to be engaged with the Advisor and that requires energy and effort to spend quality time with the Advisors.

Agreement:  If there are specific performance metrics expected of the Advisor (which is usually not the case) or shareholder duties (typically restrictions on share transfer, drag along) you may want to have an agreement with the Advisor.  In one of the startup, I have seen an Advisor who wanted the shares to be allotted upfront but took offence to signing up an agreement because it then meant he was expected to perform.

What do advisors get out it? They are definitely not in it for the compensation.  It is usually because they are thrilled at sharing their experience, establishing their thought leadership or just the kick of being called an Advisor.

Go ahead, have a carefully chosen counsel(s) that you can trust and lean on in your startup journey.

Disclaimer: This is not a legal opinion and should not be construed as one. Please speak with your attorney for any advice.

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