December 9, 2014 | 6-minute read (1124 words)
This guest post was contributed by Adam Quinton, CEO and Founder of Lucas Point Ventures.
Don’t confuse an advisory board with a board of directors (BoD). A BoD is a legal requirement that comes with fiduciary responsibility to a company's owners. The BoD has specific responsibilities, not least of which include selecting and (if it so decides) firing the CEO.
In contrast a startup advisory board is pretty much whatever you want it to be. Most people have advisors of some sort -– informal go-to people initially. But there comes a point when you want to widen the net by bringing in outsiders to play a role in supporting your business. When you reach that point, it pays to think through your advisory board's role: how to structure it, how it will work and if/how the members will get paid.
Here are 12 pointers to guide you.
The Big Picture
1. Advisory boards can give startups great advice and access while being a supportive resource. But, in the vein of "take advice, don't follow advice," a CEO needs to balance the input he or she gets from the advisory board with his own expertise and the confidence she has in her own and the team's abilities. The bottom line: you don't want to be (or be seen to be) too reliant on your advisory board.
Advisory Board Basics
2. You can have an advisory board at any stage. Whether it's an early-stage startup or a large public company, an advisory board can add value to your company.
3. The board part of the title is a misnomer! Advisory boards rarely meet as a unit. Rather, they are mostly one-on-one relationships with the CEO. Communications tend to be ad hoc with perhaps monthly set check-in calls and a verbal understanding (very early stage) or written expectations (later stage) as to time commitments.
That said, getting your advisory board together in person, maybe a couple of times a year, can pay dividends in two ways. First, by generating more ideas as members interact; second (assuming the members get on!), as the intellectual stimulation and opportunity to learn from people they wouldn’t otherwise spend time with increases members' engagement levels.
Structure and Benefits
4. "Celebrity" advisory boards are a very bad idea. By this I mean listing lots of names of "important" people on your website ... none whom actually does much for you. It sends a bad signal if investors or customers (actual or potential) ask to talk to advisory board members as part of their due diligence and discover that the listed members have no meaningful role. This is especially the case if you include those names when making an investor pitch. The point: enlist a functioning advisory board or don't have one at all.
5. Establishing a strong and highly functioning advisory board delivers multiple wins for founders. First and most obviously, you get advice from folks who are consistently involved and add value in areas that are key to the CEO and the business. It also signals to potential investors that, in addition to valuable advice: a) you can identify and engage with experienced individuals who are relevant to your business (this reflects well on your people skills and judgment) b) you have social validation.
6. A well-constructed advisory board is composed of people with diverse skills and experiences in clearly defined areas that are relevant to the CEO and founding team. For instance, these might be finance, customer acquisition, marketing, scaling, technology, or other domain expertise or reflect broader experience, maybe in founding and growing a company.
7. It's better to have 3-6 strong engaged players than a larger number of not very engaged people. Startups are ultra time-starved. Work with a small number of committed partners who can give you time and add value. Avoid everyone else! By bringing in too many people, a CEO will make declining engagement a self-fulfilling prophecy, simply because she/he won't have the time to interact with all of them in any meaningful way.
8. Whatever role they fill, advisory board members should be utilized for the value of their entire network. For example, the person who has a clear role as your financial expert could well have valuable connections with members of the media, other domain experts, etc. One thing to be wary of is having known active investors as advisors who are not invested in your company. That can send a bad signal for obvious reasons. But that can be somewhat mitigated if the individual's personal investing activities are clearly focused on another area of domain knowledge or expertise.
Formal Versus Informal
9. At the early seed stage, either at or shortly after friends and family financing, boards are usually pretty informal. Advisor relationships tend to be based on a verbal understanding of time commitment and responsibilities. This makes sense -- avoid red tape at all costs!
10. As the business develops, going into the A round and beyond, having written contracts is the way to go. At a minimum, contracts should have specified time commitments. They can also include written details of what each member is expected to contribute. Law firms can provide standard documentation.
11. Advisory board positions are typically not compensated at the very early stage. These are willing supporters who do it because they have faith in and want to support the founding team.
12. When you get to the stage where your advisory board members have contracts, compensating members starts to make sense. As a point of comparison, early-stage board members — though not founders or VCs — typically get options for 1% of equity, with 3-4 year vesting. Advisory Board members have less time commitment and no fiduciary responsibility. So they should be paid less. How much less?
It varies depending on contribution, but something in the range of 0.10% and up per year seems fair. Remuneration is best tied to specific deliverables and direct connection to value creation, not just for "showing up" or responding to occasional emails and phone calls. Optimally compensation should be via option grants that vest over time (say over one year). Typically, cash compensation is restricted to reasonable expense reimbursement.
Adam Quinton is Founder and CEO of Lucas Point Ventures. He is an active investor in and advisor to 12 early-stage companies. Adam is a founding Astia Angel and Chair of the Astia East Coast Advisory Board as well as an Adjunct Professor at Columbia University. You can read more of Adam's commentary on startup and investing issues at Analyst to Angel.