Advisors can fill critical gaps in your start-up's expertise and experience

Key Takeaways

  • Advisors can help fill gaps in your team in specific areas like hiring, regulatory affairs, or industry knowledge.
  • Look for advisors through your network and while meeting potential angels; screen them like you would screen an employee.
  • Draft an agreement to specify duration, duties, and responsibilities; when it comes to equity compensation, don’t give away too much.

There will come a day when your start-up needs an expert perspective that doesn’t exist within its core team. Whether it's a regulatory hurdle, technical matter, industry connection, key hire, or inside scoop, having a well-constructed advisory board will help your start-up break through barriers and get to the next level. But, like every key decision a founding team makes, be careful about potential pitfalls. Here are some important tips to help you build an advisory board that truly works for you.

Recruiting a circle of start-up advisors can prove crucial to the growth of a start-up. Founders report that advisors often function as an extension of their core team, enabling them to be more nimble and giving them valuable third-party insights.

Appointing an advisory board to a start-up can help founders fill vital expertise and experience gaps. But it is important to appoint advisers you trust and to avoid some common pitfalls.

What is a start-up advisor? – How is an advisor different from a mentor or a consultant?

The term “advisory board” is a little misleading as advisors generally do not meet regularly as a group and, unlike a board of directors, they don’t have legal and fiduciary responsibilities.

Normally, advisors :

  • consult one-on-one with founders and executives as needed;

  • sign agreements with start-ups specifying their roles;

  • get compensated with equity (more on that later).

Mentors, on the other hand, are different from advisors as they are unpaid and act in an informal capacity. Consultants can play a similar role to advisors but most often they are hired to perform one or more specific tasks or projects and, unlike many advisors, they are usually paid in cash.

When to start finding start-up advisors

A good time to bring on board advisors is often when your start-up begins hiring key staff or needs to ramp up sales and partnerships. An advisor with a wide range of contacts can help open doors to outside vendors or new employees, helping spur growth.

You may also want to bring advisors on board to tackle distinct challenges relevant to your business. So, 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.

Advisors can also help start-ups understand the ins and outs of specific sectors. Sometimes therefore it can help to link up with an industry veteran who has deep knowledge of a relevant industry and who will be able to help you negotiate challenges ahead.

How to find advisors for your start-up

To find advisors, start with your network. Sometimes informal mentors can morph into formal advisors if they have proven particularly valuable and you have formed a trusted relationship with them. Trust is key to any advisor relationship. So it helps to gravitate towards people you have successfully collaborated with in the past.

Beyond personal networks, use meetings with potential angel investors as opportunities to secure possible advisor referrals. This can not only enable you to test out the value of a potential angel investor, it can also unearth valuable contacts you may otherwise have overlooked. Remember also that VCs also have a network of professionals that are accessible for portfolio companies.

Screen your start-up advisors carefully

But, as you think about bringing new advisors onboard, avoid a common mistake: giving away unnecessary equity merely to add high-profile names to an advisory board to impress potential investors and customers. Remember big names can often be very busy and may not always be able to devote the required time to your business.

It makes sense therefore to vet and recruit advisors as if they were staff hires. That means conducting interviews, taking references and checking that your advisors don't have any conflicts of interest because, say, they are advising a rival start-up in the same industry. Such early due diligence can save a lot of headaches later on.

Remember also that your needs as a start-up can change quickly as your business grows. So don't hesitate to replace advisors as your priorities shift. Indeed, it can make sense to audit your advisory board every six months just to double check that their skillsets are still relevant. A good advisor may even help in this replacement process as the best advisors tend to know when it's the right time for them to move on.

What a start-up 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 lawyer drafts that agreement or you use a template, the document should include the following:

  • 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

The exact duties will depend on the advisor and the nature of the start-up. In any case, it makes sense to set and agree benchmarks. An advisor who is providing you with sales leads, for example, could be entirely remunerated based on performance.

You should also agree reasonable guidelines with your advisor over how much time they will be expected to devote to your start-up. This will vary from business to business, but a good rule of thumb is 12 to 15 hours a quarter. Ease of access can be key. So, when you have a pressing problem, will your advisor be responsive even if it is just to bounce off a couple of ideas?

Start-up 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 start-up to an advisor who has yet to prove his or her value.

Founders should be especially cautious about awarding equity to advisors in a start-up’s early days as over time these advisors could end up owning a significant share of the company. If, later on, you are looking to hire a high-profile executive or motivate existing staff, you could find this generosity early on limits your flexibility in offering share option packages down the line.

Vesting Schedules and Cliffs

As a guide, an advisor may receive between 0.25% and 1% of shares, depending on the stage of the start-up and the nature of the advice provided. Remember there are ways to structure such compensation to ensure that founders get value for those shares while also retaining the flexibility to replace advisors 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 start-up that founders will want them on staff.

If you are considering such a shift with one of your advisors, make sure you're confident that the advisor is really willing to make the move to a full-time employee and all this entails as this is not always the case, particularly for advisors that have other commitments.

Takeaway: advisors can help you break through business, technical or policy barriers but screen them carefully

Advisors can be a valuable resource providing your start-up with the right help at the right time. But remember an advisory board is not about bragging rights. It’s about finding dedicated allies, with specific skills who can help you accomplish well-defined tasks and, ultimately, accelerate the growth of your business.

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