March 27, 2020

How to Build an Advisory Board

In recent meetings with startup founders, I was asked to provide advice on how to build an advisory board. Much of my advice is similar to the information Jake Mendel, Vice President of Silicon Valley Bank's Startup Practice in New York City, provides in his article, "How To Build a Startup Advisory Board." "Building an active startup advisory board can help startup founders fill expertise and experience gaps," says Mr. Mendel, "but ... there are pitfalls to be avoided."

In explaining the difference between an advisor, a mentor and a consultant, he notes: "The term 'advisory board' is somewhat of a misnomer as advisors generally do not meet as a group regularly and have don't have the legal and fiduciary responsibilities of a board of directors."

  • Tend to consult one-on-one with founders and executives as needed;
  • Sign agreements with startups specifying their roles; and
  • Typically get compensated with equity (more on that later).

In contrast:
  • Mentors are unpaid and act in an informal capacity; and
  • Consultants can play a similar role as advisors but most often are hired to perform one or more specific tasks or projects and are paid in cash.

With respect to when to begin recruiting advisors, Mr. Mendel suggests that "startups may want to bring advisors on board to tackle distinct challenges. For instance, 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."

What is more, "Advisors can also help startups understand the ins and outs of legacy industries, like insurance. Kelly Fryer, program director for the Barclays Accelerator, powered by Techstars, remembers a portfolio company that was successfully paired with an industry veteran. 'The advisor filled the gaps in their knowledge of the industry and gave them credibility,' she says. 'They were effective by taking a Socratic approach, helping them unpack the issues, asking questions, playing devil's advocate, but ultimately giving the founders the space to make their own decisions.'

"Finally, for startups in sectors that require deep subject-matter expertise, the right advisor can be invaluable. 'For a biotech company, bringing on board someone who is a physician or a researcher with deep knowledge for one hour a month could really change a company,' says Ash Rust, managing partner at Sterling Road, a Bay Area venture capital firm that invests in and advises seed-stage startups."

As for where to find advisors, Mr. Mendel advises founders to "start with your network. Sometimes mentors can morph into formal advisors if they have proven particularly valuable and you have formed a trusted relationship with them." My relationship with a company where I serve on the advisory board often started with me mentoring to one of the founders.

But the article also mentions the importance of screening your prospective advisors carefully and avoiding "a common mistake: the temptation to give away equity for the sake of adding high-profile names to an advisory board to impress potential investors and customers."

Not having the right team is one of many reasons why startups fail, which I note in this post. The team includes founders, managers, support staff, advisors and board directors. Therefore, I agree with Mr. Mendel that it is important to perform due diligence on prospective advisors including conducting "interviews, reference checks and ensuring a prospective advisor does not have conflicts of interest because they're advising another startup in the same industry."

Based on my experience as a founder as well as an advisor, I concur that a "[s]tartups' needs can change quickly, so you shouldn't hesitate to replace advisors as priorities shift." Founders may want to consider auditing their advisory board every 12 months, as opposed to Mr. Mendel's recommendation of every six months, "to identify whether any member is no longer needed."

As mentioned previously, advisors often receive equity compensation for their service. Terms of the compensation should be formalized through an advisory board agreement. "Whether your attorney drafts that agreement or you use a template, the document should include":
  • 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; and
  • Advisor 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," Mr. Mendel explains. "It can be tricky, as you're essentially awarding a piece of your startup to an advisor who has yet to prove his or her value.

Moreover, "Founders should be especially cautious about awarding equity to advisors in a startup’s early days as over time they could end up owning a significant share of the company."

Regarding vesting schedules and cliffs, the article helpfully explains: "An advisor may receive between 0.25% and 1% of shares, depending on the stage of the startup and the nature of the advice provided. There are ways to structure such compensation to ensure that founders get value for those shares while 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."

Founders should understand there may be "times when an advisor proves so valuable to a startup that founders will want them on staff." Keeping in mind that an advisor is expected to allocate a limited number of hours per month, a company may want to consider retaining the advisor's services as a consultant or employee if it sees value in the expanded engagement.

Lastly, I support Mr. Mendel's assertion that "[a]dvisors are a valuable resource that can provide the right business, technical or policy help at the right time for your startup. But remember this: an advisory board is not about bragging rights. It's about finding dedicated allies, with specific skills who can help you accomplish a well-defined task."

Do you have any recommendations for building an advisory board?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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