Having worked with hundreds of founders and early-stage startups, I often hear questions in regards to setting up an Advisory Board. I will address some of the common questions I’ve heard over the years in this article and share some insights I’ve gained as both a founder and as an advisor.
What is an Advisory Board and is it different from a Board of Directors?
An Advisory Board is made up of experts hand-picked by you as the founder or CEO. They do not have any fiduciary duty, unlike the company’s Board of Directors. The Board of Directors is the governing body for the company and early on will typically be made up of key executives from your founding team and eventually investors. The Board of Directors may take advisement from an Advisory Board, but are not obligated to act on their advice as they make decisions for the company.
Why is an Advisory Board important?
As a founder you are faced with a lot of important decisions and it is often wise to seek advice or brainstorm with others who have faced similar decisions before. Establishing an Advisory Board is a way to surround yourself with experienced mentors who have gone down this path before. As a founder, you can often benefit from not only their knowledge, but their connections and other resources as well.
Who should I have on my advisory board?
When considering who to have on your Advisory Board, it is important to identify specifically what you are needing from an advisor. Choose experienced advisors who complement your existing team and may be able to help compensate for any weaknesses and fill gaps in knowledge, connections, experience and even potentially capital. It is not uncommon for advisors to have interest in investing in future financing rounds if they like how things are progressing with the company and have the wherewithal.
How do I create a formal Advisory Board?
Once you have selected someone to join your Advisory Board, it is important to document the terms and expectations in a formal Advisor Agreement. The Advisor Agreement should state the advisor’s background and expertise, what is expected of them (e.g., number of hours, monthly meetings, etc.) and how they will be compensated. Your startup attorney should have a good template to use for an Advisor Agreement.
How much should I pay advisors and how much equity should I give them?
Most early-stage companies are not in a position to adequately compensate good advisors with cash and most advisors realize this. That is why it is common for companies to compensate advisors through equity, often done in the form of Non-Qualified Stock Options (NSOs) or restricted stock awards (RSAs). Based on data published by Carta, for companies that have raised less than $2 million, advisors are typically granted between 0.1% - 0.5% of the company’s fully-diluted shares in NSOs or between 0.2% - 1.0% in RSAs. The reason the RSA numbers may be higher is because it is more common to grant RSAs closer to the formation of the company and NSOs later on. The earlier an advisor joins a company, the higher percentage of equity they will often be granted.
It is common to have a vesting schedule for options or shares granted to advisors also, but the vesting is commonly for a shorter period than your employees. One of the reasons for this is that in a fast-growing young company, often your advisors will add most of their value in the first couple of years and you may outgrow their expertise and want to bring on different advisors at different stages of the company’s life-cycle. A 24-month vesting period is fairly common for advisors for early-stage companies in general
What if my advisors are not meeting my expectations?
One word of advice I would share is that it is up to you as the founder to drive the advisor relationships. Founders need to set expectations up front and establish the cadence of communication with their advisors. It is your responsibility as a founder to schedule regular Advisory Board meetings and other interactions with your advisors along with the agenda and what you would like to accomplish. More often than not, advisors are excited to help, but founders fail to take advantage of the resources available through their advisors. It’s important to recognize that your company is not their full-time job and not always top of mind for them. By holding regular meetings and providing regular updates it helps keep your advisors engaged and keep your company top of mind for them.
If you as a founder have formally set the expectations, planned and executed Advisory Board meetings and regularly communicated with your advisor and they are not living up to their end of the agreement, it is your responsibility to have this discussion with them. You may need to reset expectations or if you both agree things are not working out, you may end up parting ways. In such instances it is important to refer to the Advisor Agreement and run things past your startup attorney.
While it is common for startups to have an Advisory Board, many founders fail to take full advantage of the benefits available to them through the advisors they bring on. In order to make the most of your Advisory Board you should 1) Choose experts who can compensate for weaknesses in your team and add value to your company in specific ways, 2) Set expectations at the beginning and hold advisors accountable, 3) Hold regular Advisory Board meetings with an agenda, and 4) Regularly update your advisors on things happening at the company and ask for their assistance as needed in areas where they can add value.
Jeff Erickson is an experienced founder, entrepreneur, startup advisor and angel investor. He serves on the Advisory Boards for several early-stage startups and works with a number of different startup organizations as a mentor for entrepreneurs.