Should Your Startup Have an Advisory Board?

Posted on Oct 12, 2009 | 96 comments


rodinThis is part of my ongoing series Startup Advice.  Many startup companies hire advisory boards.  It’s very tempting.  It’s mostly done by first-time entrepreneurs who want to persuade (bribe?) prominent industry luminaries to be closely associated with the company.  It’s done partly in hopes of gaining their wisdom but it’s also done to portray the company in a positive light through association.

So do advisory boards really add value?  And if you decide to have one how do you best implement it?

In my experience most advisory boards under deliver relative to expectations.  The CEO picks prominent people who are busy in their own right with their own companies.  They are usually offered around 0.25% of the companies equity in exchange for their role and I’ve seen many companies hand out a total of 2% to advisers.

If you plan to set one up – no problem.  But know what your expectations are and make them realistic.  My main advice to you if you’re considering it is don’t waste much equity on it.

Advisory Board Problems: There are several problems that I have encountered myself and in my many discussions with CEO’s who have set up advisory boards.

1. Not enough time.  Most of the people you want to ask are busy.  When they’re first approached it sounds exciting to be involved with a startup and if they’re offered free shares – why not?  If you are Mint.com (e.g. come out of the gate strong and never let up) then you might get some attention.  If it takes you a while to get going don’t be surprised if you don’t get the attention you want despite their best intentions.  Frankly, they don’t have enough skin in the game to warrant the time & energy.

2. Not enough wisdom.  When you do get time the advisers are often too removed from the details of the company to help.  Let’s face it, to help a company you really need to understand the details.  But if you have approached a senior member of your industry and if they’re on 4 advisory boards, have done 3 angel investments and probably have a full time gig themselves – it is hard to really get into the details of your company.  At a minimum their angel investments will likely take precedence.

3. Too much effort.  You’ve gotten 5 people to sign up as advisers.  You’ve given out 1.5% in total and you’re determined to get value out of the group.  So you set up advisory meetings.  They are difficult to schedule because your advisers are busy people.  Too bad you’re a startup and don’t have an assistant to deal with all of the administration / coordination of scheduling.  The week before your meeting 2 people need to cancel due to travel conflicts.

You prepare materials for them the remaining advisers to read through.  Your advisers read it – an hour before your meeting – if you’re lucky.  Even then they only skimmed it to not be embarrassed.  They’re smart people so you have an interesting discussion on the day.  Too bad it was a bit superficial, though.  Ok, next advisory board meeting in 60-90 days.  Time to start thinking about how to make it more productive.  The day comes with similar results.  You had thought this time would have been different.  3rd meeting … um … maybe we’ll postpone it a few months.

4. Expensive.  So after realizing that you’re not getting the strategic insight you had hoped for you fall back to asking for introductions.  After all, most people are good for a few introductory emails.  But I would argue that you can develop relationships with many advisers, mentors and VCs that will help with introductions for no equity.  People like to help.  So in the end advisory boards are an expensive equity proposition for merely introductions.

My view on how to best implement advisory boards:

If you do decide to set up an advisory board, here are my tips for how to do it the right way.

1. Ask for small investments - Get some skin in the game.  I know it sounds crazy that you’re approaching industry luminaries that you would die to work with and you’re asking them for, gulp, money!  But if you approach them with a very fair valuation and ask for a small check (say $10k, which should be nothing to someone in this position) I believe you’ll have a reasonable shot at it provided that you actually have an interesting company.

At a $2 million valuation this is 0.5% of the company – about right.  You can go as high as 1% because they’re going to get diluted when you bring in VC.  If your valuation is already too high then seek approval to let them invest at a price lower than the current value.  Even getting $10,000 out of someone who’s already a millionaire and super successful gets you emotional buy in and therefore you’re more likely to get value.

2. Run semi-annual advisory dinners – Don’t try to solve the world’s problems with your advisers.  One of the things that should attract advisers to your company is the thought that they’ll get to spend time with other luminaries that they respect.  So one of your sales pitches to them to join is the other people you have on board (or are approaching).  Promise them that you aren’t going to ask for tons of time and the main participation is just 2 dinners / year.  Use these occasions to get them bought into your strategy and strengthen your relationship so that when you do need help you’re more likely to get it.  Using this approach you may be able to get a few key advisers with no equity at all.  Under this scenario I’m all for advisers.  Have 8 of them!

3. Don’t overplay in your VC pitches – Final bit of advice – don’t overplay the advisers in your VC pitch.  You’d be surprised how many CEO’s go into painstaking detail on the background of the advisers when they pitch the company to VCs.  We all know advisers are mostly bullshit so it’s painful to hear you pretend like they’re really a big deal to the company.  It’s OK to have the advisor slide where you glance quickly over the names.  Just don’t lay it on thick.

OK, so I’m sure some of you have wonderful experiences with your advisers.  Others must echo my experiences.  What do you think?  Did I get this about right or am I in left field?  Love to hear others views in the comments.

  • http://bothsidesofthetable.com msuster

    Thank you. Fixed.

  • http://bothsidesofthetable.com msuster

    Yes, I suspect the problem is caused by high powered advisers. But whether high-power or not I suspect many advisers can be managed effectively without granting free options.

  • http://bothsidesofthetable.com msuster

    I'm all for having as many informal advisers as possible. And as a founder you need to find ways to also make sure you're helping them and others with areas they're interested in for a quid pro quo. I think my biggest feedback is avoid giving too much equity for it.

  • http://bothsidesofthetable.com msuster

    That sounds quite useful to people. Sounds like in essence you're becoming their sparring partner. I guess that's the role the VC is supposed to play but it never hurts to have multiple sparring partners and some that are not your immediate investors for more sensitive topics (such as compensation!) Thanks for your input.

  • http://www.echosign.com/ Jason M. Lemkin

    Great post Mark.

    How about a foll0w-on on ALL the things VCs think you need b/c of 'convention wisdom' — but that you may not need and be too expensive.

    E.g.,
    * Audited financials before you are doing $5m/year
    * 3+ hour board meetings. 60 minutes is plenty if you get the pack out 1 week early and it's complete
    * CFOs before you are doing $xm / year.
    * Outside directors before you are doing $xm/year. These are even worse than advisory boards b/c they are more expensive for less advice — AND they are your boss.
    * N+1 VCs. They want you to have 1 more than you need.
    * An expensive PR firm when you don't need it.
    * New corporate counsel that is aligned with the VCs
    * D&O insurance that only benefits the investors (big rip-off) practically speaking

    on and on …

  • http://bothsidesofthetable.com msuster

    Hard to say just on your comments. It's always good to have informal advisors around. If he wants to get more actively involved, if he has money and if the company needs a bit of cash then … why not? Not a 100% rule but in general $ = more commitment.

  • http://bothsidesofthetable.com msuster

    Hey, Jon. Glad to hear it's working for you. Seems you've found the right model. Thanks for sharing.

  • http://bothsidesofthetable.com msuster

    ummm, I'm sure tech advisory boards can work. often really technical people don't get asked to be on advisory boards so perhaps there is model where they take things more seriously. glad to hear more stories of where advisors do work.

  • http://www.linkedin.com/in/rajatsuri rajatsuri

    Hi Mark

    Great article again. Here are some points I've learned in my short career:

    - Some people like the ego-boost of being part of a formalish entity called 'The Advisory Board' even though there are never any formal meetings or. We actually got a big deal with a potential customer who was an advisor too this way.

    - Totally spot-on on the 'invest-too', but that would only be for a certain category of advisors I'd think (like brand-name big-shots).

    - The main thing I've learned is: make EVERYONE who is at all relevant and further ahead than you in network/startup-career an informal advisor. Everyone who's accomplished something in their career loves the feeling of being able to help someone down the ladder.

    You don't need to give equity -0.5% is a tiny amount anyways, and these people don't tend to care so much about that in a financial sense (although emotionally it could make a difference, and should be used to reward outstanding advisors)

    As a first-time CEO just out of college, new to the US with zero connections, my advisor network has been indispensable… difficult to imagine life without it!

  • http://bothsidesofthetable.com msuster

    Well, let me take them in turn.

    - Audited financials are a must. Just ask Ignition partners about Entellium (http://www.itexaminer.com/former-entellium-exec…) … now, I get that they shouldn't be by Big 4 firms
    - I think board meetings are critical. They shouldn't discuss financial statements in detail, they should cover strategy discussions. If founders don't want this it tells me that they may not respect the input they're getting from their VCs. I think with good investors most founders relish these sparring sessions (maybe I'm delusional? ;-)
    - CFO's – totally agree
    - Outside directors mostly a waste. I've already written the post – just haven't published it yet!
    - N+1 VC's … sometimes one extra is good. Makes it easier to write a check when the next round comes. Sometimes.
    - expensive PR for a startup is a waste
    - corporate counsel … um … yeah, I can see your point.
    - D&O insurance – not that expensive and, yes, mostly to protect investor director. True.

  • http://www.klifercapital.com/ Sachin Jade

    I agree and dont get me wrong – if you can get them to invest – absolutely! There is nothing like it. As I tell some of our startups – never say no to $$ – jsut make sure you know what the $$ is for and then make the educated decision.

    But most often than not, you will not get it – because most potential advisory board members are not sure if the startup has legs and if it can fly or not and that is a problem in its own right; whether the advisory panel can really add value if they might not completely believe in the startup idea. Hence, the mix of folks that are needed on the advisory board to make it work and get the right advise. So, as an entrepreneur, you have to try out several innovative techniques….

  • http://www.echosign.com/ Jason M. Lemkin

    I doubt the auditors would have caught the Entellium fraud, even as egregious and ridiculous as it was.

  • http://www.echosign.com/ Jason M. Lemkin

    b/c they faked the cash. The reason audited financials are not THAT important be4 $xm is because bank statements should tell the entire story at the end of day. What went out, what came in. The only thing missing is how & why.

  • http://bothsidesofthetable.com msuster

    I agree 100% with your comments so thank you for posting. Maybe I should make it more clear – I'm totally in favor of informal advisors or even telling people they are formal advisors. Heck, I don't care if you throw them on your website. I'm just warning people about:
    - free equity
    - big expectations about a formal board

  • http://www.sceneclips.com John Dugan

    Very Helpful. Thanks Mark!

  • http://bothsidesofthetable.com msuster

    You may be right but the truth is that at a minimum they are CYA for VCs with LP's (who expect us to have audited financials). Hard for me to imagine not catching the Entellium fraud but maybe you know the details better than I. Seems like a classic Ponzi scheme which any good … wait! ;-)

  • Shane

    Interesting post, Mark. Particularly because we recently had someone who I would have considered an informal adviser really, really interested in taking on a more hands-on role in the company. Given his excitement, do you suppose this would be a good time to ask him to put his money where his mouth is?

  • http://www.zoscomm.com jonziskind

    Mark -

    Great write-up. Advisers are a very important part of ZOS. We are in the location business. We have an advisor in each of the LBS sectors we are working in – manufacturer, carrier, gis and geo-spatial expert.

    They are not C-level exec guys, but guys in the trenches of the ecosystem involved with the constantly evolving marketplace.

    They are effectively part of our team and we have a very detailed deliverable description. We have a minimum of one hour a week meeting with each and continue to refine the products, technology and strategy given their expertise in the space. For this we offer a small amount of equity that would be slightly more valuable if they were to be compensated with cash. Plus a bonus.

    We may have lucked out, but these people bring more value to our organization than was possible to imagine. We have had many great successes over the past few months and we owe a lot to this group.

    This allows for us to create a great team where we couldn't have brought this talent in house.

    With all that said, I will not overplay them in my VC pitches!

    Jon

  • shavaoddfellow

    I suppose it's because I have spent some time in the nonprofit and higher ed worlds, but I'm working on my third for-profit advisory board, and never paid anyone a cent, or done more than ask them if they were interested in buying equity.

    I've used advisory boards to credit vertical market specialists who gave good free advice, as a thank you to them. They weren't necessarily world-reknowned Names, but they were respected people in their area of expertise.

    But then, as part of the community, I give back too.

  • http://andre.stechert.org/ Andre Stechert

    How strongly would you draw the distinction between “regular” advisory boards and technical advisory boards?

    I've been both a user of and a provider to a tech advisory board and have been satisfied with the two high level purposes: (1) an outside perspective to help tech groups see around blind spots/being too close to the problem and (2) specialized advice that's too narrow to hire in the early stages (think developer/committer on your favorite open source platform).

    I guess the second task could be handled as a consulting engagement, but for whatever reason, equity often seems to get more bang for the buck.

  • http://www.echosign.com/ Jason M. Lemkin

    Great post Mark.

    How about a foll0w-on on ALL the things VCs think you need b/c of 'convention wisdom' — but that you may not need and be too expensive.

    E.g.,
    * Audited financials before you are doing $5m/year
    * 3+ hour board meetings. 60 minutes is plenty if you get the pack out 1 week early and it's complete
    * CFOs before you are doing $xm / year.
    * Outside directors before you are doing $xm/year. These are even worse than advisory boards b/c they are more expensive for less advice — AND they are your boss.
    * N+1 VCs. They want you to have 1 more than you need.
    * An expensive PR firm when you don't need it.
    * New corporate counsel that is aligned with the VCs
    * D&O insurance that only benefits the investors (big rip-off) practically speaking

    on and on …

  • http://bothsidesofthetable.com msuster

    Hard to say just on your comments. It's always good to have informal advisors around. If he wants to get more actively involved, if he has money and if the company needs a bit of cash then … why not? Not a 100% rule but in general $ = more commitment.

  • http://bothsidesofthetable.com msuster

    Hey, Jon. Glad to hear it's working for you. Seems you've found the right model. Thanks for sharing.

  • http://bothsidesofthetable.com msuster

    ummm, I'm sure tech advisory boards can work. often really technical people don't get asked to be on advisory boards so perhaps there is model where they take things more seriously. glad to hear more stories of where advisors do work.

  • http://bothsidesofthetable.com msuster

    Well, let me take them in turn.

    - Audited financials are a must. Just ask Ignition partners about Entellium (http://www.itexaminer.com/former-entellium-exec…) … now, I get that they shouldn't be by Big 4 firms
    - I think board meetings are critical. They shouldn't discuss financial statements in detail, they should cover strategy discussions. If founders don't want this it tells me that they may not respect the input they're getting from their VCs. I think with good investors most founders relish these sparring sessions (maybe I'm delusional? ;-)
    - CFO's – totally agree
    - Outside directors mostly a waste. I've already written the post – just haven't published it yet!
    - N+1 VC's … sometimes one extra is good. Makes it easier to write a check when the next round comes. Sometimes.
    - expensive PR for a startup is a waste
    - corporate counsel … um … yeah, I can see your point.
    - D&O insurance – not that expensive and, yes, mostly to protect investor director. True.

  • http://www.echosign.com/ Jason M. Lemkin

    I doubt the auditors would have caught the Entellium fraud, even as egregious and ridiculous as it was.

  • http://www.echosign.com/ Jason M. Lemkin

    b/c they faked the cash. The reason audited financials are not THAT important be4 $xm is because bank statements should tell the entire story at the end of day. What went out, what came in. The only thing missing is how & why.

  • http://www.sceneclips.com John Dugan

    Very Helpful. Thanks Mark!

  • http://bothsidesofthetable.com msuster

    You may be right but the truth is that at a minimum they are CYA for VCs with LP's (who expect us to have audited financials). Hard for me to imagine not catching the Entellium fraud but maybe you know the details better than I. Seems like a classic Ponzi scheme which any good … wait! ;-)

  • http://oddfellowstudios.com/ Shava Nerad

    I suppose it's because I have spent some time in the nonprofit and higher ed worlds, but I'm working on my third for-profit advisory board, and never paid anyone a cent, or done more than ask them if they were interested in buying equity.

    I've used advisory boards to credit vertical market specialists who gave good free advice, as a thank you to them. They weren't necessarily world-reknowned Names, but they were respected people in their area of expertise.

    But then, as part of the community, I give back too.

  • http://twitter.com/bethechange99 Be The Change

    Excellent advise. Many thanks!

  • Guest

    Have to disagree: http://bit.ly/2aMvvL. My BOA has proved invaluable. They're legally committed, are expected to give a certain # of hours per month, and meet with me practically monthly. Serial entrepreneurs, angels, IPO leads, industry bigs, young guys with passion…they're all there. Not only do they anticipate problems, they make introductions, push me hard, bring in backup and give me hell on the weekends to help improve my pitch, and even take mtgs I can't attend to see if a particular VC firm would be a good fit. They work pretty darn hard for me and I couldn't really imagine asking more from them.

  • http://twitter.com/bethechange99 Be The Change

    Excellent advise. Many thanks!

  • http://www.betteroffline.com AK

    Sorry about multiple comment submissions…it's like I've never seen a computer before

    [edit] Ahh, the bit.ly link must be hanging things up

  • http://www.betteroffline.com AK

    Have to disagree. My BOA has proved invaluable. They're legally committed, are expected to give a certain # of hours per month, and meet with me practically monthly. Serial entrepreneurs, angels, IPO leads, industry vets, young guys with passion…they're all there. Not only do they anticipate problems, they make introductions, push me hard, bring in outside help, give me hell on the weekends to help improve my pitch, and even take mtgs I can't attend to see if a VC firm would be a good fit. They work pretty darn hard for me and I couldn't really imagine asking more from them.

  • http://www.betteroffline.com AK

    Sorry about multiple comment submissions…it's like I've never seen a computer before

    [edit] Ahh, the bit.ly link must be hanging things up

  • nathanbeckord

    Good article, Mark. I like the different angle of the article about whether a startup should even have an advisory board. In the event the startup does, in fact, decide they need one, it comes down to i) screening for folks who are truly motivated to help; ii) setting/managing expectations and roles upfront; iii) making it worthwhile and “fun” for them to stay involved.

    The “fun” part should not be neglected. I sit on two advisory boards and it is a blast to participate on the startup rollercoaster without having to deal with day-to-day minutiae.

    One other tip for getting participation at meetings: rather than trying to coordinate several persons' schedules (an impossible task), simply dictate a firm meeting date well in advance (like 2 mos) <or> have a regular standing meeting (e.g., 3rd thursday of each month).

    I wrote a (rather detailed) why-when-who-what-how blog post recently called “The Care and Feeding of Advisory Boards” recently; for further reading: http://bit.ly/13u2IE

    Nathan Beckord

  • bobarciniaga

    Our firm has built and managed about 100 of these boards and although you bring up some great things to consider when it comes to building a board I would pose a couple of concerns about asking for a capital contribution when it comes to adding your board members;

    1. I propose that this is now a board of directors and if you think the time and energy to manage an advisory board is hard wait until you have to run a governance board.

    2. Changes the tone of the advice. As an advisor with “skin in the game” I am now focused on preserving and growing my investment (no matter how rich I am I would rather not lost the $10k). My advice is now going to have some element of self preservation and advancement. What if your advisor does not think you are the guy to grow the company as the CEO but you want to continue in that role?

    3. eliminates some potentially great advisors that may not want to invewst in your company but are willing to invest their time and tacit knowledge instead to help you grow a sutainable company which will be far more diffcult than raising money.

    Look at the ability to have these advisors help you build a company not raise m0ey. Raising money is not a long term strategy and once you have raised your money what value do these guys provide? Assuming you have a real company you are going to raise your money and if you do you are going to need these guys to help you grow it.

    Some great information though and I cannot agree more with the potential pitfalls of engaging a group at this level and how critical it can be. As we tell all of our clients if done right with the right expectations and the right structure this can be one of your most powerful and effective tools. If not done right this could be one of the biggest disasters you can make. For more information you can check out our blog at http://www.boardbestpractices.com

  • http://www.liveumbrella.com ladyleet

    Great advice. I'm really enjoying this series of yours. Keep up the awesome input.

  • http://www.twitter.com/ladyleet ladyleet

    Great advice. I'm really enjoying this series of yours. Keep up the awesome input.

  • http://www.nuiteq.com/ Harry van der Veen

    Thanks for this one.

  • http://www.nuiteq.com/ Harry van der Veen

    Thanks for this one.

  • http://www.virtualocity.biz/ Trish Renshaw

    I so appreciate the candor. I am approaching people to be on my team and board. One person suggested the advisory role because of his time constraints and so I was looking into it. At least he is being honest so I figure I can sign him up but don't offer any equity.

  • http://www.virtualocity.biz/ Trish Renshaw

    I so appreciate the candor. I am approaching people to be on my team and board. One person suggested the advisory role because of his time constraints and so I was looking into it. At least he is being honest so I figure I can sign him up but don't offer any equity.

  • http://www.virtualocity.biz/ Trish Renshaw

    I so appreciate the candor. I am approaching people to be on my team and board. One person suggested the advisory role because of his time constraints and so I was looking into it. At least he is being honest so I figure I can sign him up but don't offer any equity.

  • Pingback: Keeping Startup Advisors Informed (Email Template) | Dan Martell (@danmartell)

  • Wayne

    Occasionally, a 10 minute phone call over a specific issue or a lunch for a general discussion with an advisory board member is extremely valuable. These are people I go to infrequently; as an advisory board member, he/she is more knowledgeable and more likely to respond. The big advisory board meeting usually useless.

  • Nomad Influencer

    The most important ingredient is for YOU to leverage your advisory board, not sit back and hope it goes well. This post is flawed based on my real life experience, sorry. Failed Advisory Boards start and end with the founder not being prepared to work with one. Now if your post was about Board of Directors…yeah, that would make sense.