This 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.