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://www.danielbru.com Daniel Brusilovsky

    The advisory board at my startup, Teens in Tech Networks, is awesome. They all help out, give advice when asked for, and attend meetings, etc. Can't complain :)

  • http://bothsidesofthetable.com msuster

    Cool. Are they junior / mid-level / senior? Did you give them equity? How often do you meet? Do they know the details of the business?

  • http://twitter.com/dodeja Akshay Dodeja

    Thanks for the advice.

    I have been trying to figure out how to get started with a set of advisors/mentors for Mugasha. One of the things that have been difficult so far has been trying to find the right people. Given that I have not given my complete attention to this matter, its start difficult to figure out where to start finding them.

    Especially that my company if positioned as a Media company and necessarily a SAAS or a product company. Any thoughts?

  • http://twitter.com/davidsmuts David Smuts

    Great post here Mark, completely concur. I also find that for early startups an advisory board can be useful just for name-credibility pruposes. In other words, if you have a big name CEO or Tech guru on your advisory board this can be externally impressive (to some at least). Just don't expect them to be all that usefull to you (beyond the name association) until you have some hard cash to incentivise them.

  • http://bothsidesofthetable.com msuster

    If you do consider an advisory about I'd probably look to digital music industry luminaries. The industry has a history filled with great companies that have struggled to legally monetize and to gain support of the labels on economically viable terms. I think that's where I'd focus my attention. Good luck.

  • http://bothsidesofthetable.com msuster

    Yeah, I agree they can help lend credibility through their name. Just that I wouldn't part with valuable equity for that alone.

  • gdpandme

    i was just debating this with a friend. Thanks Mark. I also think groupthink could be an issue. best to talk to strangers sometimes: better truth quotient.

  • http://twitter.com/scyphers C. Scyphers

    I'm on an advisory board for a few startups, but I think the way I'm/they're doing it is different than your model. I know the folks from prior ventures (either other startups or other work engagements); they trade me a modicum of equity and both I and a few others act as a sounding board for them. They bring us ideas, strategy, direction, tactics and we give them our thoughts (“that sounds like a good idea”, “well, there's a problem in that you're not considering the entrenched competition — namely InfoSys”, etc.). So far, things have more or less worked out, but these aren't companies that are trying to go public in a three year window; more like trying to achieve a few million in revenue in the first three years or so.

  • http://mynameisned.com Ned Dwyer

    I've been thinking about how to approach this lately so this post couldn't have better timing. Will keep the advice in mind as we get closer to putting together the advisory board – and make sure we manage expectations.

  • http://bothsidesofthetable.com msuster

    Thanks for the input. Yeah, I know it works out for some (many?). But I see many people shooting to get the founder of (brand name) Silicon Valley icons such as Flickr, LinkedIn, Yelp, Twitter, etc. These uber-connected valley people mostly drove my posting mentality but frankly I think it applies to any senior executive. I'm glad to hear it's working for you.

  • http://bothsidesofthetable.com msuster

    Good luck. Don't want to scare you off of advisory boards – just want to be sure you don't overdo the equity component or set time expectations too high.

  • http://www.danielbru.com/ Daniel Brusilovsky

    The advisory board at my startup, Teens in Tech Networks, is awesome. They all help out, give advice when asked for, and attend meetings, etc. Can't complain :)

  • http://bothsidesofthetable.com msuster

    Cool. Are they junior / mid-level / senior? Did you give them equity? How often do you meet? Do they know the details of the business?

  • http://twitter.com/dodeja Akshay Dodeja

    Thanks for the advice.

    I have been trying to figure out how to get started with a set of advisors/mentors for Mugasha. One of the things that have been difficult so far has been trying to find the right people. Given that I have not given my complete attention to this matter, its start difficult to figure out where to start finding them.

    Especially that my company if positioned as a Media company and necessarily a SAAS or a product company. Any thoughts?

  • http://twitter.com/davidsmuts David Smuts

    Great post here Mark, completely concur. I also find that for early startups an advisory board can be useful just for name-credibility pruposes. In other words, if you have a big name CEO or Tech guru on your advisory board this can be externally impressive (to some at least). Just don't expect them to be all that usefull to you (beyond the name association) until you have some hard cash to incentivise them.

  • http://bothsidesofthetable.com msuster

    If you do consider an advisory about I'd probably look to digital music industry luminaries. The industry has a history filled with great companies that have struggled to legally monetize and to gain support of the labels on economically viable terms. I think that's where I'd focus my attention. Good luck.

  • http://bothsidesofthetable.com msuster

    Yeah, I agree they can help lend credibility through their name. Just that I wouldn't part with valuable equity for that alone.

  • gdpandme

    i was just debating this with a friend. Thanks Mark. I also think groupthink could be an issue. best to talk to strangers sometimes: better truth quotient.

  • Pingback: Should Your Startup Have an Advisory Board? | CloudAve()

  • http://www.cscyphers.com/blog scyphers

    I'm on an advisory board for a few startups, but I think the way I'm/they're doing it is different than your model. I know the folks from prior ventures (either other startups or other work engagements); they trade me a modicum of equity and both I and a few others act as a sounding board for them. They bring us ideas, strategy, direction, tactics and we give them our thoughts (“that sounds like a good idea”, “well, there's a problem in that you're not considering the entrenched competition — namely InfoSys”, etc.). So far, things have more or less worked out, but these aren't companies that are trying to go public in a three year window; more like trying to achieve a few million in revenue in the first three years or so.

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

    I agree with some aspects and disagree with others.

    Similar to startup valuation, getting the right advisory board is as much an art as it is a science. This is my advise to the startups -

    1. No matter what VC's say and do, a lot of them have no startup operational experience. If the VC's can bring in operational expertise and help you that is great.

    2. The advisory board should consist of no more than three people – SME [in the field that the startup is focusing on], an entrepreneur [someone who has run a startup before and knows the pitfalls and what it takes], a missing gap person [a skill which the management team lacks – could be marketing, finance etc.].

    3. What we are interested when investing in early stage is whether the founders meet with the advisors once a quarter or once every two weeks. And so, our suggestion has been to give out equity[1% per advisor – that amounts to a maximum of 3% before dilution] and meet with them every two weeks when the startup is young. As it matures, the meeting frequency changes. And that the meeting is not necessarily with the advisory board as a whole. This is where the founder/entrepreneur has to be creative – such as have coffee with the “entrepreneur” advisor and ask about how to structure option pool. The next week or a couple of weeks later, meet with the SME advisor and ask for advise on a certain feature/customer requirement etc.

    And a lot of the times what you are doing with respect to meeting with the advisor's is getting your thoughts clear and understanding your gaps and how to resolve them.

    They are a good source, provided, like everything like else in a startup ecosystem,you do your homework and understand that it is a two way street.

  • http://mynameisned.com Ned Dwyer

    I've been thinking about how to approach this lately so this post couldn't have better timing. Will keep the advice in mind as we get closer to putting together the advisory board – and make sure we manage expectations.

  • http://bothsidesofthetable.com msuster

    Thanks for the input. Yeah, I know it works out for some (many?). But I see many people shooting to get the founder of (brand name) Silicon Valley icons such as Flickr, LinkedIn, Yelp, Twitter, etc. These uber-connected valley people mostly drove my posting mentality but frankly I think it applies to any senior executive. I'm glad to hear it's working for you.

  • http://bothsidesofthetable.com msuster

    Good luck. Don't want to scare you off of advisory boards – just want to be sure you don't overdo the equity component or set time expectations too high.

  • http://www.yumento.com/ David J Lowe

    Thanks Mark. A riveting read. I am currently in the process of looking for advisors to form a board for my startup yumento.com. Your advice has certainly made me think hard about it. I had assumed that to get a 'hot' advisor in would be one way traffic – his wisdom and time in return for a small equity stake. I will now seriously consider asking for buy-in.
    David J Lowe

  • http://twitter.com/cdixon chris dixon

    Totally agree. Get them to invest instead.

  • http://twitter.com/DmitriDon Dmitri Don/Fotki.com

    Your Startup Advice link is not working.

  • http://twitter.com/ColinHayhurst Colin Hayhurst

    Interesting thoughts, Mark.

    I am wondering if a lot of these advisory board problems are caused by getting on board high powered advisors who are just too busy to help. Perhaps it is more effective to not aim for big names and but go for experienced and well connected people who have more time to give.

    By the way, a lot of the smart startups & entrepreneurs I support simply keep a range of informal wise advisors who they call on when they need help. No equity given away, no diary issues for board meetings and as you say people do like to help.

  • http://www.marketing.fm EricFriedman

    People do like to help and that can sometimes come from someone not in a formalized role. I think it helps entrepreneurs gain some rulesguidelines and although it may not always be in a traditional sense, some deadlines to report back to people they respect.

  • chrisyeh

    Mark, what I tell the companies that I advise (including Daniel's Teens in Tech) is that they have to have the right expectations. I can't do work for them–I simply don't have time. What I can do is listen to an explanation of an issue or situation, then offer an action plan that can help them resolve or get the most out of it.

    I suspect that my primary value lies in helping them make the right decisions, rather than in any work I'm doing for them.

    I also give each entrepreneur my cell phone number and tell them to call me at either 8:30 AM or 5:30 PM, since I am driving at those times, and let them know that they can call me as often as they want in those time slots.

  • John Storey

    We don't have any on our board, but I suspect you're right. I think one should be very wary of inviting anyone onto the board who doesn't fill 2 basic criteria: an cash investment to protect, and the time to do more than just attend a monthly meeting

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

    I agree with some aspects and disagree with others.

    Similar to startup valuation, getting the right advisory board is as much an art as it is a science. This is my advise to the startups -

    1. No matter what VC's say and do, a lot of them have no startup operational experience. If the VC's can bring in operational expertise and help you that is great.

    2. The advisory board should consist of no more than three people – SME [in the field that the startup is focusing on], an entrepreneur [someone who has run a startup before and knows the pitfalls and what it takes], a missing gap person [a skill which the management team lacks – could be marketing, finance etc.].

    3. What we are interested when investing in early stage is whether the founders meet with the advisors once a quarter or once every two weeks. And so, our suggestion has been to give out equity[1% per advisor – that amounts to a maximum of 3% before dilution] and meet with them every two weeks when the startup is young. As it matures, the meeting frequency changes. And that the meeting is not necessarily with the advisory board as a whole. This is where the founder/entrepreneur has to be creative – such as have coffee with the “entrepreneur” advisor and ask about how to structure option pool. The next week or a couple of weeks later, meet with the SME advisor and ask for advise on a certain feature/customer requirement etc.

    And a lot of the times what you are doing with respect to meeting with the advisor's is getting your thoughts clear and understanding your gaps and how to resolve them.

    They are a good source, provided, like everything like else in a startup ecosystem,you do your homework and understand that it is a two way street.

  • http://twitter.com/cdixon chris dixon

    Totally agree. Get them to invest instead.

  • http://twitter.com/DmitriDon Dmitri Don/Fotki.com

    Your Startup Advice link is not working.

  • http://bothsidesofthetable.com msuster

    Thanks, Sachin. Some good additions. Even when done your way, in my gut I'd still ask them for $$$ ;-)

  • 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.

  • RajS

    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://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://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

  • 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://twitter.com/ColinHayhurst Colin Hayhurst

    Interesting thoughts, Mark.

    I am wondering if a lot of these advisory board problems are caused by getting on board high powered advisors who are just too busy to help. Perhaps it is more effective to not aim for big names and but go for experienced and well connected people who have more time to give.

    By the way, a lot of the smart startups & entrepreneurs I support simply keep a range of informal wise advisors who they call on when they need help. No equity given away, no diary issues for board meetings and as you say people do like to help.

  • http://www.marketing.fm EricFriedman

    People do like to help and that can sometimes come from someone not in a formalized role. I think it helps entrepreneurs gain some rulesguidelines and although it may not always be in a traditional sense, some deadlines to report back to people they respect.

  • http://chrisyeh.blogspot.com Chris Yeh

    Mark, what I tell the companies that I advise (including Daniel's Teens in Tech) is that they have to have the right expectations. I can't do work for them–I simply don't have time. What I can do is listen to an explanation of an issue or situation, then offer an action plan that can help them resolve or get the most out of it.

    I suspect that my primary value lies in helping them make the right decisions, rather than in any work I'm doing for them.

    I also give each entrepreneur my cell phone number and tell them to call me at either 8:30 AM or 5:30 PM, since I am driving at those times, and let them know that they can call me as often as they want in those time slots.

  • John Storey

    We don't have any on our board, but I suspect you're right. I think one should be very wary of inviting anyone onto the board who doesn't fill 2 basic criteria: an cash investment to protect, and the time to do more than just attend a monthly meeting

  • 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

  • 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://bothsidesofthetable.com msuster

    Thanks, Sachin. Some good additions. Even when done your way, in my gut I'd still ask them for $$$ ;-)