Startups and Advisory Board Members

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Startups and Advisory Board Members

 


I have been on both sides of the Advisory Board equation.  As a startup founder, I’ve invited individuals to be an advisory board member.  I’ve also been asked to be an advisory board member to other startups.

First, lets summarize the two most likely reasons you would put someone on your advisory board (one or both of the following apply):
  1. Advisory Value:  The person you are inviting has experience and knowledge and can act as an advisor to your startup.

  1. Brand Value:  The person you are inviting has “brand” and credibility.  By placing them on your advisor board, you are hoping that some of that credibility will rub-off on your startup.


There’s nothing wrong with #2, but I’d argue that where possible, you should add advisory board members that can actually be advisors (and not just a name on your website).

Having said that, here are some additional thoughts on the topic.  I’m writing this from the perspective of the entrepreneur (but factoring in some of my experience being an advisory board member myself).
  1. It’s Not About The Equity:  It is customary to offer some equity to advisory board members (and not customary to pay any cash).  But, the level of equity given is usually so low that it is unlikely that advisory board members will agree to join your board simply for this.  Lets take a look at a quick example.  Lets say you offer an experienced startup entrepreneur with experience in your domain about 0.10% of your shares.  Now, even if your startup is acquired for a $100 million dollars in 5 years.  Since you will have likely issued more shares along the way (possibly for raising capital), the 0.10% that the advisor has will be diluted.  At the end of it all, she will likely have much less than $100,000 in value.  Not that this isn’t significant money, but given the risk associated with this (i.e. the probability of you actually exiting for $100 million+ is not 100%).  In short, most savvy advisors know that the equity that they are getting is not worth that much (in current terms).

  1. Be Respectful:  In most cases, those that join your advisory board member are doing so because they want to help.  As noted above, the actual compensation that they get for their time is pretty nominal.  From a “brand building” perspective, the value they get from sitting on one more advisory board is much less than the value you get from having them on.  It is important to recognize this and be respectful of their time and situation.

  1. Be Reasonable:  I’ve seen several startup founders “recruit” advisory board members, given them a minor number of shares and expect the world in return.  Just because someone joins your advisory board (and you give them some token shares) does not mean they will open up their network to you, help you find early customers or be willing to introduce you to potential investors.  Of course, they may do all of these things, but each situation is different.  Don’t be unreasonable in your expectations.

  1. No Responsibility:  Unlike a board of directors member, an advisory board member has no real decision-making authority and no real responsibility.  Their role is simply to act as an advisor.  How much advice you try and extract – and what you do with it, is totally up to you.

  1. Informal Advisors:  Certain individuals may turn-down the offer to formally join your board of advisors (in exchange for token equity), but may still be willing to help you on an “ad-hoc” basis.  I do this all the time.  My rationale is that by accepting a “formal” role (and taking any minor equity stake), I feel like I have an obligation to actually do something.  (I’ve actually turned down equity as part of a formal advisory role simply because I didn’t want the associated obligation).  In these cases, it may be possible to still get the help.  Work out some informal relationship so that the advisor can still help you based on their situation.


Of course, there’s nothing that says you actually need to create a formal advisory board for your startup.  It’s up to you.  I personally think there is value in it, but it does take some effort and energy – and drawing the value can sometimes be a challenge.  What are your thoughts?  Have you formed an advisory board for your startup?  If so, what was your experience?




Posted by admin_onstartups.com admin_onstartups.com on Mon, Sep 25, 2006

COMMENTS

I'm considering forming an advisory board, but I'm totaly new to this and I didn't know how it worked.
Thank you for the advice, it's of great value to me.

posted on Monday, September 25, 2006 at 11:11 AM by Narciso Cerezo


Dharmesh, I think that this post might be of interest for Spanish speaking people, and I wonder if you'll let me translate it into Spanish and post it in my personal or corporate blog.
Please, let me know.

posted on Monday, September 25, 2006 at 11:20 AM by Narciso Cerezo


Narcisco: Sure thing. Feel free to translate if you feel it will be useful (I've had others do something similar in the past). All that I ask is that a link to the original article be included in your translated version. Thanks.

posted on Monday, September 25, 2006 at 11:23 AM by


You nailed it in your closing lines. I have worked with an advisory group and it took too much to get people to meet for some qulaity time. Ad hoc seems to work much better, but then agian I have never paid the advisors.

posted on Monday, September 25, 2006 at 11:50 AM by Paroon Chadha


There is also another need for an advisory board: I found them particular important to the venture community. I made certain the advisors knew the pitch I was giving to the VC. I also made sure the advisors knew that I expected them to be independent enough to say what they thought. I found many times the VC would call them asking them about the market and opportunity.

posted on Monday, September 25, 2006 at 11:52 AM by Charles Wegrzyn


Dharmesh,
I've translated it and posted it to my personal blog. Of course, I've kept a link to the original post and I've mentioned that the translation has your permission.
Here is it: http://narcisocerezo.zoomblog.com/archivo/2006/09/25/startups-y-los-Miembros-del-Consejo-de.html

Thanks again for your advice, I'm almost starting to consider you as an "Informal Advisor" :-)

posted on Monday, September 25, 2006 at 12:30 PM by Narciso Cerezo


As you might imagine, advisory boards raise legal issues. In the following post:

http://bizzbangbuzz.blogspot.com/2006/02/advisory-board-advantages-raise-legal.html

I explain some of the issues and provide links to other resources on this topic that may be of interest.

posted on Monday, September 25, 2006 at 5:05 PM by Anthony Cerminaro


Dharmesh -- Great insights!

I too have been on both sides of the advisory-board table.

Advisory boards can be just terrific: you can get some really wonderful counsel for the price of a large pizza and a handful of stock options. The important thing is the pizza -- will the advisory board members come to your home office (or your world headquarters :-) and eat it with you while you give them a demo or show them a bunch of powerpoint slides, or whatever? If they're too busy or too far away, then they aren't worth your trouble, I believe.

"Advisory board" members whose names are on there for their marquee value are counterproductive, unless they come to eat pizza with you. Investors and early customers know all about this trick.

posted on Monday, September 25, 2006 at 5:11 PM by Ollie


An advisory board can be useful to keep the founder(s) "real" and focused, particularly if the advisory board members have industry experience and know about the common business mistakes and pitfalls.

I don't have a formal advisory board for Invoiceplace.com but do seek informal feedback from business folk whenever possible, but of course being conscious of other's time constraints.

Regards,
Scott
http://www.invoiceplace.com

posted on Monday, September 25, 2006 at 10:19 PM by Scott Carpenter


Thanks for the piece! As I'm now on the verge of setting my BoA this came just on time.

posted on Tuesday, September 26, 2006 at 3:24 AM by Ran


As advisors are of most use before you have raised finance or made a profit - how do you go about paying them (even when using some options as leverage)? Chicken and egg.

posted on Wednesday, September 27, 2006 at 12:29 PM by Philip Wilkinson


Thoughtful and useful post!

posted on Thursday, September 28, 2006 at 7:13 AM by Sheamus


Question, Where and how do you approach potential Advisory Board Members?

posted on Monday, September 03, 2007 at 5:45 PM by Joe Entrepreneur


Sir, 
I wish to be member of advisory board, please let me know the details. 
Thanking you 
Parashuram.Y.J.

posted on Wednesday, August 19, 2009 at 4:39 AM by Parashuram.Y.J.


Sir, 
I wish to be member of advisory board, please let me know the details. 
Thanking you 
Parashuram.Y.J.

posted on Wednesday, August 19, 2009 at 4:40 AM by Parashuram.Y.J.


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