Should your Startup / Scale-up have an Advisory Board?

Robert P. Mollen, Counsel at Fried, Frank, Harris, Shriver & Jacobson (London) LLP.

I find that thoughtful founder questions generate my most interesting blogs to write.

Recently I’ve been asked on several occasions about advisory boards – should an emerging company have one, should its members be compensated and, if so, how, and what should an advisory board do? I recently engaged in a thought-provoking exchange on this subject with Paul Bojarski, founder of Sceenic, a Techstars alumni company that provides a really neat “watch together” solution for cable, satellite and other video operators.

I’ve previously written about the value of the advice that business angels and advisors can provide, particularly in an international context http://bit.ly/AngelsandAdvisors, so I fully appreciate that their help can be invaluable.

I’ve also written about appropriate ground rules for “mentors” – including the fact that they should not look for reward while they “give first”. However, mentorship may be time-limited, and it is true that, at some point, the relationship may need to change into a more formal advisory relationship. http://bit.ly/MentorsandFounders

Conversely, founders may find that they are disappointed by what their advisors deliver, or they may conclude, over time, that the relationship simply doesn’t work.

Just to be clear, when I speak about advisors in this blog, I’m talking about individuals who provide business advice from time to time, not professional or financial advisors. I’ve separately written about how startups and scale-ups should select professional advisors: http://bit.ly/StartupProfAdvisors

So how does this all play out in the context of thinking about advisory boards?

1. Make sure you know what you should expect from the relationship

Startups sometimes start with the view that they should have an advisory board because other emerging companies do. That makes no sense.

Advisors can serve a variety of purposes, such as by providing: (a) specialized advice; (b) credibility (i.e., their involvement may make the business more credible to potential customers or investors); and (c) access to a network of customers, investors, or other key decision-makers. Make sure that you and the advisor understand what you expect the advisor to deliver, and make sure you appropriately diligence whether the advisor is likely to have the ability to deliver it. Don’t take that on faith.

2. Advisors should “give first”

In my experience, most advisors (even those who make a living as consultants) are prepared to “give first” to startups and scale-ups, without looking for an immediate quid pro quo. I’m pretty sceptical about startup and scale-up advisors who aren’t prepared first to make some commitment to the relationship before seeking compensation.

From a founder’s perspective, this provides an opportunity to “try before you buy.” I think it generally doesn’t make sense for an emerging company to enter into an advisory relationship before you have a clear idea of what you can expect to secure from the relationship. Unfortunately, not all advice is good advice, and not all advisory relationships work from a personal standpoint, so it makes sense to test things out first.

3. Startup/Scale-up advisors aren’t necessarily motivated by compensation

Some advisors may need, or want, to be compensated – they may make their living from their work, want the founders to have some “skin in the game” in the relationship, or simply think that what they provide is valuable and they should be paid for it. Others, however, help startups and scale-ups for other reasons, which may include a general desire to “give back”.

While founders may reach a point where they feel better asking for help if they are paying for it in some way, founders shouldn’t make assumptions about what advisors are looking for. You don’t need to guess – if you find that the relationship is of continuing value and you want it to continue, discuss this directly with the advisor.

4. Well-selected business angels may be your best advisors

Business angels with relevant experience and/or contacts may be your best source of help. Because they are invested in the business, they are motivated to want you to succeed, and there is no need to provide them with other compensation.

Indeed, it may make sense to accept small amounts of investment (less than you usually would bother with) from angel investors who have the capacity to provide useful advice or introductions to their networks.

5. If you need to compensate your advisors, don’t pay upfront and don’t overpay

Where startup or scale-up advisors or advisory board members are compensated, it is usually in the form of shares, not least because startups and scale-ups may not have much cash. Make sure that any share grants vest/reverse-vest over time – indeed, it makes sense to use the same “four year vesting with a first year cliff” that you would use in making equity grants to your employees. That will put you in a position to terminate the advisor and limit the compensation if the relationship is not delivering sufficient value.

Also, don’t overpay. In my experience, it would be rare that a purely advisory relationship is worth more than 0.25% of your equity per annum, and even that amount may be excessive, particularly at a scale-up stage. Potential investors will not be happy if they think you are wasting valuable equity.

6. Advisors are not the same as an advisory board

For the reasons described above, you may conclude that it makes sense not only to enter into more formal relationships with advisors but also, potentially, to hold them out publicly as advisors. It goes without saying that you will need their permission to do so.

Assuming that they are comfortable playing a public role, however, that doesn’t mean that you need to hold out an advisory board.

An advisory board is not like your board of directors. An advisory board does not have governance or oversight responsibilities. There is generally no reason that an advisory board should meet as a board, and it is likely that one-on-one meetings or calls in response to a specific issue may be the most effective way to use advisors.

Indeed, one problem in having your advisory board meet formally is that this may blur the distinction between what its members reasonably should be doing and what your board of directors is required to do. Some venture capital and business angel investors have a negative view of advisory boards – while some of this may relate to the compensation issue and the equity cost vs value, I think that for some a more fundamental reason is that an advisory board, acting as a board, has no useful role to play.

7. Conclusion

As will be clear from the discussion above, I think that, in a startup or scale-up context, advisors can be very useful, formal advisory boards rather less so. In any case, though, be very clear about what you are looking for your advisors to deliver.

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This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact [email protected].

You will find a listing of Bob’s startup and scale-up blogs on US and international expansion and other startup and scale-up matters here: http://bit.ly/StartupGuidesIndex