Building a team of advisors can be one of the most beneficial steps a startup can take in its early stages. Even the bests entrepreneurs don’t know everything, and it’s critical for them to acknowledge and address blind spots. Successful startups tend to be the ones that do this sooner, rather than later, and doing so sends positive signals to future investors and stakeholders.
Benefits of an Advisory Team
A well-rounded and diverse team of advisors can be an invaluable resource for a startup. Not only do advisors bring knowledge, experience, and contacts, but they also de-risk the venture.
An experienced advisor may have faced the same or similar issues plaguing the entrepreneur and may be able to provide insight on other issues that the entrepreneur did not even know would be a problem. Well-connected advisors can also provide access to a deep network of investors and/or industry insiders, which may result in new clients or strategic partnerships for the company.
A solid advisory team also helps to make the company more appealing to investors by reducing the risk faced by the startup. An entrepreneur with an advisory board signals both that he has recognized and identified his shortcomings, and is taking steps to address them. Moreover, an impressive advisory board signals that those well credentialed individuals have enough confidence in the company to attach their name to it and commit a significant portion of their time to helping it succeed. Overall, such companies are less likely to face the pitfalls another company might face due to the wealth of experience brought by the advisory board.
Recruiting the Advisory Team
Entrepreneurs should be strategic in recruiting their advisory team, as it’s not a one-size-fits-all process. Entrepreneurs should consider the current stage of their company, and the specific challenges it is facing.
At nascent stages, it may be most helpful to seek advice from someone who has a general understanding of the foundational issues startups face, likely someone who has previously started their own company. Such advisors can often provide insights into the areas of recruiting and managing financial resources.
As the company progresses, it may be useful for entrepreneurs to engage advisors with industry-specific knowledge. The company should target those who can advise on the challenges, market dynamics and competitive landscape of the markets the company seeks to serve.
In later stages, it’s important to consider the gaps of the company’s in-house expertise. For instance, the company may have a solid product, but does not know how to get it picked up by retailers, or needs to better develop its marketing. The types of advisors the company should be seeking are those with experience in growing and scaling companies, commercializing products, and navigating implementation challenges.
There are also some across the board considerations in selecting advisors. First, all advisors should believe in the organization and its mission. Someone who isn’t passionate about the company will not bring the energy or commitment the startup needs. It’s also critical that the advisor have the capacity to speak up and challenge the founders or CEO. The advisors shouldn’t be yes-men or women, but should be encouraged to push back when appropriate (keeping in mind that the founder or CEO is the one with ultimate decision-making authority).
Finally, it is important that the advisory board be diverse in its experiences, backgrounds, and perspectives. It’s not uncommon to discuss the same issue with three different people and get three different answers. Imagine a medical technology company faced with an important decision in its product development, and its advisory board consists of a lawyer, a doctor, and a venture capitalist. Each advisor may offer drastically different, and even conflicting, recommendations. The CEO may ultimately choose one path over the others, or blend multiple options together. But if the board consisted of three lawyers with similar advice, it could appear to the CEO that there was only one option available. Better decisions will be those made with full awareness of the risks involved and alternate paths available. A well-rounded group of advisors will lead to a well-rounded approach by the company.
Formalizing the Advisory Board
At the early stages of a company, it might not make sense to formalize an advisory board. Founders may rely on mentors who can offer advice and emotional support over a cup of coffee, and who may be more comfortable with low commitment or engagement in the company. Typically, mentorships operate as informal relationships, without any exchange of consideration or documents to be signed.
As the company grows, however, entrepreneurs will want a more formal structure,[1] with advisors on whom the company and its founders can rely. To accomplish this, many companies engage advisors through an advisory agreement. Though there are some “do’s” and “don’ts” involved, advisory agreements are usually simple and straightforward.
Generally, advisory agreements should lay out the role of the advisor, address the ownership of intellectual property, and set forth confidentiality obligations. Such agreements should also address compensation. Often, the advisor is given a fraction of a percentage of equity. The Founder’s Institute’s FAST template makes a precise calculation easy, providing percentages based on the stage of the company and the advisor’s time commitment. Of course, the company and/or advisor may wish to, and are entitled to, negotiate something different. Regardless of the amount of equity that is ultimately exchanged, it’s frequently a good idea to subject any equity grant to a vesting schedule, to ensure the advisor sticks around and stays committed.
Templates abound for advisory agreements. But the templates vary in quality, and there are a variety of issues in using form contracts. Because the company is giving away an ownership interest to a new party, founders should have the agreement reviewed by a lawyer before signing anything.
If you’re looking to bring on an advisory, or form an advisory board, give us a call, or reach out to info@springer-law.com.
Tags: #StartupTips #AdvisoryBoard
[1] Note that an “advisory board” is usually not really a “board,” but a reference to a group of individuals with whom the company has engaged in an advisory capacity.
This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship. You should consult an attorney regarding your individual situation. We are not responsible for the content of other websites to which we link, and the content of those websites is not guaranteed to be correct, complete, or current, and should not be relied upon as legal advice.
Comments