published January 27, 2021
Startup guru Jim Collins was on to something when he said “People are not your most important asset. The right people are.” That wisdom goes double when you’re considering advisors for your new company. Getting the right advisors on your advisory board is one of the best investments you can make at the early stage of your company.
Trusted advisory board members aren’t just there to make you look good for investors, they fill in crucial gaps in experience when it’s too early to make key hires. Often they can give you introductions and connections to many people who are important for building your business—they can even introduce you to investors down the line as you start fundraising.
Typically, more experienced founders have less advisors, while new founders have more. While having more than 10 will likely make investors blink twice, a single-digit number is usually fine.
It’s Not All About Signaling, Is It?
Let’s start with the obvious advice: If you’re working in a specific or technical industry, like Biotech, it pays to create advisory roles for domain experts, especially those that hold bona-fides that you lack on your founding team.
One of the other primary purposes of advisors is to signal your credibility, especially if you lack it in a certain category. Essentially, the role of advisory board members is to help you fill identified holes in your organization where pain points may crop up in the immediate future.
Another possible purpose of an advisor is to give you product and business advice, and to help you refine your own understanding of the space in which you’re operating. In some cases, their industry connections can be very important.
At my last startup, we had an advisor that received 1% (a high amount of startup equity for an advisor) over 4 years for his Rolodex alone. Guess who introduced us to the company that acquired my tech startup?
When seeking out advisors, it pays to use any local support you have in place for references, like an accelerator or business organization. Don’t be afraid to reach outside of your network. The best advisors are forward-thinking and will be interested in your company if it appeals to them, whether they have worked with you previously or not.
Red Flags. Beware of advisors who ask for up-front cash payments (unless they have Sergey Brin-level visibility or prestige) or unusual investment terms or types of equity options.
In some cases, companies will on-board an advisor for their financial connections in the hopes that they will be able to draw in or introduce new investors. It’s common sense that investors are unlikely to take their recommendation unless they themselves have a stake in your company.
Some (less valuable) advisors will expect to meet with founders twice a year, and not have much interaction besides. If you somehow end up with one of these on your advisory board, take comfort in the fact that you can terminate the advisory agreement and their stock vesting will cease.
Getting The Most Out of Your Advisors
Making the most of your advisor agreements requires you to vet your external board members, much like you would an employee. Don’t be afraid to interview them and get some back channel references from other companies they have advised.
The percentage you’ll award them will be largely a response to their answers and how helpful you expect they’ll be to your company. At the end of the process, this will result in a share grant (read about types of share grants in the article Employee Stock Compensation: Equity vs. Options).
Make sure to set the rules of engagement in your advisor agreement before you give them the share grant. This will help set expectations in terms of board member duties, board member roles, and the basic startup to advisory relationship.
Stock, Options, or Cash?
Once you’ve chosen your advisor, you will want to have them sign an Advisor Agreement outlining their responsibilities, rights, and any relevant compensation terms. This is likely to include a statement of your expectations regarding time and involvement, and non-disclosure as well as non-compete arrangements.
An IP assignment agreement may also be something to consider. Most advisor agreements are hastily assembled, but many experts argue for making yours as specific as possible to help establish expectations early.
Most advisor relationships last one or more years—usually no longer than 4—based on what stage their help will be most useful to the company. They will often be subject to a vesting schedule. Product-centered advisors will be most helpful in the first two years as you establish product/market fit.
While some companies choose to provide and paid advisory board positions with direct compensation on a per-meeting or per-event basis, most will choose to structure their advisor compensation as equity in the form of stock options or a stock grant. In the case that an advisor may be one of your initial investors, the additional agreement is still needed if they will receive additional shares.
Capbase provides a default for this agreement, based on a set of assumptions that reflect industry expectations, including a either a one or two-year vesting period with no vesting cliff and a schedule of either monthly or quarterly vesting.
In most Silicon Valley startups, advisory will typically receive equity amounts from .005% and .25% of the company per year. Higher numbers are typically reserved for extremely involved parties. Our set of assumptions also includes a pre-authorized buyback in the event that your relationship with your advisor is terminated before all the shares have vested.
- Inexperienced founders will have more advisors than experienced founders, especially repeat entrepreneurs
- Choose advisors that fill gaps in your organization.
- Beware of advisors that ask for up-front cash payments.
- Advisors typically receive between .005% and .25% yearly in Silicon Valley startups. Larger share grants are reserved for hands-on advisors that play a critical role for the development of your business.
- Most advisor relationships last two years, rarely longer than four.
- Initial investors may be good candidates for an advisor position, especially if you find their advice helpful.
- If your advisors are not providing the help that they promised you, you can terminate the advisory relationship and end stock vesting.