Advisory boards are not always that well understood, but they can be a huge driver of success for start ups. Advisory boards can provide a company with experience, connections, perspective, and legitimacy. And there are times when they can provide encouragement to even the most battle-hardened CEO. But how do they work and what are the mechanics of getting one set up?
Below are some pointers on how to deal with advisory boards and advisory board service, then afterwards a great story for you to watch. New England angel Ty Danco has shared the best advisory board story I have ever heard. It is a video of a talk at an SVB Boston CEO Summit. Fantastic story well worth a watch. While viewing the video, pay attention to how Ty thought about the composition of his board relative to the needs of his company. Where he was weak, or at least knew he needed to be really strong, he specifically shopped for the right connections and experience.
In terms of setting up an advisory board, here are a few thoughts for you to consider (read this for a discussion on the difference between an advisory board and a regular corporate board):
Payment
It is rare to pay advisory board members cash compensation. More typical is to give them stock, generally in the range of 0.25%-1.5%. Figure 0.5% in most cases, but more if the person is an absolute key driver of the company’s success or will be helping the company close critical early customer deals. (But see the vesting discussion below.) Companies will, however, need to reimburse board members for reasonable expenses incurred on its behalf, so founders should keep that in mind if they plan to meet frequently in person (which is unusual) and want to include someone who has to travel a great distance to get to them.
Term
Most entrepreneurs are new to the advisory board concept and so they don’t look far enough down the road. The company’s needs change as it progresses through the early stages of its development, so the ideal advisory board composition should change over time too. Companies should consider trying to give less stock, but with shorter vesting, so that they can rotate skills onto and off of the board over time.
Homework
It is true that some of the value of the board is window dressing for the sake of credibility, but founders are foolish if they stop there. They are giving away far too much valuable equity to let their advisory board members coast. A good CEO will constantly be doling out assignments, requests for assistance, questions, and floating ideas. To get the full value, they must engage advisory board members, so put them to work. (This applies to their regular Board of Directors as well.)
Confidentiality
Good CEOs will be very clear with the board when they want board members to keep information confidential and remind them often what they can and cannot say. A lot of companies leak from the top, but it is the CEO’s fault if she doesn’t over-communicate and over remind on this subject.
Exclusivity/Non-Compete
It is worth considering whether there are certain kinds of companies advisors should not simultaneously represent or do business with while in the inner circle of another company. Best for all involved if that is clarified up front before it is too late.
Publicity
Most advisory board members understand that a company will disclose their relationship, but not all of them do. In either case it is well-worth the CEO and board members reviewing whether there are any rules of the road which must be observed when disclosing advisory involvement. This is especially true with the “great catch” VIPs a company lures onto its board. Some people can be very sensitive to a company acting or writing in a manner that implies more of an endorsement than the advisor is comfortable giving. No upside in making an enemy out of a VIP.
Use an Agreement
It is worth having a short agreement spelling out the key issues in this list. Any corporate lawyer worth her salt can supply you with some templates you can look at and adapt, or this list itself can be adapted into a letter agreement.
Ownership of Ideas
A clause asserting that the company owns all rights in any ideas, discoveries or inventions which crop up during the course of the advisory work is worth its weight in gold; it can prevent major issues down the road when in due diligence for an exit or if the non-compete issue comes into play.
Other Legalities
Since the parties are doing an agreement anyway, it is worth clarifying that advisors are independent contractors, not employees entitled to benefits or overtime, and it is also worth putting in some language limiting liability to each other (but make sure that the limit on damages does not apply to [or at least is much higher in relation to] breaches of confidentiality).
Working on or with an advisory board can be a lot of fun and it can really turbo-charge both the pace of a company’s learning and the pace of its growth. With a little luck and some planning there is no reason a company cannot build a great advisory board. The good ones will go make it happen.
Thanks again to Ty Danco for sharing his awesome story!
