One of the first conversations I have with founders following the incorporation process is around forming and filling an advisory board. As a founder, surrounding yourself with knowledgeable, connected and committed players can add significant value for your start-up out of the gate. On the flip side, there are uniform mistakes founders often make that end up hurting their company (and cap table). Here are 5 of them:
1. Too many advisors, too soon.
Coming out of inception can be a scary time for a founder, particularly if this the first time at the rodeo. There can be a resulting temptation to get as many advisors involved with your company as soon as possible. The thinking being that, given the relatively cheap costs of an advisor (often just a modest equity grant; see discussion below), your start-up doesn’t need to give up too much to get in return the cache of attaching a strong roster of big names toyour company. A founder’s concentration, however, should be on building meaningful relationships with a small handful of trusted advisors that are going to be available and committed to the success of your company (and, on the flip side, that you will have time to leverage). Additionally, what your company might need today (e.g. advisor with particular industry expertise and/or connections to VCs) is not what it will need in the future (e.g. advisor with experience building commercial relationships or connections to strategic investors/acquirers). Remember, nothing precludes you from adding additional advisors to your company’s roster at those future inflection points….which is when you will be able to get the most out of the relationship.
2. Defining your advisor’s responsibilities too broadly.
The most sought after advisors are often time the busiest advisors. It is important to set expectations at the outset by establishing discreet parameters for an advisor’s responsibilities. As opposed to the loosely defined roles: “general advising services,” “periodic check-ins,” etc. Think: quarterly calls, review of deck/investor pitch, make # of introductions, etc…the types of metrics that you can hold the advisor accountable for and which will help prevent the “disappearing” advisor problem. Advisors will appreciate a more defined role and set of expectations so they can pre-schedule their services into their busy calendar.
3. Giving away too much equity.
I’ve talked with a number of high profile advisors who are constantly being asked to formally advise tech start-ups. One of the pieces of feedback from them is that they are often times amazed at how much a start-up is willing to give-up in equity for only a small amount in return. As a founder, it is easy to get excited about adding that star name advisor to your advisory board but don’t deviate from market expectation. Depending on what services your company will receive, expect to give up anywhere from 0.10% - 0.50% of the fully diluted capitalization of your company. Anything more begins to look expensive (and may be questioned as such by your investors).
4. Getting vesting wrong.
A founder’s instinct may be to set a service provider's vesting period as long as possible to maximize value over a longer period of time. When it comes to advisors, however, that is most often the wrong approach. Advisors typically have a shelf life as to their value accretion. VCs absolutely appreciate the fact that these advisor relationships take their course over a much shorter period than the standard 4-year employee vest period. And that period is typically no longer than 2 years. So instead of diluting value over a longer vest period, the question a founder should be asking is how to maximize value within that shorter window.
5. Don’t judge an advisor by its cover.
Picking the right advisor is not a “one-glove-fits-all" exercise. It can be tricky to anticipate which advisor relationship will ultimately prove to be fruitful. That said, there are initial signs that a founder should certainly not ignore. If the engagement process takes weeks to close out (perhaps because the prospect keeps disappearing on you or they over negotiate the arrangement, etc) or you find yourself being too shy to flesh out the details of what you might expect from the relationship (perhaps because you are concerned you would be bothering the prospect or overburdening them), chances are its not the right fit. A star advisor looks great on the final slide of your pitch deck but an advisory board alone will not be the determining factor for a VC to give you money. Results are. Choose wisely.