Last week we hosted a panel about the importance of Advisory Boards for startups. Unlike a board of directors, an advisory board is much more informal and commonly utilized on an ad hoc basis by founders when they need help. Advisors make critical introductions, provide essential tactical advice regarding business strategy, fill in knowledge gaps, and signal to the market that your startup is worth engaging with.
The panel included David Bookspan (Founder of Monetate and at Dreamit), Josh Udashkin (founder of Raden), and Ed Lando (Founder of Horizons) and covered topics like: how to find advisory, how to compensated them, and how to leverage them for external "signaling."
The full podcast can be found here and I have summarized 3 key takeaways below:
The first step in building an advisory board is looking inward. Founders should think of the holes in their businesses and use advisors to fill those gaps. "Once you identify the need, it's surprisingly easy to find the people," states David Bookspan. When Bookspan built the advisory board at Monetate, he found thought leaders in the industry who complemented Monetate's strengths. Bob Myers, for example, is a highly regarded executive at one of Monetate's early customers and influential thought leader in eCommerce. Bookspan invited Myers to join the Monetate Advisory Board, and Myers offered Monetate important input into its product and credibility in the market, as well as introductions to other prospective advisors and customers.
Advisors are the people who, in a world free of financial constraints, you would love to join your startup. But they typically have demanding jobs and salaries out of the range possible for a small startup. They are more expensive than you can afford to hire and are more prestigious than anyone would expect to be associated with a brand of your size.
Once this first step is completed, you have to actually reach out to the leaders who you want on your board. "People underestimate the extent to which people who they want are within their reach," states Ed Lando, founder of Horizons School of Technology. Lando advised founders to do a little investigating to figure out things like where your dream advisor spends his or her time, where they are speaking, what organizations they are engaged with. You can insert yourself and make the connection happen even when you don't have someone who can make a warm introduction on your behalf.
Take Josh Udashkin as an example. He built his company with the help of advisors like Brad Feld of Foundry Group, who he cold called and brought on as an informal advisor without having any previous relationship. He did his research and learned as much as he could about how Feld helped scale Fitbit, a hardware business similar to Raden, without hundreds of millions of dollars in capital. Feld agreed to give Udashkin advice, taking no equity for his work.
Importance of Signaling
In addition to advice, advisors can also create value by association. "There is a difference between advisors and an advisory board. I think of an advisory board as people who will advance your mission. If you're looking for an advisor, will a quote from this person mean something to somebody- an investor, a customer, a provider, someone in the supply chain?" asked Bookspan.
Startups can - and should! - use their advisors to build trust. When there is a high cost of switching to your product or when you are working in an industry where sensitive data is at play, advisors can function as testimonials to consumers and help sway a buyer's decision to adopt a new technology.
If this is the case for your startup, you should always include quotes from your advisors, and not just their pictures, on your website. "Having faces on a website is nice. Having their words is a whole lot nicer," states Bookspan. Consumers want to know why these people are invested in the product. Their words tell this story.
One question that always arises with advisors is whether compensation is necessary.
If you decide to compensate, there are certain norms for advisors. Founders typically give between a quarter of a percent and a full percent of equity to advisors, depending on the stage of the startup and the nature and role of the advisor. This equity usually vests over two years with either a six month or one year cliff, i.e. if you stop being an advisor in month three, you don't get any equity.
Generally, though, it's not about the amount of equity. These amounts are too little to influence someone who is a leader in their field. Intrinsic motivation is critical for an advisor to come on board. They must believe in your vision and be inspired to give you their time. However, offering the additional equity gives another form of value that is not negligible.
If someone starts to negotiate aggressively over these numbers, it could mean they are not someone you want as an advisor. "At the end of the day, you're so busy working on your business yourself that an advisor is more of a nice to have rather than a need to have," states Udashkin. For instance, finding advisors should not get in way of recruiting an amazing designer or engineer, people who are crucial to the success of your startup.
Bear in mind that equity compensation is not the only route. Sometimes, investors start speaking to founders and give free advice. They may be thinking of building a long-term relationship. "It's almost like an informal option on being able to participate in later rounds," suggested Lando.
For consumer companies, gifting your product is also an option. Josh Udashkin managed to build an all-star advisory board, with people like Reed Krakoff and Brad Feld, without giving up any equity. He does send them his highly sought after luggage, though.
In any case, getting advice is not a one-way street. Figure out something to give your advisors in return, whether that be equity, deal flow, industry insights, or, in the case of Raden, luggage.
Based on a panel "Building a Board of Advisors and Putting them to Work" on the Dreamit #Get2A podcast. Check out upcoming webinars on Dreamit.com.