My friend, super angel Dave Berkus, has observed that you should hire talent, but rent experience. Early start-up hires are so critical, he reasons, that the focus needs to be on "adaptability, creativity, intelligence, drive, and cultural fit." But startups also need to expand insights into what they are doing, so obtaining broader experience is also key. Building an advisory board is a great way to "rent" that experience. Advisory boards can be a huge driver of success for start-ups. Not only can they add needed experience, they can also bring connections, perspective, legitimacy, and encouragement.
Advisory vs. Corporate Boards
New entrepreneurs are often confused about the difference between advisory boards and corporate boards of directors. The confusion is justified - there is some conceptual overlap - but they are very different. Think of the two boards as a nested set of responsibilities, with the corporate board having the fuller scope. A good corporate board of directors will primarily meet as a group and provide a big dose of essential corporate governance, oversight and controls but a necessarily smaller dose of business and strategic advice given their fuller set of responsibilities. Conversely, advisory "boards" are totally focused on the business and strategic advice. Advisory boards usually consist of individual advisors who have one-to-one relationships with the CEO and provide guidance and advice through less formal channels--less, group meetings, more 1:1 email and phone calls. These individuals are your superstar talent "for rent," since they don't hold formal positions, but do advise on business details.
Advisory boards are not all that hard to set up, but there are a few key issues to address getting started.
Use a Written Agreement
It is worth having a short, agreement to spell out the key issues identified below. Any corporate lawyer worth his or her salt can supply you with some short templates to use.
It is rare to pay advisory board members cash compensation. Typically, they receive stock, generally in the range of 0.25%-1.5%. In most cases that means 0.25% to 0.5%, but more may be appropriate if the person can be an important driver of your success, will be committing a significant chunk of time each week, or will help close critical, early customer deals. You may also want to reimburse advisory board members for reasonable expenses incurred on your behalf, so keep that in mind if you plan to meet frequently in person and include someone who has to travel a great distance to get to you.
Term & Vesting
Most entrepreneurs are new to the advisory board concept and so they fail to look far enough down the road. Needs change as a company progresses through the early stages of its development, so your advisory board should change over time too. Rather than giving advisors a big chunk of stock with a normal four-year vesting term, consider giving less stock but with shorter vesting so that you can rotate skills on and off the board over time.
It is true that part of the value of an advisory board can be window dressing with recognizable names to add credibility, but don't stop there. You are giving away far too much equity to let your advisory board members "coast." A good CEO will constantly dole out assignments, and requests for assistance, questions, and ideas. To get full value, you must engage them, so put them to work. (This applies to your regular Board of Directors as well.)
Be very clear with advisors when you want them to keep information confidential and remind them often what they can and cannot say. A lot of companies leak from the top, and it is your fault if you don't over communicate and over remind on this subject.
It is worth considering whether there are certain kinds of companies your advisors should not simultaneously represent or do business with while in your inner circle. It is better to clarify that up front before it is too late.
Most advisory board members understand that you will disclose their relationship, but some may not, so it is well-worth reviewing any rules you need to observe when disclosing their involvement. This is especially true with the "great catch" VIPs you lure in as advisors. Some people can be very sensitive to your acting or writing in a manner that implies more of an endorsement than they are comfortable giving. There is no upside in making an enemy out of a VIP, so clarify it in advance.
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 a non-compete issue comes into play.
Since you are doing an agreement anyway, it is worth clarifying that their role as independent contractors not employees entitled to benefits or overtime., It is also worth adding some language limiting liability to each other (but make sure that the limit on damages does not apply to breaches of confidentiality). If the form you are working with does not address this, get some help from corporate counsel.
Working with an advisory board can be a lot of fun. It can really turbo-charge both the pace of your learning and the pace of your company growth. With a little luck and some planning, there is no reason you cannot build a great advisory board. And, because you're "renting" this superstar talent, your bottom line will benefit too. Go make it happen!