The term adviser has a homey and relaxed ring to it, conjuring images of warm chats over coffee with supportive friends or brilliant experienced mentors. But according to Jessica Alter, co-founder and CEO of FounderDating, when it comes to the world of startups, a soft and fuzzy approach to advice has serious downsides.
"My biggest shock while we did customer development was the number of entrepreneurs and advisers who are working together 'informally,'" she wrote recently on the company's blog. "This is honestly the biggest mistake you can make in an adviser-advisee relationship. Once in a blue moon, everything might work out well but more often than not, your relationship will fizzle or be inconsistent at best if you don't have an adviser agreement in place. If you've gotten by without establishing formal relationships, you've been lucky."
So what's the right approach to setting up expectations with your advisers? Alter's answer breaks down into the classic 5 Ws.
Everybody! If you're a startup with a busy adviser, you should formalize that relationship.
Two reasons, according to Alter. The first is demonstrating that you value your advisers' time. "While advisers aren't likely to get rich off a small piece of equity (nor are they planning to), you need to show you value their time and knowledge. And that is exactly what an adviser agreement does," she writes. Without one you might hesitate to contact them or feel like you're just "pestering" a busy person.
Second, you need to ensure your incentives are aligned. Formalizing the relationship "ensures you're both working towards the same long-term goal and understand the company vision."
What exactly does "formalize" mean in this context? Alter's answer: "Signing an adviser agreement: a legal document that briefly outlines the adviser's commitment to your company and gives him or her a small amount of equity. It's a short document, and there are several templates on the Web. (Here's one we created with the blessing of two leading law firms Orrick and Gunderson Dettmer)."
"Typically, after a few meetings and work together sessions," answers Alter.
OK, this isn't really a W, but "how" is a favorite tag along to this classic formulation. Alter's answer encompasses the slightly modified "how much." "The amount usually ranges from 0.2 to 1 percent, and it's a good idea to consider the size and growth of your company and the adviser's experience (both as a professional and specifically as an adviser). This chart helps break down some average ranges for you to consider," explains Alter.
And how about giving cash as an alternative? Bad idea, says Alter, as "most companies are cash poor and equity rich in the first few years, so you'd be using your resources unproductively."
Do you have formal agreements in place with your startup's advisers?