How Your Startup Can Work Effectively with Experienced Advisors
Startups run lean—money, time and deep expertise are often in short supply. But seasoned entrepreneurs who have built and exited companies can be a powerful asset—if engaged the right way. This article breaks down how to work effectively with outside advisors who have been to where you are trying to go: how to choose them, structure the relationship and compensate them to grow your business.
Be Strategic About Who You Bring In
Seasoned advisors can provide startups with key expertise advantages, if structured properly. Experienced advisors—usually entrepreneurs who have exited but are looking to “give back” by sharing their expertise with select early-stage companies—have “been there, done that,” so they can offer industry insights, introductions to customers or partners, regulatory know-how and help avoiding common missteps, all while adding credibility to open doors as your business grows. Before you add an advisor to your team, assess what your business really needs and what you expect the advisor to add. Look for alignment—not just on expertise, but also on vision and values. Advisors aren’t employees; their role is more limited in time and duration, which often appeals to advisors who can offer high-impact returns for your startup.
Clearly Define Their Role
Set expectations at the outset of the relationship with any outside advisor, both in terms of what the advisor will do and in terms of how the relationship will be structured. For example, are you establishing a formal board of advisors and do you expect your advisors to attend regular meetings, or are you looking for advice and mentorship on an ad hoc basis that can be achieved through periodic calls? Are you asking your advisor to make introductions to target customers or offer expertise in a particular substantive area? Nailing down what the relationship looks like and how much time you are expecting the advisor to be available will help you achieve success. Some companies form a formal “Board of Advisors,” but most founder-advisor relationships are informal—more like mentor-mentee. Either way, keep in mind that outside advisors are not executives or employees of your company, and do not have decision-making authority for the startup. Simply said, advisors advise, but they do not exercise oversight for the organization or have voting rights.
Put It in Writing
Every advisor relationship (even informal ones) should be governed by a written agreement to avoid unpleasant surprises or disagreements. Your agreement should address:
Don’t Ignore Cap Table Math
Your startup’s cap table is sacred. Outside investors will expect equity to be allocated wisely—with enough reserved for founders and executives that they will stay motivated. Advisor and employee equity pools are typically capped to limit dilution to you and your investors. If your startup grants too much equity to advisors and executives too early, this can limit the company’s equity financing options later.
Build in Review Points
Advisor relationships should evolve—or end—gracefully. Set check-in milestones to evaluate if things are working. Some advisors are brought in for a phase (e.g., product validation or regulatory approval) or a purpose. You may wish to base the vesting on their equity on those goals so everyone stays aligned. In short, the best advisors offer a wealth of variable talent and experience for a reasonable cost—securing the right relationship with outside advisors can contribute significantly to the success of your startup.
Be Strategic About Who You Bring In
Seasoned advisors can provide startups with key expertise advantages, if structured properly. Experienced advisors—usually entrepreneurs who have exited but are looking to “give back” by sharing their expertise with select early-stage companies—have “been there, done that,” so they can offer industry insights, introductions to customers or partners, regulatory know-how and help avoiding common missteps, all while adding credibility to open doors as your business grows. Before you add an advisor to your team, assess what your business really needs and what you expect the advisor to add. Look for alignment—not just on expertise, but also on vision and values. Advisors aren’t employees; their role is more limited in time and duration, which often appeals to advisors who can offer high-impact returns for your startup.
Clearly Define Their Role
Set expectations at the outset of the relationship with any outside advisor, both in terms of what the advisor will do and in terms of how the relationship will be structured. For example, are you establishing a formal board of advisors and do you expect your advisors to attend regular meetings, or are you looking for advice and mentorship on an ad hoc basis that can be achieved through periodic calls? Are you asking your advisor to make introductions to target customers or offer expertise in a particular substantive area? Nailing down what the relationship looks like and how much time you are expecting the advisor to be available will help you achieve success. Some companies form a formal “Board of Advisors,” but most founder-advisor relationships are informal—more like mentor-mentee. Either way, keep in mind that outside advisors are not executives or employees of your company, and do not have decision-making authority for the startup. Simply said, advisors advise, but they do not exercise oversight for the organization or have voting rights.
Put It in Writing
Every advisor relationship (even informal ones) should be governed by a written agreement to avoid unpleasant surprises or disagreements. Your agreement should address:
- Defining the Role: Spell out how the advisor will help the organization—will he or she be a sounding board, make introductions, assist with strategy, or provide expertise?
- Term & Exit: Set a clear term for the relationship and the expected termination provisions. Remember, you can always extend the relationship if it is working. Either party should be able to end the agreement, and it is useful to document how the relationship could end. Advisors may lose bandwidth, or your business may outgrow them. Vesting on advisor equity is an important consideration for this reason.
- Time Commitment: Agree on estimated hours per month or quarter, or set a cap (i.e., “no more than X hours per quarter”).
- Confidentiality: It is critical to protect your startup’s confidential, proprietary and sensitive information, and each advisor should agree to this in writing.
- IP Ownership: Even more critical, your agreement should clearly state that all IP created by the advisor using your resources or related to your business belongs to your company. Outside advisors should agree not to reuse your IP in other business ventures or share with other ventures they are involved with. (See above and below.)
- Conflicts of Interest: Your agreement should address conflicts of interest. When you are engaging knowledgeable, experienced industry veterans as advisors, conflicts can arise. You will want to know whether your advisor is working with a competitor and how that would be handled. If a conflict is too significant, it is okay to decide to forgo this relationship.
- Compensation: Most advisors expect to be compensated, generally with equity or a mix of cash and equity. Their compensation should be clearly spelled out in the agreement. If you are granting the advisor equity, then be sure to state clearly whether the equity grant is subject to time-based and/or milestone-based vesting based on the term. Be mindful of the amount of equity you grant an advisor and how quickly it vests because this impacts your cap table.
Don’t Ignore Cap Table Math
Your startup’s cap table is sacred. Outside investors will expect equity to be allocated wisely—with enough reserved for founders and executives that they will stay motivated. Advisor and employee equity pools are typically capped to limit dilution to you and your investors. If your startup grants too much equity to advisors and executives too early, this can limit the company’s equity financing options later.
Build in Review Points
Advisor relationships should evolve—or end—gracefully. Set check-in milestones to evaluate if things are working. Some advisors are brought in for a phase (e.g., product validation or regulatory approval) or a purpose. You may wish to base the vesting on their equity on those goals so everyone stays aligned. In short, the best advisors offer a wealth of variable talent and experience for a reasonable cost—securing the right relationship with outside advisors can contribute significantly to the success of your startup.