83 % of respondents to a recent survey said they belief in advisors or even advisory boards adding value to their businesses. 17 % considered them a waste of equity / time.
As a founder you might wonder though what advisors actually do, how they add value to your startup and how you would find and compensate quality advisors. This article will answer those exact questions.
What is an adviser and what do they do?
In short advisers, advise the CEO and their team on matters they are experienced in. They are not employees of the company and hence rarely “produce” work product but are engaged to tell you and your team how to get from where you are where you want to be. They also provide access to their network and lend their credibility to your venture.
Most commonly startup advisers are (ex-)founders, investors, experienced industry leaders or subject matter experts with expertise, reputation and/or network the company needs. Dedicated technical/scientific advisors are often seen in industries that need deep technical and/or scientific knowledge to push through their challenges.
How do advisers add value to your startup?
1. They provide skills you lack
No startup will manage to have all skills needed in their company from the get go. They often struggle to attract highly experienced talent as well for inability to challenge them or pay their market rate. On the other hand, specialized skills often are highly critical on occasion but are not permanently needed and do not justify bringing in another co-founder (e.g. fundraising experience).
Bringing in an advisor allows you to tap into someone else’s 10.000 hours, avoid costly mistakes, and often get practical “been there, done this” level of advice.
We have to appreciate here though that advisors are neither employees nor consultants and only dedicate a few hours per month or quarter to your company. It is their job to tell you how to get the job done but not to do the job for you.
2. They provide valuable connections
Especially former CEOs, founders and industry leaders will have extensive networks of contacts you could benefit from. These might be vetted suppliers, potential customers, quality talent or even investors interested in businesses like yours.
Due to this they are often able to make warm introductions and get you in front of people that would otherwise not respond to your requests for face time.
3. They are coaches and mentors
The highest decorated athletes have excellent coaches. The same is true for (future) titans of business. As a CEO you will have few people giving you candid feedback or being able to appreciate your specific challenges. Especially ex-founders are often happy to take a new founder under their wing and help you to put your situation into perspective and keep you on target.
A word of advice here: There are a lot of business coaches out there that are all to keen to work with new founders but have little actual startup experience. They might be excellent at the coaching process but make sub-par mentors. And sometimes you do not have time to be coached towards the optimal outcome but need someone who can just point you at the shortcut.
4. They help you with selecting key talent
Especially when your founding team lacks a critical skill set (e.g. no technical co-founder) and you like to hire your first VP or CxO to cover that area a strong advisor in that space can be an asset to your selection process.
While they might be able to provide you with names from their own “talent bench” some are also more than happy to interview your final top 2-3 candidates to give you an experts perspective.
When do you enlist a startup advisor?
The best time is naturally when you start building your team and have a clear understanding what skills you will lack or need to strengthen. A very common approach is to hire a more junior employee for a role while securing access to a senior advisor to cover the more high level & strategic aspects. With enough skin in the game advisors might also be willing to help your staff to grow into their role.
Other triggers can be the need to build partnerships, ramp up sales or start another round of fundraising. For the latter advisors not only lend their networks and advice but also their credibility, which sometimes is what you need to get that first meeting with a potential investor.
I have also seen founders bring high caliber talent into their startups as advisors with the intention to hire them into their executive team at a later stage. While this is not guaranteed to work out as intended it is a valid strategy to get talent excited about your vision & impact before you make them an offer.
What I would advise against is to bring in advisors to solve one very specific problem that is unlikely to reoccur. Especially when compensated with equity that might put someone on your cap table with little opportunity to add long term value to your business.
Expect your advisory board composition to change over time. Even top-notch advisers might specialize adding value to companies at a specific stage of their development. As your companies outgrows their expertise they might become less and less relevant till it is time to bring in new expertise.
How to find the best advisors for your business?
As you connect with potential advisors, avoid the temptation to focus only on high-profile names because you want to impress potential customers and investors. Unfortunately, those super starts are not only very busy and expect you to work around their schedules but also require a significant premium in compensation. Less well-known experts, often offer the same if not better advice and are normally willing to stretch their agreed hours budget for you if there is an urgent business need.
You should vet any advisor, like you would a potential consultant or hire. Meet them, ask them interview style questions, do reference checks and especially confirm that there is no conflict of interest.
A conflict of interest might arise if the advisor already works for or is invested in one of your competitors. A professional advisor should always declare such a potential conflict to all parties pro-actively but it is always worth to request confirmation.
How do you compensate a startup advisor?
Startup advisors do not work for free. While most will have one free session or make one introduction to demonstrate their capabilities, they will expect a return on the value provided after that.
In principle there are 3 common models to compensate your advisors:
1. Hourly rate or meeting fee
Experienced advisors can charge from $250 to $1,500 per hour depending on their specialization. This is in line with the rates of management consultants and legal professionals.
If the advisor you like to engage ask you to make an offer and is still employed elsewhere a good rule of thumb is to divide their monthly pay by 160 and double it to start negotiations without causing offence.
It is also common to reimburse advisors their expenses to attend any board or other face to face meeting and compensate them for any travel time.
2. A monthly / quarterly retainer
Advisors that are needed for more than 1-3 hours per quarter are often hired on a retainer basis. That normally works out in favor of the startup as similar to executives most advisors don’t mind to do a bit of extra without asking for overtime pay. How you set the retainer should be driven by an honest estimate of how much time you need from your advisor and their hourly rate.
3. Equity stake
This is the most common model to compensate advisors, given especially early-stage startups will not be able or willing to pay their market rates. In my career I have seen advisors getting from 0.25 % till up to 5 % equity with most taking 1.5 to 2.5 %. While this is a very big range it of course depends mainly on the stage of development of the startup, the level of experience of the advisor and how much time you want the advisor to spend with you. As mentioned advisors with “star potential” will command significant premiums that can go even beyond the mentioned ranges.
It is common to use the same vesting schedule applied to the founders for advisors as well. If founders have no vesting schedule, I would recommend to still have advisor equity vest quarterly over a 2-year period. This secures that advisors get compensated but you can also cut your losses if and advisor stops adding value to the business prematurely.
4. Equity / Cash mix
Naturally options 1-3 can be combined freely. Advisors taking a lower equity stake combined with a below market meeting fee are common. We also often see advisors being compensated by the hour for any work that goes beyond the agreed monthly/quarterly amount of time agreed in their advisory agreement.
It is fair to include certain key milestones you like advisor to achieve to reap their full reward. Expect advisors to bulk at milestones that rely on you implementing their advice successfully. Similar as with employees their KPIs should be largely within their area of influence (e.g. organizing a certain number of meetings for an advisor helping with sales or having a certain number of review sessions with your technical team for a technical advisor).
What should you cover in your advisory agreement?
As with your employees, co-founders and consultants you want to have a detailed, written agreement with your advisor. While you can ask your attorney to draft an agreement or Google for a template, professional advisors often have their own templates as well that are applicable to the jurisdiction, they reside in. At minimum your agreement should include:
Where can you find quality advisors?
As any quality talent good advisors are not waiting in front of your office till you need them. They typically have day jobs already and are hence also not out there actively looking for new companies to advise. If you do not have people in your personal network already that you like to get onboard you can facilitate on of the methods below:
1. Startup & Pitch Events
Be it a demo day, meetup or startup focused webinars, you will find that many great advisors like to keep taps on what happens in the entrepreneurial ecosystem around them. The same goes for industry events and groups.
You optimize your chances by actively participating and present your company or product as this might get advisors that can help you intrigued to strike up a conversation with you.
2. LinkedIN
You will find that many experienced leaders that are happy to advice startup mention that in their profile (as does the author of this article). They are quickly identifiable via LinkedIN search and you often find excellent talent with a network disjunct from yours.
3. Cold Emailing
This is applicable to LinkedIN or other social networks as well. As you would do when looking for new hires the best people are normally busy and not out there looking for you. If you pitch your opportunity well they might very well get interested in talking to you though.
A few tips I found useful in approaching advisors cold:
Personally, I am not a fan of online communities or dedicated mentorship platforms. When building my advisory boards for my companies myself, I have found them full of professional coaches selling their coaching programs at best and sleazy sales people that use “free advisory calls” to get on your calendar to pitch their “must have for every founder”-product at worst.
4. Venture Studios, Incubators and Accelerators
All reputable accelerators will assign one if not multiple advisors to the startups in their programs. So will many VCs and alternative investors. They take a fair share of your equity of course and unless you want to do their programs anyhow are most likely the most expensive way to acquire quality advisory.
How to maximize the value you get out of your advisors?
The most important component is that you think of your advisors just as another team in your company. While it might be interesting to have multiple experts chime in on an important decision you like to build a diverse group that can advice on multiple different topics.
Second you need to look for people you respect and are willing to take actionable advice from. The most useless advisor is the one upon who’s advice you will not act. This also means they should have the ability to present their point of view in a way that is convincing to you.
Third make sure you leverage them for their ability to give you unbiased strategic and directional advice. While many of them will be excellent operators, the tactics they can provide you are often also obtainable from your staff or consultants that will cost you a lot less per hour.
Do not worry to end a relationship that does not work prematurely. Be fair and respectful but cut your losses if you have too. As with any type of hire you will make a mistake eventually and bring in the wrong person.
Conclusion
Quality advisors can be a powerful addition to any business. The main advantage you have as a startup is speed and highly talented advisors allow you to buy their 10,000 hours with money or equity instead of your time.
If after reading this article you still struggle to find the right advisor for your startup in the Life Science, MedTech, Digital Health or FinTech space do not hesitate to reach out and let me know what tactics you tried so far. Happy to look through my virtual rolodex and point you in the right direction.
