Creating an Advisory Board

Advisory boards can be an invaluable source of insight. Think of an advisory board as a collection of mentors that can provide individual expertise, provide you a sounding board for ideas, give you advice, introduce you to valuable contacts, and tell you when you’re potentially making a mistake.

“Think of an advisory board as a collection of mentors that can provide individual expertise, provide you a sounding board for ideas, give you advice, introduce you to valuable contacts, and tell you when you’re potentially making a mistake.” 

Finding the Right Advisors

When looking for advisors consider the following:

• Size Matters. Most advisory boards have three to five members. Any less, and you won’t have a diversity of opinions and skills; any more, and you’ll face the “too many cooks in the kitchen” problem.
• Where to Find Them. You can find advisors from all walks of your life. They can be friends, professional colleagues or those in your network or your industry.
• Find Skills That Complement Yours. When looking for advisors, try to find people with skills that are complementary to yours. If you’ve got a lot of experience in one ares, try to find advisors that have experience in another. By picking advisors who can “round out” your team’s knowledge and capabilities, you’ll ensure that your business can grow in every aspect—not just the ones you and your employees know. Plus, when it comes time to hire, say, a head of marketing, your advisor can give you his or her expert opinion on the candidates.
• Find Experience in Building Companies. It is always helpful to have advisors that have experience building companies to help you implement the processes and structures that drive success.
• Look for Industry Experience. If possible, you also want advisors to have experience in your industry. Imagine you’re the founder of a healthcare startup. An advisor well-versed in the healthcare industry can help you understand how health industry players – health plans, hospital systems and pharmaceutical companies – act and buy solutions. They may also have contacts in the industry and leads for potential employees. As a company changes organically, even the best business plan can fail to anticipate all the challenges or opportunities that will come up. Having a board member from an analogous industry, even in an advisory capacity, can help you keep from reinventing the wheel.
• Look for True Belief. You also want to ask people who seem to genuinely passionate about what you’re doing. Being an advisor is time consuming, and it is rare that you are paying advisors so having advisors that are personally interested in your business is a key criteria.
• Seek Market Presence for Credibility. Certain advisors that have a market presence or are well-known can also lend credibility to your organization. For example, if you get a prominent angel or VC to act as an advisor, you gain credibility within the entrepreneurial community.
• Build a Pipeline. To create an advisory board of five people, you probably need to reach out to 25. Unless you know them, of the 25 you reach out to, you will likely hear back from 15 and end up with your final five.
• Look for Those That Will Challenge You. The best advisor is often one that challenges you. Being forced to examine your assumptions, take risks, and make dramatic changes is hard, but usually, it’s worth it. So if you’re sitting down with someone who’s blunt and a little aggressive, don’t automatically write the person off. He or she could turn out to be your most valuable advisor.

Approaching Potential Advisors

Here are some techniques to use when approaching advisors:

• Existing Relationships. Some of the people on your list may already be acting as advisors, just without the title. They’re the easiest to ask: Tell them how much you appreciate their advice, then say you’d be honored if they’d consider joining your advisory board.
• Strangers. Strangers are a little more difficult, for obvious reasons. Use LinkedIn to see if you have any mutual connections. If you do, ask that person to introduce you. If you don’t, try cold-emailing the potential advisor. A couple of notes:
  • Meeting in-person is ideal, but a video call can suffice.
  • Do not ask them to sign an NDA—you’ll come across as presumptuous and ignorant.
  • Don’t say you’re reaching out because you want them to be your advisor. You don’t know if you want them yet, and that’s like asking someone to be in a relationship with you before your first date.
  • At the meeting, you should give a well-prepared pitch and a product demo.
  • While they’re giving you feedback, measure how excited or interested they seem. Are they asking relevant questions and honing in on the right areas?
  • At this stage of the game, professional chemistry and passion is more important than wisdom.
  • After your conversation, send them a warm email thanking them. You should also try to provide value to them. Is there anyone you can connect them with? Have you read anything recently that’s related to their space? Are you going to any industry events they might be interested in?
  • After a week or two has passed, send them another message asking for a second meeting. Since an advisor position is a big commitment on both sides, having more face-time before you formally ask is important. But let them know why you’re asking again, so they don’t think you’re being overbearing.
  • If you send this email to 10 of the 15 people you met with previously. If all goes well, eight of them will accept the second meeting.

Setting Expectations and Getting Value

Setting expectations serves to align an advisor’s expertise, time and interest with your needs. Here are a few tips:

• Set Expectations. Spelling out the expectations and responsibilities of advisors is best done ahead of time.
• Establish a Process for Efficiency. Keep in mind that advisors are usually helping you “on the side” of their day job and also not being compensated. In light of that, it is important that you set a process that maximizes what you can obtain from these advisors and makes the best use of their time. For example, set up a weekly call for an hour in which all advisors join to talk through what everyone is working on.
• Establish their Time Commitment. Be clear not only about your process for interacting with advisors, but exactly what time commitment they are willing to make. This helps align their activity to the time they have made available to you.
• Focus on Their Area of Expertise. Align activity and deliverables for each advisor to their area of expertise.
• Understand How They Like to Operate. Some questions that can help you flush this out:
  • What are their business strengths/where do they feel they can add the most value?
  • How much experience do they have with…
  • Where do they see your startup going?
  • If they could change one thing about your revenue model, pricing strategy, marketing plan, company structure, what would it be? (
  • What’s their preferred communication style? (Does it conflict with how you like to communicate?)
  • Have they ever worked with an advisor, and if so, what did they like/dislike about the experience?
  • Have they advised anyone before?
  • Why are they interested in your company?
• Sign an Advisor Agreement. Create a contract. This document will help you keep your advisors accountable. After all parties have reviewed and signed the contract, you’ll have officially created your startup advisory board.

Advisors don’t manage themselves and these simple steps help to keep everyone’s expectations and deliverables aligned.

Compensation

Many advisors do not charge for their services and for others a small piece of equity in your company is expected. Here are some guidelines:

• Equity. First, how much equity are you going to give each member? The standard amount ranges from 0.25% to 2%, depending on the advisor’s profile, time commitment, connections, as well as how far along your startup is. (Check out this chart for a detailed breakdown of how much stock to allocate.) Shares usually vested over two years (with no cliff) to ensure that the advisor has a semi-permanent interest in the company’s success.
• Cash. While you have the option of paying advisors in cash instead, this practice is typically discouraged. Not only does having equity give advisors a literal stake in your startup, but the advisor-advisee relationship is very different from the employer-employee one and should be compensated differently. Plus, you’re a young company—which means you’re probably low on cash. But if, for whatever reason, you decide to go the cash route, you should expect to pay $1,000 to $5,000 per advisor per meeting (again, depending on how much they’re bringing to the table and what stage your startup is in.)

Difference Between Board of Directors and Advisory Board

There are three levels of oversight of a company each with different roles and legal responsibilities:

• a formal board of directors, with voting rights on important decisions and certain legal liabilities;
• advisory boards that can provide non-binding industry insight without liability; and
• people with observation (but not voting) rights — the right to sit in, listen and even offer insight at boardroom discussions as the board of directors makes key decisions.

Keep in mind that an advisory board is not the same as a board of directors. A board of directors is formal mechanism that has a legal role and authority. They are elected by the shareholders and act as shareholder representatives and have certain legal and business powers An advisory board doesn’t have any official authority. In addition, any company can have an advisory board, but they’re not mandatory. Public companies, on the other hand, are required to have a board of directors. And while advisors typically meet with the company leaders intermittently, the board of directors must meet at scheduled times.