The Power of An Advisory Board

Advisory boards can be a huge driver of success for start ups. They can provide you with experience, connections, perspective, legitimacy, and encouragement.

Below are some pointers on how to deal with advisory boards, then afterwards a great story for you to watch. My buddy Ty Danco just posted the best advisory board story I have ever heard. It is a video of his talk last week at the SVB Boston CEO Summit. Fantastic story well worth a watch. (And for a discussion on the difference between an advisory board and a regular corporate board, see here.)

While watching the video, pay attention to how Ty thought about the composition of his board relative to the needs of his company – where he was weak or at least knew he needed to be really strong, he specifically shopped for the right connections and experience.

In terms of setting up an advisory board, here are a few thoughts for you to consider:

Payment

It is rare to pay advisory board members cash compensation. More typical is to give them stock, generally in the range of 0.25%-1.5%. Figure 0.5% in most cases, but more if the person is an absolute key driver of your success or will be helping you close critical early customer deals. (But see the vesting discussion below.) You will, however, need to reimburse board members for reasonable expenses incurred on your behalf, so keep that in mind if you plan to meet frequently in person (which is unusual) and want to include someone who has to travel a great distance to get to you.

Term

Most entrepreneurs are new to the advisory board concept and so they don’t look far enough down the road. The company’s needs change as it progresses through the early stages of its development, so your advisory board composition should change over time too. Try to give less stock with shorter vesting so that you can rotate skills onto and off of the board over time.

Homework

It is true that some of the value of the board is window dressing for the sake of credibility, but you are a fool if you stop there. You are giving away far too much valuable equity to let your advisory board members coast. A good CEO will constantly be doling out assignments, requests for assistance, questions, and floating ideas. To get the full value, you must engage them, so put them to work. (This applies to your regular Board of Directors as well.)

Confidentiality

Be very clear with the board 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, but it is your fault if you don’t over communicate and over remind on this subject.

Exclusivity/Non-Compete

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. Better to clarify that up front than when it is too late.

Publicity

Most advisory board members understand that you will disclose their relationship with your company, but not all of them do. In either case it is well-worth reviewing with them if they have any rules of the road they need you to observe when disclosing their involvement. This is especially true with the “great catch” VIPs you lure onto your board. 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. No upside in making an enemy out of a VIP.

Use an Agreement

It is worth having a short agreement spelling out the key issues in this list. Any corporate lawyer worth her salt can supply you with some templates you can look at.

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; can prevent major issues down the road when in due diligence for an exit or if the non-compete issue comes into play.

Other Legalities

Since you are doing an agreement anyway, it is worth clarifying that they are independent contractors not employees entitled to benefits or overtime, and it is also worth putting in some language limiting liability to each other (but make sure that the limit on damages does not apply to breaches of confidentiality).

Working with an advisory board can be a lot of fun and it can really turbo-charge both the pace of your learning and the pace of your companies growth. With a little luck and some planning there is no reason you cannot build a great advisory board. Go make it happen.

Thanks again to Ty Danco for sharing his awesome story:

http://www.youtube.com/watch?feature=player_embedded&v=aAP-ehqlsoE#!

Comments, questions or reactions to this post? Leave a note below and I will respond to your questions.

If you enjoyed this, you might enjoy: Boards vs. Advisory Boards, What I Look For In An Entrepreneur, Why Angels Chase Electrons, Are Entrepreneurs Wild Risk-Takers?, Pick Your Founder/Co-Investors Carefully & Reflections on the Nature of Entrepreneurs, Top 20 Dos & Don’ts with Angel Groups & Early Stage Financing, Delusional Economics, The Overture, That Vision Thing, Loch Ness, Unicorns & The First-Mover Advantage, Should I Wait For A Technical Co-Founder.

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The Power of An Advisory Board

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