Archive for July 16, 2008

Common Questions about Advisory Boards

Written by Theresa Shafer. Posted in Rules of Thumb, Startups

What is an advisory board?

An advisory board is a formal or informal group of advisers who give advise, contacts, and feedback. Unlike the board of directors they do not have a fiduciary responsibility but are critical for start-ups. Also see Forming an advisory board.

How can they help me?

There are three broad ways that an advisory board can help you. The first is domain or technology knowledge. Secondly, industry knowledge advisors will understand the real ins and outs of how your market works and what the market needs are, they may also be able to open doors. Domain or technology folks maybe able to open door to potential partners and suppliers, but market knowledge folks maybe able to bring in the prospects or at least have you talk to people that prevent strategic misfires as you go into the market. And thirdly, if neither of the other two groups have been in a start-up before, it’s good to have at least one person either on your team or as an adviser who has rapid growth. So, if you are fortunate and you start to really takeoff, you have some somebody that helps you make decisions in a timely way and understands what to look out for and how to scale the company.

What do I give them?

Normally advisors which add credibility to your firm in a variety of ways, will trade expertise or services for equity.You typically are going to give them founders’ equity stock which is coming out of your pocket. It is frankly a negotiation, how much time they give you or how much equity they get, and that brings anywhere from 0.1% or 1%, in some very rare cases perhaps 2%, that’s the negotiation. Usually there is some kind of vesting schedule maybe on a 2-year or 3-year schedule with a 3 month or 6 month cliff. Because you want to make sure that things are working out, you don’t have a values’ conflict or getting value, you normally have a 3 or 6 month cliff. If things do not work out, then they walk away and they don’t get anything. You can consider those early few months a probationary period that allows you to make a final mutual assessment.
How do I use them?

You want to actually bring them together as appropriate to do at least a quarterly meeting, might be a phone call, might be a nice dinner. This time you can brief them on your business, dry run your demo, and get feedback on your plans.  you would like to be to able get some introductions. They are a great source for contacts for employees, partners, prospects, or investment partners.

What do I ask of them?

  • You are looking typically for 2 hours a month, 4 hours a quarter. Schedule either monthly, or twice a quarter, once a quarter formal meeting where you present a briefing for them.  These become a proxy for your real board meetings until you have a real board of directors, this is a board of advisors.
  • You want to be able to call them when urgent things come up. They are busy people, so you only want call for urgent things, but when urgent things come up, you want to be able to reach out to them.
  • You want to negotiate use their name. You would like to announce in a press release that they have joined you, would like to be able to use their name on your website, you would like to be able to have folks call them to get their opinion of you, it might be investors or it might be a major prospect you are talking to.

Normally about two-thirds of that value is the advice they give you and one-third is the doors they open and the value that their reputation sheds on your company.

VentureHacks has three relevant posts that are more focused on VC related issues than bootstrapping but still worth reviewing:

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