Most startups seem to have advisors listed in their pitch decks, but it’s not always clear what they actually do.
Not every company needs a formal advisory board, but there’s a reason why it’s common practice for many startups to have one. Even the most experienced CEOs can’t possibly be experts in every single aspect of their business and industry, and advisors are the people they often turn to to answer difficult questions, or help make critical industry introductions.
This is especially true for early stage companies that can’t always afford to hire experts until they have enough revenue.
In this episode we discuss what advisors do, what the difference is between formal and informal advisors, how to compensate your advisors and more.
We tell a few stories about how we were able to find very experienced and sought after advisors for our own startup, and how we negotiated with them. We include real information about equity percentages that we offered, and give you some tips about how you can decide how much equity to give.
Listen here to make sure that you have all the information you need to put together your advisory board, and leverage them in the most effective way.
Music by: www.purple-planet.com
- 1:00 Does everyone need an advisor?
- 1:18 While it can be helpful, not everyone needs one. It’s kind of like saying do you need a business partner to succeed? Sure, but not always
- 1:50 If you will never grow beyond a few people in your company, you may not need an advisor
- 2:00 The difference between a mentor and an advisor is that an advisor is typically someone with a specific expertise, while a mentor is often more of a generalist
- 2:40 In a startup you’re always either selling or building, so one example is if you don’t have expertise in selling or building, you might want to bring an advisor to help you understand what to do
- 3:20 VCs often want you to have an advisor because they know in the early stages you might not know everything about your business, and you might not be able to afford to hire someone.
- 4:50 Domain expertise is one reason to bring on an advisor
- 5:13 For example, if you know you’re going to grow your business from 20 to 50 employees, you might want an advisor to help you figure out how to scale a team. It might be too early to bring on a VP of HR, but an advisor can help in the short term
- 6:17 You might also want advisors who can introduce you to potential customers, or people who might invest in your business
- 7:20 Although, if your advisor is also an active angel investor and they’re making introductions to other investors, they should also invest something in to your business. It will be the first question their investor friends ask. “Are you investing?”
- 7:45 If they never make startup investments then you don’t have to worry about this
- 8:43 What’s the difference between a formal and informal advisor?
- 8:52 The main difference is that a formal advisor is compensated in cash or stock, whereas an informal advisor is not
- 9:09 Formal advisors are almost like a contract employee. They provide a lot of value and you want them to be someone you can use on a consistent basis, over a defined period of time
- 9:45 Our story about meeting an informal advisor. We reached out cold to a guy who we thought might be a client
- 10:11 Michael Goldenberg was one of those people, and we ended up having a few phone calls with him, and he got excited about what we were doing
- 10:36 Sergei met with him and we noticed that he started reaching out proactively to us to learn more about the business
- 10:54 Every time we spoke with him on the phone he would give great insight on how our product could be better
- 11:20 Since he was also a sales leader, we wanted to involve him more closely, but would likely only speak to him once a month, so we weren’t willing to compensate him
- 11:30 But we did want to set the expectation that we would speak with him regularly
- 11:47 We asked him: "What do you expect to get from this?"
- 11:52 It turned out he just wanted to be able to put on his LinkedIn that he advises a startup, to boost his resume. So it was a win-win
- 13:10 All advisors want to feel like they’re providing value for you. Not just a name on your deck
- 13:38 What expectations should you set?
- 13:45 With the informal advisor we told him we wanted to check in with him once per month on the phone
- 14:05 In a formal advisory situation you should set expectations about how long the relationships will last
- 14:39 What’s the difference between an informal and formal advisor?
- 14:45 Formal advisor is typically more mission critical to your business, and you want that person more involved and therefore you want to compensate them financially, through equity or cash
- 15:30 How much should you offer in stock compensation?
- 15:49 It’s a negotiation, but usually from .1% of equity to a few percentage points. If you’re giving a few percentage points they’re almost an employee
- 16:10 In this case, you can email them several times a week or even every day and they should respond
- 17:00 .1% is probably the bottom of the range if they will materially impact your business. Usually you go that low if they’re really busy and can’t work with you every day
- 17:40 How we met our formal advisor
- 17:45 We reached out to people cold in our university alumni database
- 18:29 We saw on Angel.co that he was an advisor to other sales software companies, so we spoke to him on the phone
- 18:48 From a timing perspective of when to ask someone to become a formal advisor, if you only met someone once and they ask to be a formal advisor who is compensated, that’s a red flag. They need to offer value first. Not just advise you but do things that are critical like introductions
- 19:35 We met with Kyle in his office after a few calls where he was very helpful. That meeting solidified that we wanted him as a advisor because we had another valuable session with him
- 20:18 How we approached the conversation
- 20:30 In the end of the meeting one of us told him that we enjoyed working with him, and know he advises other companies, and we wanted to make sure we can continue this relationship in a more formal way. We asked if he would be open to being a formal advisor
- 21:13 We asked if he was looking for other companies to advise, because we would love to have him on board
- 21:54 We asked him what his range is for equity. He said if he likes working with a company he asks for up to a few percentage points
- 22:45 Usually you compensate an advisor with stock options, not straight up equity. It was options with a vesting schedule, and he also signed an NDA
- 23:40 We asked if he would take .1% because we knew he was a busy guy and wouldn’t be as active
- 23:59 He said he needed .5% to take it more seriously, and that’s what we agreed on
- 24:59 Should you ever compensate with cash?
- 25:12 If this is a true advisor, you should have them be aligned with you and take equity. Resist paying cash
- 25:53 How can you find advisors? For us it was reaching out to alumni and through cold outreach
- 26:52 Another way is by joining an accelerator program with great mentors who are relevant to your business. Through those programs you meet a bunch of mentors and sometimes they organically become advisors
- 27:11 You can also ask other entrepreneurs to introduce you to their advisors, since they’re already pre-vetted
- 27:37 The difference between an advisor and mentor is that usually an advisor has a specific area of expertise, and you can often demand more from them for how often you can meet them
- 28:00 Sometimes advisors and mentors cen overlap
- 28:17 These relationships are what you make them, and every advisory relationships is different, but it’s important to set expectations with your advisor for how the relationship will play out