Startups and Advisory Board Members

Written By: September 25, 2006

I have been on both sides of the Advisory Board equation.  As a startup founder, I’ve invited individuals to be an advisory board member.  I’ve also been asked to be an advisory board member to other startups.

First, lets summarize the two most likely reasons you would put someone on your advisory board (one or both of the following apply):
  1. Advisory Value:  The person you are inviting has experience and knowledge and can act as an advisor to your startup.

  1. Brand Value:  The person you are inviting has “brand” and credibility.  By placing them on your advisor board, you are hoping that some of that credibility will rub-off on your startup.

There’s nothing wrong with #2, but I’d argue that where possible, you should add advisory board members that can actually be advisors (and not just a name on your website).

Having said that, here are some additional thoughts on the topic.  I’m writing this from the perspective of the entrepreneur (but factoring in some of my experience being an advisory board member myself).
  1. It’s Not About The Equity:  It is customary to offer some equity to advisory board members (and not customary to pay any cash).  But, the level of equity given is usually so low that it is unlikely that advisory board members will agree to join your board simply for this.  Lets take a look at a quick example.  Lets say you offer an experienced startup entrepreneur with experience in your domain about 0.10% of your shares.  Now, even if your startup is acquired for a $100 million dollars in 5 years.  Since you will have likely issued more shares along the way (possibly for raising capital), the 0.10% that the advisor has will be diluted.  At the end of it all, she will likely have much less than $100,000 in value.  Not that this isn’t significant money, but given the risk associated with this (i.e. the probability of you actually exiting for $100 million+ is not 100%).  In short, most savvy advisors know that the equity that they are getting is not worth that much (in current terms).

  1. Be Respectful:  In most cases, those that join your advisory board member are doing so because they want to help.  As noted above, the actual compensation that they get for their time is pretty nominal.  From a “brand building” perspective, the value they get from sitting on one more advisory board is much less than the value you get from having them on.  It is important to recognize this and be respectful of their time and situation.

  1. Be Reasonable:  I’ve seen several startup founders “recruit” advisory board members, given them a minor number of shares and expect the world in return.  Just because someone joins your advisory board (and you give them some token shares) does not mean they will open up their network to you, help you find early customers or be willing to introduce you to potential investors.  Of course, they may do all of these things, but each situation is different.  Don’t be unreasonable in your expectations.

  1. No Responsibility:  Unlike a board of directors member, an advisory board member has no real decision-making authority and no real responsibility.  Their role is simply to act as an advisor.  How much advice you try and extract – and what you do with it, is totally up to you.

  1. Informal Advisors:  Certain individuals may turn-down the offer to formally join your board of advisors (in exchange for token equity), but may still be willing to help you on an “ad-hoc” basis.  I do this all the time.  My rationale is that by accepting a “formal” role (and taking any minor equity stake), I feel like I have an obligation to actually do something.  (I’ve actually turned down equity as part of a formal advisory role simply because I didn’t want the associated obligation).  In these cases, it may be possible to still get the help.  Work out some informal relationship so that the advisor can still help you based on their situation.

Of course, there’s nothing that says you actually need to create a formal advisory board for your startup.  It’s up to you.  I personally think there is value in it, but it does take some effort and energy – and drawing the value can sometimes be a challenge.  What are your thoughts?  Have you formed an advisory board for your startup?  If so, what was your experience?

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