Advisory boards seem to be all the rage these days in the startup world. Having trouble raising money? Let’s give away some of our company to people we think will peddle our shit for us. Don’t have a product to demo yet? Let’s beef up our pitch deck with a 10 person advisory board to make up for it. Don’t have product market fit? Let’s point to the big name exec who AGREED TO TAKE FREE EQUITY FROM US as a sign of traction. With God as my witness, I have seen way too many pitch decks with more advisors than employees. WTF.
At least once a month, someone asks me if I’ll be on their advisory board, and most of the time, I have to politely turn them down. One might think it’s stupid to turn down free equity, and given the fact that most of these companies will die, it’s a numbers game, and I’m losing. I do know some people who are advisors to 50+ companies, some of which have hit big time, and so it’s clearly worked out for them. I’ve also seen entrepreneurs hand out advisory shares to very well known executives, and then had to spend 5x more time trying to manage these people and get their money’s worth out of them. Having been on both sides (having given out advisory shares, and having been the recipient of them, here’s how entrepreneurs should think about advisory boards):
- If the primary reason you are giving out advisory shares to someone is in connection with fund raising, stop right there. This almost never ends up working out, and most importantly, it’s against SEC rules to pay someone in relation to raising money, unless they are registered as a broker-dealer. I guarantee you, whoever it is that you are offering advisory shares to, is not registered as a broker-dealer. What’s perhaps a little more palatable though, is to offer advisory shares to someone who invests in the company and isn’t an institutional venture investor, but can be very helpful if he / she takes a more active role, and is incentivized to do that via an additional equity kicker.
- If you’re offering people advisory shares because you want to get a bunch of brand names on your pitch deck, even though you know the most they are going to do is make a few introductions, you’re being stupid. Unless you’re building the next iPhone and Steve Jobs has agreed to be on your advisory board, I’m not impressed. I’d much rather see a non-famous person who has some super relevant experience, and is actually going to do some work on your behalf.
- If you’re offering customers / decision makers advisory shares, well, this is sort of bordering on straight up bribery, but we’ll call it startup hustle. Doing this with 1 or 2 industry influencers isn’t a terrible idea if they are going to help you shape the product, but assume that there will be some skepticism from investors if those two influencers are also your only clients. Starts to feel like a pay to play situation real quick.
- Be cognizant of conflicts of interest or potential conflicts of interest down the road, especially come acquisition time. Often times, a potential advisor who works in the same industry, is taking a bit of a chance by being an advisor to multiple companies or perhaps with their own company. At some point, they may have to start picking sides, and it could get awkward.
- Make sure incentives are aligned and appropriate between you and the advisor. An advisor is someone you can reach out to once a month at most for about an hour of their time to help with something very specific. What that’s worth really depends on how much value you think they can add, they think they can add, and then how much they actually add. If this advisor is shaping the technology because he / she is a rocket scientist, this is probably at least worth a couple of percentage points. Either way, make sure the equity vests over a reasonable amount of time (a couple of years) so that you have some protection if they turn out to be completely useless. Whenever I have turned down advisory board positions, it has been because I truly do not believe that I can make an impact with an hour of my time a month. If I was a full time employee, sure. But purely as an advisor, I wouldn’t be doing the entrepreneur justice by taking their equity, and not being able to deliver enough to move the needle.
- Find out how many other companies the advisor is involved with and ask for a reference. If you’re giving up a percent of your company to someone, you have the right to make sure you’re making a good choice. If someone is advising a ridiculous number of companies, either they are really just that good, or they are playing the numbers game and likely won’t be able to add all that much. It’s your decision to make.
- Remember, advisors are NOT:
- Fund raisers
- Sales guys
- Pitch deck creators
- An extra developer who is writing code for you
In my experience, the best advisers are those that are always offering to help, and never ask for anything in return. Don’t take that for granted. If someone has actually been overly helpful over a period of time without having any skin in the game, you should probably do right by them. The ones that always have their hand out like an ambulance chaser, usually end up being the least helpful.