Set Some Good Objectives

You want people who:

• you trust and who trust you,
• know stuff that you don't and who know what you will need,
• are excited by your vision and mission,
• will be reasonably responsive to your requests for help.

Using an Advisory Board as a Promo Tool Will Backfire

Have you seen those ventures with a long list of "brand name" advisers? Are they there for show or for real? Do you think investors are convinced by them? Do you think customers or users care a hoot about them?

It just looks amateurish. It is an old, out-of-date trick that has lost all credibility.

Advisers worth getting give real time and attention to the ventures they advise. So they limit how many they work with. They don't "spray and pray."

Advisers and advisers

You may have any number of advisers -- friends and family -- who you turn to informally for advice and who expect nothing in return except your friendship. But we use Advisers here with a capital "A" to denote someone with an official, compensated relationship with the company.

How to Get the Best from Your Advisers

Don't try to "get your money's worth" by asking unnecessary questions. Wait until you really need help. Make sure you don't ask dumb questions when a simple online search for the answers would do the job. Know enough about each of your advisers to know who would most likely be able to help in a particular situation immediately. Give them reasonable notice, no "I must know today" stuff.

But when you've covered all of the above, be demanding. They took on a job and are getting paid for it. (See below.)

How Many and What Type?

Don't have too many advisers. That is an unnecessary expense in time and money. Get advisers, like anything else, in the right time. The quality of advisers you can get will grow as your venture grows, and your compensation (equity) will look more valuable.

One rule of thumb: don't have more advisers than the number of people on your management team. Two to three should be the max to start with.

Seek a balanced team. If the founders are strong in business or a particular domain of business, then seek a technically oriented adviser. Or seek somebody with domain skills in your entry market. Somebody with financial chops is always useful. You always want entrepreneurs who have gone through what you will go through.

How to Compensate

Compensate with the only currency you have: equity. Don't even think of compensating in cash until your venture is spinning off a ton of cash.

Their equity should vest over a four-year period, just like the founders'.

The price of the stock will depend on when you bring them on. If the venture is pre-financing, sell them founders' stock; i.e. at nominal value. If they come on after a round that values the business, give them options to buy at that valuation.

How much? If you get advisers at the earliest stage, offer them something in the range 1 to 2% of the company. Yes, that is a real commitment, so limiting your number of advisers and getting only really good ones who contribute is all the better advice.

Give them anti-dilution rights. For example, if they have 2%, and an investor comes in and dilutes everybody by 30%, the adviser should have the right (but not the obligation) to invest their own money at the same valuation as the investor to maintain their 2% stake.

If they come on after the first round of external financing, you'll have additional things to consider:

1. The adviser should be compatible with the investors and comparable in level of experience (so that the adviser can work with the investors as a peer). Having an adviser on the board of directors who is neither an entrepreneur nor an investor but who only wants the venture to succeed is a good idea. Post-financing, you won't have the same freedom of action (hint: so get them pre-financing).
2. Their equity options will be part of the management team's option allocation. So, they won't get the same 1 to 2% that an adviser would get pre-financing.

Transactional or Deliverables Compensation?

These are tempting but usually a bad idea, They are something along the lines of, "I'll give you X% if you get Y," Y typically being securing financing, but sometimes development or obtaining customers. Treat these people as vendors and pay them on a deferred risk basis (see Building Your Team Pre-Financing). These are short-term, tactical relationships. Advisers should represent a long-term relationship based on trust.

What About the Investor's Pre-Built Networks?

Cash is fungible. A dollar from investor A is exactly the same as a dollar from investor B. Investors don't like offering a commodity, so they stress their value as advisers and the quality of their networks. That is true; they do offer a lot more than cash, but note the following:

1. An adviser from the investor's network will tend to favor the investor (if there is ever a conflict),
2. You will get better terms if you bring your own network rather than rely on their network.

But you do pay for your adviser, so like any early team decision, don't take this one lightly. It is a defining one.