Do I need an advisory board? I just joined an incubator and everyone is telling me that I have to have one in order to raise funds from investors. True? How much should I pay them?
You ask a really good question, which relates to the priorities of entrepreneurs who are getting ready to raise capital from investors.
Your colleagues think that an advisory board will demonstrate to investors that the founder has a strong ecosystem of professional advisors to provide advice and contacts to help the business advance. It’s a good nice-to-have but would not ever trump the more important reasons why investors invest in startups.
Here’s the real deal. Venture capital funds and smart angel investors will not base their funding decisions on the caliber of advisory board members. They know better. They would, however, be more impressed if well known individuals reached into their pockets to invest in your business. That’s a far better demonstration of their confidence in your company’s growth prospects than simply joining an advisory board.
My problem with advisory boards usually has to do with execution. Too often founders set up boards just to put their names in business plans, company literature or websites.
In haste, they then hand out generous stock awards before really working through exactly how advisory board members will help startups achieve key first year operating priorities. Unlike employees and board members, advisory board members really don’t have to be accountable to a startup organization. Since it’s hard to get back stock options to advisory board members, I typically encourage entrepreneurs to hand out stock awards for specific work well done, rather than work that might never happen.
I do have a few exceptions to my cautious attitude about advisory boards for startup organizations. Advisory boards can be useful if the members are genuine representatives of a target customer audience and can help test and fine tune products and services before market launch.
Advisory boards work best when the board has a specific purpose and members are asked to contribute ideas or industry information on an ongoing basis. A company that is working on new treatments for say children with cancer may develop an advisory board made up of pediatric oncologists and therapists.
Advisory boards can also advance medical technology startups to the extent that healthcare professionals have tested and “approved” of the new product or service concept. These types of advisory boards make sense if they speed revenue generation or approvals to regulatory agencies.
For time management purposes, my preference is to avoid setting up a formal advisory board during the first year of operations. You can derive the same advisory benefits by reaching out to knowledgeable professionals on a less formal basis as you need them.
How to set up and compensate advisory board members
The starting point of setting up a board of advisors is to consider what exactly you want to accomplish with the members. When you know what you would like to achieve with your advisory board, then it is much easier to put a value on the board's services.
In terms of payment, for-profit companies should expect to compensate advisory board members for their time and the privilege of using their name in professional circles. If advisory board members are asked to travel then you should promptly reimburse them for their travel expenses.
For-profit companies should pay more to corporate board members than advisory board members. Even in privately-held companies, corporate board members assume certain potential financial liabilities and so they should be compensated for added risk and responsibility.
Young, cash-strapped companies can set aside a pool of common stock or stock options to provide annual awards to advisory board members. Or companies can provide a larger grant of equity and then vest the shares over a period of time. I prefer the former because entrepreneurs are more likely to get their money’s worth for the stock grants.
The advisory board should not duplicate the activities of a company's board of directors.
- Advisory board members should be closely vetted to make sure they agree with the ethos and operating goals of the company.
- Management should instruct advisory board members what information is confidential to the company.
- Advisory boards tend to become more productive when they have the opportunity to meet with other members, share information and put forward recommendations. This means don’t expect many advisory board members to do much without prompting from the founder.