Selecting an Advisory Board
Entrepreneurs are often told that it is a good idea to recruit an advisory board for their new business. In theory, this makes sense. In practice, however, it is very difficult to form an advisory board that is effective. My column this month is intended to provide some advice about advisors. Keep the following tips in mind when forming an advisory board for your startup:
1. Recruit advisors for short-term objectives. Startup business models evolve and change. Don't recruit advisors who will help you with future products or future markets. Focus on the short-term and determine what skills, introductions and knowledge you will need to accomplish your immediate business objectives. Your advisors should help you fill the gaps for the next six months, not six years.
2. Advisors can help establish credibility. One of your needs as a startup entrepreneur is to establish business credibility. This will help you attract customers, partners, key employees, financiers and other essential ingredients to get your business off the ground. Picking the right advisors will help you establish credibility. In fact, it is often easier to persuade industry luminaries and prominent experts to join your advisory board than it is to persuade operational executives who are not used to the idea of devoting personal time to serve on boards. Keep in mind, however, that industry luminaries are not likely to roll up their sleeves and help you with basic startup issues like meeting payroll and paying rent.
3. Look for advisors in unusual places. One traditional place to find advisors is by getting referrals from the SBA's SCORE (Service Corps of Retired Executives) program, a national mentoring service for entrepreneurs. However, to find advisors who are specialists in your business, you will need to be more creative. If your business has industry conferences or training workshops, this is one place to start looking. Open the Yellow Pages and call "competitors" from different regions or different neighborhoods that you can learn from. Ask your relatives and friends if anyone they know has started a comparable business. Talk to potential suppliers for introductions. You should also try using online services such as MicroMentor , a free matching service for entrepreneurs and business mentors.
4. A free lunch is often a better motivator than equity. Some advisors will ask for equity in your business in exchange for advice and introductions. Others will be satisfied if you pay for lunch now and then. In my experience, the advisors who prefer a free lunch are better than the advisors who demand equity. As a gesture of gratitude, you may decide to give a particularly helpful advisor some equity in your company over time-but do not be in any rush to do so. If you have attracted a top advisor who is asking for equity, make sure you structure the compensation over a payment schedule (such as quarterly or annual) rather than upfront.
There is no standard compensation scheme for advisors, because it depends on how many advisors you need, how much time they will devote and what kind of company you have. For example, a rule of thumb for high-growth ventures is 1.0 to 2.5 percent of share capitalization for all advisors-contrasted with 10 to 20 percent reserved for senior executives and key employees. If you have five advisors, you should consider 0.2 to 0.5 percent of share capitalization as compensation per advisor.
If you are too early-stage to put together an equity compensation plan, you should consider making a small cash payment to your advisors. For example, you can cover their expenses to attend meetings, or you can allow them to submit expense reports for sales and marketing activities that are tangentially related to your business. (If you do this, don't forget to specify an expense limit.) These are variations on the free lunch concept and tend to motivate advisors more effectively than equity-particularly while the company's business model is not yet proven and the value of the equity is difficult to pin down.
5. Don't treat advisors like employees or suppliers. It's not easy to hold advisors accountable. They are not like employees whom you are paying with a steady paycheck. They are not like suppliers who are billing you for services rendered. Even if you are paying them, it is difficult to hold advisors accountable in practice. This is because most advisors have income from other sources and will treat your business as a part-time hobby or casual business interest. Since they are usually not fiscally responsible in the same manner as a company officer or director, they can easily walk away if they do not perform up to expectations.
6. Set term limits. Much like board members have term limits, advisory board roles should also have term limits-such as 12 months or 24 months. It is awkward and may even be potentially damaging to your business's reputation to kick out an advisor if he or she is not performing. Setting term limits makes the transition happen naturally. In my experience, most advisors make their most valuable contribution shortly after they sign on and are excited about their involvement. After some months, they get distracted with other matters and it takes effort to keep them motivated. Some advisors will become very involved with your business, will take on the role of passionate advocates, and will want to renew their engagement. If you cannot afford to do so, don't be discouraged. If you treat your advisors well, they will continue to help you without any formal compensation and title and will expect nothing in return but the satisfaction of watching your business grow.