How To Create An Effective Advisory Board To get the most out of mentorship, startups should formalize these relationships into advisory roles compensated with equity in the company.
Opinions expressed by Entrepreneur contributors are their own.
You're reading Entrepreneur Middle East, an international franchise of Entrepreneur Media.
Melltoo, the startup I cofounded, recently created an advisory board which includes the ex-COO of OLX-Dubizzle MEA, Anvita Varshney; hacker, digital security expert, and founder of Yinkozi Ltd, Loic Falletta; and payments and lending expert with three decades of senior level experience at American Express and MasterCard, Sanjiv Purushotham. We are thrilled to welcome our advisors on board and are looking forward to building the region's largest peer2peer marketplace for secondhand things.
Why an advisory board?
Mentorship is a buzzword that startups toss about regularly. Typically, mentoring relationships are casual and inconsistent, an offhand conversation at an event or a phone call when a startup founder has a question. To get the most out of mentorship, startups should formalize these relationships into advisory roles compensated with equity in the company.
Advisors are compensated with equity in a startup. (Advisors that are compensated in cash are consultants.) Therefore, advisors are investing in the startup by exchanging their time for equity. Assuming your advisors are renowned in your industry, it immediately conveys credibility to your startup's business model by virtue of their association with the startup. Startup business models are typically a leap a faith, if they weren't, they wouldn't be disruptive. In our case, having Anvita Varshney on board signifies that an insider in the classifieds industry believes in Melltoo's "no-meetup classifieds" model.
The right advisor brings to the table expertise a startup doesn't have. It is not possible for founders to be an expert in every aspect of a business. Furthermore, for most startups, hiring experts is financially out of reach. The only way to get the expertise you need is to "do it yourself...with some help". We have spent the past 3 years building a robust and engaging consumer product. Our marketplace facilitates the trade of secondhand items by providing payment and delivery. To ensure the highest level of security for our payments and eWallet module, we brought in the expertize of Loic Falletta, a digital payments security expert who's worked with the top 30 largest banks in Canada, Europe and South Africa. While Loic doesn't build our security infrastructure for us, he guides and challenges us and pokes holes that we fix. Rather than going through years of trial and error, we've been able to professionalize our security up to the standard of international financial institutions in a matter of weeks.
Networks and access
Access is something money cannot buy. Access comes from years of networking and relationship-building. It's not who you know, it's how you know them. Access is valuable for this very reason and even the best products will languish and die without the right partnerships and access. As Melltoo gets ready to scale with our marketplace and payments integration, we've brought Sanjiv Purushotham into our fold. As a regional payments and lending professional for nearly 3 decades, Sanjiv brings not only in-depth knowledge of the industry, he provides access to key financial institutions in the region. One of the hardest things to build is trust. Partnerships with established financial institutions give our customers peace of mind and builds trust in the public sphere.
Team building is pivotal to a startup's ability to grow. Startups are messy at the beginning and the success of a startup rests on whether it is able to transform into a functioning organization at scale. The ability to get highly qualified people to join a startup testifies to a founder's ability to lead and inspire. From competitor to advisor, our board of advisors includes executives from our main competitors. Morrad Irsane, my cofounder, spent months cultivating relationships to attract the right advisors to Melltoo: "To be an effective CEO, you must not only be "in' the business, you must also be "on' the business. It is important to be active in your ecosystem and it is a key part of building a business."
The nuts and bolts of an advisory board
Step 1: Identify the skillset you need from advisors
Be as selective with advisors as you would be with employees. Often, startups make the mistake of thinking that any remotely relevant c-level executive will make a good advisor. Startups also often undersell themselves and imagine that advisors are doing them a favor by joining. Everything you do, especially at the early stages, defines your startup. If you assume a position of weakness, you will end up weak. Pick the right advisors and pursue them as you would investors. And be clear that while the advisor will bring you value, association with your startup is even more valuable in the long-run. If you don't believe it, then you're in the wrong business.
Step 2: What, when, how?
Set expectations from the start. Be clear on the amount of time an advisor is expected to devote to your business. Determine the medium via which advice is given. Typically, the board of advisors convenes for a monthly or quarterly meeting of 1 - 2 hours. Advisors are also expected to respond to emails within a reasonable time frame. In our case, we wanted a more engaged and hands-on approach, so we created a slack group for advisor discussions and have occasional calls and in-person meetings on an as-needed basis. Our advisors are as excited about Melltoo as we are, so it's not hard to get them involved.
Step 3: Decide on compensation
In general, advisor compensation ranges from 0.2% - 0.5% of equity in a startup. There is usually a 3-month cliff and monthly vesting over 12-24 months. A cliff is like a trial period, if an advisor quits or is dismissed before the cliff period is completed, no equity is earned. Monthly vesting is like pay day. For every month an advisor is engaged with your startup, he/she earns the proportionate share of total equity due to him/her. For instance, if vesting takes place monthly over 12 months, the advisor will receive 1/12 of the shares due to her every month for 12 months. All of these are negotiable depending on the size and stage of the startup and how much the startup wants the advisor. In theory, once all shares are vested, the advisor has completed the terms of the agreement and no longer needs to continue advising. In practice, most advisors will stay on, although it is likely that the startup would have moved on and have different advisory needs.
Step 4: Sign an agreement
There are many templates for an advisor agreement, the most popular of which is Founder/Advisor Standard Template (FAST), created by the Founder Institute. As with any legal template, we do not recommend that you simply copy and paste. Rather, depending on the jurisdiction and governing law, edits are probably necessary. It makes sense to have a lawyer look it over, but having a template to begin with means fewer lawyer hours. In addition to the standard terms, be sure to include the "what, when, how" from step 2.
Step 5: Onboard advisors to maximize interactions
Every business is different and even the most experienced advisor will not know the details of your business history. Just like a doctor cannot help a patient without knowing the symptoms, it's important to provide your advisors with a clear picture of the unique situation of your startup. Be organized and concise. It is never a good idea to overwhelm advisors with too much information, lay out your priorities and disseminate the information accordingly.
Do not neglect the power of advisors to take your startup to the next level. Silicon Valley doctrine prescribes getting advisors on board as step one. We wouldn't go that far since you might end up bloating your cap table too early on in the game. However, the right advisors can help accelerate your startup in many directions, including credibility, funding, trust, and access.
Related: How To Find A Mentor