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Put Your Advisory Board to Work

It's time to rethink the roll of advisors and how they are compensated.

This story appears in the June 2009 issue of Entrepreneur. Subscribe »

For the past few years, advisors have had it easy. Typically, advisory board membership involved lending to a startup in return for a slice of equity. Some deals would involve vesting for the stock over several years, but most gave the advisor the stock upfront. This compensation structure, of course, created no incentive for the advisor to stay engaged once the paperwork was signed and his name was listed on the startup's website. Meanwhile, entrepreneurs assumed that the credibility associated with the advisory board would magically increase the chances of closing a round of funding.

For some, this worked. But in today's fundraising environment, the rules have changed for creating an advisory board. In fact, I once thought that a prestigious advisory board was essential to establishing a credible startup--but it's not. It's time to rethink the role of advisors and how they are compensated.

Out of fear or just inexperience, entrepreneurs have avoided the obvious ways to align incentives with advisors, such as performance-based vesting on stock, bonuses for helping raise money, or annual renewals for membership on the advisory board. As a result, most startup advisory boards fizzle out after the first few months of fanfare. I know this from personal experience, as my own advisory board eventually migrated into a loose confederation of consultants who helped me with specific projects. (For example, one advisor helped me raise money, so I eventually hired him as a consultant.)

One way to align incentives is to create a "give or get" policy for advisory board membership. Advisors are required to raise a certain amount--say $100,000--from their network of contacts or invest that sum from their personal resources. This really forces advisors to get out their Rolodex and make calls. And I've seen it work for different target fundraising amounts. In my experience, the advisor ends up making a small investment in the company--say, $50,000--so he can tell his friends that they should follow his lead. With the right incentives, this type of arrangement can help you raise $500,000 quickly from a small, productive advisory board. And under these market conditions, that's a lot better than a prestigious group of luminaries.

My advice: Don't waste equity on unproductive advisors. Don't waste time on people who won't return your phone calls. Focus on advisors and consultants who can help you with your short-term priorities. You can even take the extra step of creating short-term contracts with advisors with specific deliverables, much like a typical consultant agreement. If they perform, renew the contract. If not, let it fizzle out.

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