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Bringing on Advisors: The Nuts and Bolts
07.28.11

A friend of mine with a startup IM'ed me the other day -- he and his co-founder found a potential advisor they wanted to bring on and we ended up having a larger discussion around a number of issues with respect to advisors, including:

1. How do advisors add value?
2. How often do you talk to your advisor(s)?
3. What's the difference between an advisor and a consultant?
4. When should companies bring on advisors?
5. How are advisors compensated?

So question 1: how do advisors add value?

I think there are (3) broad areas advisors are perceived to add value:
a) famous / brand value -- this is a fairly typical arrangement which I generally think is a waste of equity. If you're a good startup, you'll get all the brand value you need from having solid investors (either angels or institutions.) If you bring on advisors in the hopes that they'll help you get the good investors -- well, VCs know this game plan well. I think there are exceptions -- but generally, if you need brand value, bring them on as investors. 
b) connections -- this is self-explanatory and I generally think this is a waste of equity as well. The valley is a pretty easy-going place where people will make introductions often for goodwill. Not always, but often. I think people who make connections are wired that way. It's relatively rare to find people who will make connections but only if you compensate them. Well, scratch that. That happens all the time... in L.A. But it's a different world in L.A. than in Silicon Valley. I would also argue that in L.A., with a startup, I would be wary of those types of arrangements -- I think you can find plenty of people who just want to meet and help good people. 
c) domain expertise -- I think this is where you actually want to bring advisors on. On a very simplisitic level, most startups I see need two areas of expertise. I'll call it product expertise (basically being able to build a good, functioning product), and then some sort of industry expertise (because that product lives in an industry.) A simple example would be amazon.com. You need technical / product expertise to run and operate an e-commerce site but you also have to understand retail. 

Let's say you found someone with domain expertise. On an obvious, practical level -- the questions are along the lines of, "I don't understand X about the industry. What should I do?" They're there to help you navigate it.

I would argue that good advisors are much broader and more strategic than that though. Think about your day if you're the CEO of a startup. You have employees. You're running a company (often for the first time). You have investors. There are all sorts of competing agendas. What an advisor can do is carve out an intellectual space for you to deal with all the large and small issues. It's a cliche, but it's also true -- it's lonely at the top. Many startups don't have a great executive bench. Those aren't (or at least generally shouldn't be) the early hires. They're expensive and they're not necessarily the folks doing the actual work initially. A CEO often can't talk to lower level employees about larger, strategic issues. They can talk to their board -- but that's problematic for different reasons. They may not get a lot of time from the board. Or the board has particular things they want to talk about. Or the CEO doesn't want to raise certain issues because then it seems like they're unsure or it somehow shows weakness. An advisor can carve out an intellectual (and private) space for the CEO to talk about everything from the strategic to the mundane. What should be done about the holiday bonus to whether they should hire (or fire) a particular employee to how to go about raising a new round of financing. We all need people to talk to -- so beyond the domain expertise of answering specific questions, there's also the ability to work through a myriad of problems / issues.

 

2. How often do you talk to your advisor(s)?
As an advisor, this varies for me and I try and accommodate the CEOs I work with. Some like to work frequently and regularly -- one startup I work with, I have a weekly 1:1. With another, we meet in person for 1-3 hours at a time when they request. We don't do much over email or the phone. Still with another startup, they like to infrequently ping me with very specific questions / requests. I would say the informal nature of the latter two is also typical of the startups that I'm friendly with (but don't formally advise.) I'll get an email asking to get together for dinner or something -- and they'll be at some inflection point (launch of a new product, preparing for a raise, etc.) and want to discuss. 

Here's my recommendation: regularlity is good. If you have 4 advisors, you're not going to want a weekly 1:1 with each of them -- that's not a good use of your time. However, beyond having them all available on-call for when problems arise, there is a great benefit to just touching base with them with some frequency. This not only keeps them up to date on what's happening, but it also allows that intellectual space to be created. Sometimes it's good when there's no agenda. Broad questions get asked -- what do you think of your team? How's your runway looking? What keeps you up at night? -- and this often leads to thoughtful examining of major areas of the company. I think an important but fine tension is dealing with the everyday minituae to make sure things get done while constantly being aware of the long-term strategic goals of the company. It's sometimes hard to keep sight of the latter when overwhelmed with the details -- and that's something an advisor can help with. I would say that my meetings are 80/20 -- 80% what the CEO wants to talk about and 20% what I want to talk about. The 80% is critical because I should be adding value everytime we talk -- and the best place for me to add value is to help him/her through specific problems they're having. I try to ensure that that 20% also occurs because that allows me to raise larger strategic issues that I see -- which I may see simply because I'm outside the company -- that they should be thinking about. 

 

3. What's the difference between an advisor and a consultant?
I think there's a great deal of benefit to hiring consultants. The most obvious major benefit is that it can be cheaper. You can pay them cash rather than equity. Also, if you're a startup and cash is tight -- it makes you appreciate (and evaluate) the value you're getting from that outflow. For cases where you're looking for very specific domain expertise, this is not a bad way to go. Depending on the industry though, it may be hard to find these consultants. 

Let me step back for a second though. The value of an advisor or a consultant is not in economic efficiency. The value is in them helping take your company to the next level. This is where you have to be self reflective and ask, "What do I need?" In many cases, the answer to that is domain expertise. Sometimes you can get that expertise via consultants, and sometimes you can get that via advisors. A big benefit to doing it with an advisory board is that a lot of really senior people are not on advisory boards and would love to be -- so it's a great way to attract them in a way that a high hourly rate would mean nothing to them. In some cases, the answer to that question is that you need an additional trusted source that you can work with / bounces ideas off of. In that case, it's an "advisor" in the truest sense of the word -- you present a problem and they advise you on the solution or potential solutions.

There is some aspect of fundamental investment with the company that occurs as an advisor that probably doesn't with a consultant. Advisors are equity owners in your company. Consultants are usually on a specific contract. Thus, the alignment is a little stronger with advisors than with consultants.

4. When should companies bring on advisors?
Before you do a formal raise / carve a percentage of equity off for advisors (assuming that's what you want to do) -- just meet with people. Good advisors will meet for free and share thoughts / make connections / etc. -- for free. If they're unwilling to do that -- well, just move on. There are lots of good people out there. If you do a raise and want to bring on advisors -- do that in a systematic way. For example, let's say you carve off 20% of the company for employees and another 1% for advisors. You can then set up guidelines in terms of how much each advisor gets and there's a pool to draw upon. You don't have to do custom work for each advisor. 

It's sort of like small company / medium company. When you're a small company -- just meet with people and buy them coffee. When you're a little bigger and do things more formally and have some folks that you want to bring on / have officially aligned with your company -- then do something more formal and have some paperwork drawn up.

 

5. How are advisors compensated?
I'll cover off how I'm compensated -- but obviously this will vary from person to person. I typically get 0.25% equity for 1 year -- vests monthly. Sometimes this is more and sometimes this is less. (When it's less, it's because the percentage that's typically given out to advisors for that company is less than that and then we usually reach a compromise where I come down a little and they come up a little.) I don't take cash compensation (or at least haven't yet.) 

My recommendation in this area is if advisors / creating an advisory board is something you want to do -- to just create guidelines. Figure out how many advisors you're likely to want to bring on, carve off a percentage for advisors, and try and create a standard template to make it as easy as possible. But most of all, get to know them. Have 2 or 3 meetings before formally bringing them on. Domain expertise and brand value and connections are valuable -- but I think the greatest value an advisor brings is if he/she creates that space where you, as the CEO / founder / etc., want to go to them for advice. You have hard problems that you need to work through and that's the person you trust to discuss it. The other stuff you can find elsewhere. This is much harder.

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