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Advisors

A formalized role where someone (or a group of people) with relevant industry or operational experience is engaged to assist the CEO in running the Company. If an Advisor is used properly, they can have tremendous impact on the CEO and hence the success of the Company. They can act as a sounding board for key decisions, make introductions to key accounts and partners, help expand the senior leadership team by assisting in the selection process, meet with key members of the team to act as a role mentor, help prepare for Board meetings, convey a variety of insights into certain upcoming challenges and more. Unlike Board members, Advisors are not being asked to help govern the Company, so they are more free to work with the team on issues that impact the team (including things you might not want to expose to the Board until you know if they can be resolved).

Unfortunately, more often then not, Advisors are used as figureheads to create the illusion of support and endorsement between an industry-recognized resource and a startup Company looking to align with an "name". In these situations, it's a wasteful exercise, underused and undervalued which provides an indication that the leadership team (led by the CEO) is closed to outside help in succeeding.

Advisory Boards

Astute entrepreneurs realize there are limitations to their experience. Limitations that may prevent them from realizing the potential of the business they create. As such, formalizing a group of Advisors is a prudent approach to gaining access to needed wisdom so you don't make unnecessary mistakes (or at least make less of them). An Advisory Board of 3 to 5 people is usually a good number to consider.

Much like a Board of Directors, the Advisory board would meet on a scheduled basis (typically via conference call unless they are local to your city). The agenda would often be a review of Company strategy and discussion of upcoming challenges. The CEO needs to drive the agenda and make sure value is gained from the discussion. Although Advisors often have their own full-time jobs to take care of, they can often take away an action item or two such as review and provide feedback on a document or make a phone call to introduce you to someone they know. Unless an Advisor is a consultant, it would be rare you can count on them to complete a more lengthy task on your schedule, even if they say okay at first.

Unlike Board meetings, you would not normally have to minute the results although it is good to document any key recommendations that you feel you will adopt so the Advisors feel like they have been listened to.

The Advisory Board should contain people with a variety of experiences and skills to maximize their value to the Company. As an example, if you sell into the insurance industry, having an Advisor who comes from the insurance industry (perhaps an insurance broker who would have solution insight and relevant industry contacts) would be a great approach. Another good choice would be someone with relevant operational experience in a technology company to help with some key challenges you may have -- perhaps a technical expert or someone with a successful sales and marketing background.

The choices you make for your advisory board also would often also work well as an independent Board of Director, so if you find an excellent Advisor, considering them for the other role as well..

Compensation

In young companies, an Advisor is often expecting a grant of stock options versus a salary or consulting fee. You can propose whatever works best for your business model, but you should be prepared to offer an Advisor some form of compensation.

If proposing money, it might be one or two thousand dollars per month, essentially acting as a retainer so that the Advisor is available and accessible regularly to provide the assistance required. If you need them to perform an extraordinary task, such as analyze an aspect of your business, you may need to treat it as a consulting engagement and compensate appropriately based on the time spent.

If proposing stock options, it can range anywhere from a small number through to 1% of the fully-diluted share pool. If early stage, the Advisor understands their allocation will be diluted as investment rounds are taken on. If the Advisor continues to play a significant role for you, you may want to continue to offer option allocations with each round to keep them incented and ultimately rewarded for helping you build company value. It's not uncommon to offer a shorter vesting period (2 years versus the more standard 4) and perhaps some preset acceleration on acquisition.

Gaining Value

How much value you gain from an advisor or an Advisory Board is really up to you. As mentioned above, it's not uncommon for companies to get excited by who they attract, use their names and reputations in press releases but not otherwise engage them to help with the business. It's seen as a bother to reach out, arrange time and get them up-to-date with your needs. It's the type of encounter that is a bit out of sync with normal business rhythm (you could say the same thing about Board meetings). Gaining value requires some effort, well worth it if used effectively.

The following suggests some possible ways to maximize value from an Advisor (or Advisory Board):

Currency

Any business undergoes changes over time. The market changes, the products change, the economy changes, things are in flux -- perhaps even faster than ever. If you decide to leverage Advisors, make sure they stay relevant to your business needs. Someone you might have engaged in the early stages has less relevance as your business grows to new stages. Don't hesitate to end an Advisor relationship and replace with another. You should be a bit selfish about this, as it is your task to build maximum value in the business, doing so with Advisors who you have left behind is not a good use of your time (and stock options).

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