Updated: May 10, 2021
Most founders know that they need or will benefit from having advisors, even if only from watching “The Social Network.” Having navigated the startup landscape previously, Sean Parker helped Mark Zuckerberg grow Facebook into the billion-dollar company it’s become today.
And it’s not just in the movies. Some data suggests that startups with advisors are able to raise 7x more money and have 3.5x better user growth.
I often get questions about team-building and specifically about appointing advisors. While founders, staff, and investors play significant roles in a company’s growth, advisors can also be a critical factor in a startup’s ability to navigate tricky terrain. And the team at an early-stage startup is the most crucial component of an investor’s decision to commit, which is why advisors can tip the scales in favor of founders from an investment standpoint. But choosing the right advisors at the right time can feel like a daunting process.
There are different types of advisors for different purposes and different stages of business— some are temporary or transactional, while others are ongoing and long-term. Advisors are different than mentors, coaches, and board members. It’s easy to understand why some first-time founders get confused!
THE DIFFERENCES BETWEEN ADVISORS, BOARD MEMBERS, NON-EXECUTIVE DIRECTORS, AND MENTORS
People tend to use the terms “mentor” and “advisor” interchangeably, but a mentor is distinctly different from all other roles because of their stake in the company - or rather, the lack thereof. Mentors aren’t usually compensated for their time or advice, whereas advisors receive equity or cash in return for their services.
Let’s use term sheets as an example.
If you have general questions about term sheets, or maybe just a specific question about one you received, you might connect with a mentor via Clubhouse, or a community platform, or simply ask someone you know who has been through it before.
If you want someone to thoroughly look at your term sheet and give you specific advice on how to move forward, you may want to pay an advisor to review it and provide guidance in a 1:1 session. A good example of this is a lawyer or tax advisor who will advise on specific matters relating to their area of expertise. You may also have specific questions and simply want advice from someone who has successfully negotiated term sheets before as a founder or investor who may also advise you.
But if you’re planning to initiate a raise, you may want to engage with an advisor for the long term. That way, you have someone who understands the intricacies of your business and can help you every step of the way.
Sometimes, founders look to board members as advisors, too. In early-stage startups, board members often have legal and fiduciary duties as well as personal liability in exchange for equity. They make key decisions around the governance of the company but they’re not usually involved in the day-to-day operations and are typically less involved than advisors in specific areas of the company.
In the UK, non-executive directors (NEDs) may be paid to represent the company’s interests in some board meetings, but they don’t participate in the day-to-day decision-making within the business. Startups in the US don’t usually work with NEDs unless they are expanding into or have operations within the UK, in which case NEDs can be helpful for navigating foreign terrain. While they may be compensated in different ways (more on that in a bit), they still have some stake in, or responsibility towards, your company.
But advisors don’t usually sit on the board, nor are they employees. They’re outside parties who want to see your business succeed, and they often take the risk of not being compensated through fees for their services upfront to make that happen with the hope that years from now they might celebrate financial success with you in a liquidity event.
They become advisors because even if they can't vote like a board member, they want to influence your strategy to create positive outcomes. And if they don't see this happening, they are unlikely to stick around. That’s why it’s important to know how an advisor can help you, when to engage with an advisor, how to determine the right fit, and how to compensate them.
HOW ADVISORS HELP STARTUP FOUNDERS
Every advisor and founder has their own idea of what “help” really looks like. Advisors may offer services that are wide and diverse, as well as less (or more) time-intensive. They can:
Leverage their network to improve your velocity, performance, and outcomes by tapping new hires, partners, customers, other advisors, and/or good investors
Offer both strategic and tactical advice that can be incredibly impactful to your business and help create competitive moats
Expand or deepen domain expertise for your business
There are also instances when a transactional advisor might be useful, particularly in the early stages as you’re approaching investment (like the term sheet example, or if you need help developing your pitch). Transactional work is also a great way to test the waters with a potential advisor: you can work together on a short-term goal or project, and if all goes well, you can enter into a long-term advisor agreement.
But advisors can also help build a strong foundation for your business and accelerate your position as an industry leader in a number of ways:
Strategy - The right strategy can make or break a business, so find an advisor who excels at asking the right questions to help you create the best strategy for your business as well as the tactics to efficiently execute.
Business Development - A strong advisor can help expedite access to key executives at larger companies who could be advantageous customers or partners. An advisor who is a customer acquisition czar is worth their weight in...well, customers.
Fundraising - Some advisors have specific expertise and networks to perform specific fundraising-related tasks, such as reviewing your pitch deck, offering fundamental feedback about the business, and connecting you with the right investors (i.e. make recommendations on how to approach investors or facilitate introductions). However, unless an advisor is also a registered broker, they cannot get compensated based on the outcome of your fundraising. (See more details in the endnote.)
Recruitment - In the ongoing war for talent, you want to become a talent magnet. A great advisor can help you attract the right hires who will 10x themselves.
Scaling - Velocity and size matter. Growing from idea to IPO requires different skills and strategies at different stages, so look for an advisor with operational experience scaling other businesses.
Leadership - It’s really tough for a founder to be all things to all people. Management is different from leadership, even if there is some overlap. If leading a high-performance, cross-functional team isn’t an area where you shine, engage with an advisor who has leadership skills you admire or specializes in organizational leadership.
Emotional Support - Talking to a therapist, practicing self-care like breathwork, or other modalities are the best options for treating serious mental health issues. But when you need to address the root causes of stress within your business, an advisor can be a sage soothsayer. They will give you some objectivity and cheer you on when you’re going on your third month of not paying yourself in order to pay your team, or whatever the challenge du jour may be that makes you question your sanity or abilities.
When I spoke to one of the founders that I advise while writing this essay he said,
“I think one of the ways I get the most value out of you and my other advisors is that you are a ‘reset button’. When I get stressed or overwhelmed, having a call with you always grounds me and refocuses my thinking.”
Having someone to help you reset when you feel overwhelmed, distracted, or unsure about which way to go can make a world of difference. Your employees and investors want you at your best and feeling confident that you can lead the team to victory. Having a consigliere who you can be vulnerable with is invaluable.
Once you’ve identified the ways an advisor can help your business, you can start reaching out to potential candidates.
WHEN TO ENGAGE AN ADVISOR
Typically, early-stage startups (pre-series A and series A) will especially benefit from having a strong team of advisors (6-8 folks). The number of advisors, however, directly relates to the needs of the company and the benefits they can provide. So, if you’re currently focused on developing your minimum viable product (MVP), you probably don’t need to engage just yet with an advisor who specializes in marketing.
But it doesn’t hurt to keep a running list of possible connections! If you meet someone today who has extensive experience in marketing, keep that relationship warm. You may want to ask them to be an advisor at a later stage.
And remember: if you are issuing equity, be mindful of both the number of advisors and the amount of equity being issued (more on this later). These advisors often become a core part of the team and have a strong desire to see you and your company thrive. But you don’t want to dilute yourself. This is your company, after all.
HOW TO GAUGE FOUNDER/ADVISOR FIT
The best advisor will complement your strengths, offset your weaknesses, and be willing to put some ongoing time into their role. Beware of ‘advisors’ who ask for significant equity and are not clear on what they have to offer in terms of time, commitment, and specific roles or tasks. But, a great advisor should also be someone who is great to work with, gets you, is excited about your business, and truly supports you. You have to feel like they want you to win. If you don't feel this way about your advisor, then keep looking.
You can always find talented people who fit the bill from a credentials standpoint but finding the right founder/advisor fit can be more elusive. When considering an advisor, it’s wise to first look at your existing network: get referrals from friends, family, and former colleagues whom you know, like, and trust before looking farther afield. If your network is limited or you’re simply not finding the right fit, then start researching your ideal advisor profile online using the trusted resources I include at the end of this article. When you do find someone that fits your profile, you want to get them excited about the team, the market opportunity, and joining you on this journey. You'll want to think about why and how this might fit into their goals and aspirations beyond how it benefits you and your company. You should exchange references. They’ll want to speak with people who have worked with you, and you’ll want to speak with other founders they’ve advised. Take the time to vet your potential relationship to make sure it’s a win/win.
HOW ADVISORS ARE PAID
Like most things in the startup world, compensation isn’t cut and dry. Advisors and founders can approach each situation uniquely depending on the specific role, anticipated outcomes, and time commitment.
You decide what you prefer, which also largely depends on your mindset. These are three typical payment models, but keep in mind that they can vary drastically depending on factors such as the stage of the company, the sector or industry, and the time commitment involved. There’s no one size fits all payment model!
Equity. The advisor agrees to forego cash now in exchange for what they hope will be a larger payoff later by taking a piece of your pie. If they want equity in your company, they will likely conduct their due diligence before signing an agreement. Knowing that more than 90% of startups fail, they take the risk of never being compensated for their time, with the hope that you will continue to grow and succeed. Typically, (and the way I often engage) this is done for .5% equity over a three-to-four year vesting period with a one year cliff. In other words, after one year of working together, the advisor receives 25% of their equity award. Then, as you continue working together, the advisor receives the remaining 75% of their equity in monthly installments. Time-based vesting helps protect the company from an overly passive advisor relationship and incentivizes the advisor to continue helping the company grow. If the advisor role, however, is temporary for a specific task, the equity may be issued either upfront or all at once when the task is completed. The percentage ranges can vary among advisors anywhere between 0.25% to 1%, but 1% is on an expert level and merits a significant commitment. The compensation also depends on the related services to be provided, which should be somewhat defined in an advisor agreement (see the standard FAST Agreement below). Keep in mind that terms can evolve and be amended once the advisor takes a deeper look into the company and the company’s needs. One important note: confirm that the percentage issued is the percentage at the time of entry into the advisory agreement (at least initially). In other words, ensure that your advisor agrees to be compensated based on today’s value of your company and not the future value of it. Simply saying the advisor gets 1% equity leaves you open for problems later on. Equity is often diluted over time, so, what might be .5% at the start of the advisory relationship may not represent .5% after several months of working together. (At least, that’s the dream, right?) In each case, it’s important to make sure the agreement between the advisor and the founders clearly sets expectations at the time the advisor is engaged, including how and when that percentage is calculated.
Cash payment for services. Not every advisor wants or needs equity in your company. You may just hire them for a specific role and pay them for their services. These are often business consultants who can help orchestrate partnerships, build your customer base, or coordinate growth campaigns for the business. As always, you’ll want to clearly define the deliverables and timelines in a written agreement. In the UK for example, NEDs often get paid a monthly retainer based on an annual or multi-year agreement, and they may participate in board meetings (similar to a Board Observer). Some, however, employ a hybrid model of equity and payment.
Hybrid. A combination of both options -- a portion of cash for services rendered and a percentage of equity over time. Advisors can offer a variety of services and skillsets, but you may need them to play multiple roles within your company. For example, I am an advisor to a company where I take .5% equity over a four-year period with a one-year cliff. I also separately have a consulting agreement with the same company where I serve as a part-time fractional business development executive. I help them secure top celebrity talent, media coverage, and OEM partnerships, which are more time and resource-intensive than typical advisory services. It’s unclear how long I will need to serve in this capacity while the team grows, so this is an annual contract that can be terminated by either of us with 30 days’ notice. But regardless of when or whether the company needs those services in the future, we both agree that my role as an advisor will be beneficial throughout the lifespan of the company (or at least for the next several years). It’s also less time-intensive and requires a different set of skills.
Each option can be beneficial to your company at different times. For bootstrapped startups, equity may be the best option so that cash can be used for other expenses. But if a company wants a super clean cap table, cash may be a more attractive option to offer advisors. And some advisors may only want to be compensated in equity, some in cash, some in both. I know some people who won’t take equity because they believe ownership will remove a sense of objectivity from their role.
In the end, it really comes down to the risk they’re willing to take and the time they’re willing to commit. No matter what, it’s important to ensure there is alignment on both sides. Have a formal agreement in place, whether it’s drafted by your lawyer (see recommended counsel in the “resources” section below) or a customized version of the FAST Agreement (also below). These documents will outline and define key terms such as non-disclosure for intellectual property, duration of advisory relationship, duties, and responsibilities of both parties. And always be mindful of employee versus consultant classification issues. Check the labor and employment laws in your relevant state.
These conversations may feel uncomfortable, and the costs to formalize agreements can seem prohibitive. But handshakes and smiley face emojis don’t hold up in court - put everything in writing!
HOW TO GET THE MOST OUT OF YOUR ADVISOR
Once you choose an advisor and sign the agreement, it’s finally time to start working together.
Set expectations from the start. The importance of clear expectations cannot be stated enough. Start with straightforward questions about how you can best leverage your advisor’s skill sets. What’s your ideal meeting schedule? What’s the expectation around email responsiveness? How often will you have phone calls? Ask them how you can get the most out of your time together.
Address the friction in your business. Where are you stalled? Where are you hesitating in decision-making? Friction is often an indicator of where we need help. Ask your advisor to help you power through that friction to keep forging ahead.
Invite the fight. No, not a physical one, but it can be beneficial to have an advisor who will duke it out with you on an issue and poke holes in your ideas, all with the intention to bring the best of you and your business forward. You want your advisor to feel like they have your full support to call you out if they need to.
Don’t forget that you are the captain of the ship. At the end of the day, the ship sails or sinks with you on board. The power lies with you to take responsibility for steering your relationship. While you shouldn’t have to ride an advisor to deliver on their promises, don’t be afraid to put the pressure on if needed. If they didn’t follow through when you really needed them, don’t let your disappointment go unstated. Give them a chance to rectify the situation.
WHERE TO FIND AN ADVISOR
Think about your current network and who you know that may fill a specific need for your business. Some people may advertise that they’re open to becoming advisors, while others may have never considered it before. Either way, it doesn’t hurt to ask!
If you need to look outside your network (or expand your existing one), go to networking events or join online communities for professionals interested in helping startups. There are hundreds of people out there itching to advise the next big thing - just make sure they’re the right fit for you.
Ready to start your search for an advisor? Forward this article to your ideal candidate to start the conversation! You can customize these Advisor Outreach Templates today to start building your dream team!
Please note that advisors, unless they are registered broker-dealers (registered with the SEC and FINRA), cannot perform services that require broker-dealer registration and be careful of advisors who offer to help you with your equity raise in exchange for getting an issuance based on the amount of the closing of financing if they are not registered broker-dealers. The distinction between a finder and a broker-dealer as classified by the SEC can have significant consequences to the business and is a somewhat complex analysis. Transactions involving unregistered broker-dealers can create a right of rescission (of investors to require the company to return the money invested), among other consequences. There are a number of factors the SEC will look at that weigh in favor of concluding there is a finder relationship in lieu of a broker-dealer relationship (such as, for example, the advisor introduces investors to the company without further involvement in the negotiation and without giving advice on the investment’s structure or suitability; the advisor receives compensation for making the introduction and the compensation is not instead tied to the success of the capital raise- is not a commission on the raise, among several other factors). The following would weigh in favor of finding a broker-dealer relationship: the advisor participates in negotiations between the company and potential investors and assists the structuring of the transaction; receives transaction-based commission or compensation tied to the closing of the investment or size or type of the related investment; screens potential investors to determine their eligibility to purchase equity; advises regarding the value of equity; sends private placement memorandum, subscription documents or due diligence materials to the potential investors; and many other factors. Although I am a lawyer, I am not practicing and the above is not legal advice. It is merely to demonstrate that, in this particular area, it will be important to appropriately define the advisor’s role and seek legal counsel review. Please find counsel below for professional legal advice.
Legal Inquiry or Engagement around Advisor Relationships or General Corporate - Hilary St. Jean, Esq.- HilaryStJean@RogowayLaw.com
Community for Angel Investors and Angel Stage Founders with tons of great learning and resources started by yours truly - AngelClub
The FAST Agreement is a standard template you can customize for your needs to formalize your agreement with an advisor.
Startup Boards is a great book navigating the process of selecting and working with Board Advisors and Board Members is Brad Feld’s book. Add it to your reading list.
This article from 1st Round Review is an excellent resource for getting the most out of your advisor relationships.
A great guide to running board meetings from Both Sides
My advisory services (including help curating advisors): AngelGambino.com/advisory
My free mentoring: AngelGambino.com/mentor
Thanks to these fine folks for sharing their views and resources, which contributed to this article.