Developing a strong advisory board can be a key element of a startup’s success. Founders may have great ideas, but running a successful business requires expertise in a variety of fields, and it would be unrealistic to expect even the most well-grounded founder to be well-versed in everything. For this reason, having an advisory board with seasoned and experienced executives can provide key insights and help founders navigate unfamiliar issues on their way to that next level of success.
Nonetheless, there are also unintended risks that accompany building a board the wrong way. Here are three pitfalls to avoid when forming an advisory board.
Avoid employing an advisory board to create false momentum.
Some founders use their advisory board as a marketing strategy, luring big names to their advisory board to show the viability of their product. These startups often have a long list of notable advisors, hoping that these names help lend the company credibility in the eyes of investors and business partners.
However, there are downsides to this practice. Advisory boards are most valuable when they provide legitimate advice and support to the business’ leadership. Choosing an advisory board to give a company false momentum not only creates inefficiencies in terms of managing a large group of advisors but also can be viewed externally as a negative signal. People can tell when your advisor is just a “famous” face on your website.
Avoid too many cooks in the kitchen, and keep track of when the menu changes.
The advisory board should be a tight knit group of trusted advisors—having too many voices may be counterproductive. Keep the advisory board small, around four to six members, and only add more advisors when needed.
Also, business needs change. As the business grows and develops, the advisors should change, as well. Contracts with advisors should be short term—ideally 12 to 24 months, so the business can reevaluate its growth from a fresh perspective when necessary.
Avoid giving away the company.
Founders should remember that employing a long list of advisors can be expensive. Most commonly, advisors are compensated with equity—having a long list of advisors can lead to a substantial loss of equity at the very start of the business.
So how much equity should you allocate to advisors? Our general recommendation is that founders set aside 1-1.25% of outstanding equity for the entire advisor board for the next two years. We frequently hear that it’s “market” for each advisor to get 1% of the company (and we find it’s typically the advisors themselves that say this). One percent is an enormous amount of equity to grant someone, and we recommend you limit these stakes to full-time employees. If you are granting a significant equity stake (i.e., > .25%) to an advisor, then the advisor should be in the trenches with you developing your product or sourcing leads and customers, or you should be bridging them to a full-time role with the company.
Takeaways
- Pick your advisory board based on their skill set and experience.
- Avoid using the advisory board to create false momentum or prestige for the business.
- Keep the advisory board small.
- Advisory board agreements should be made on a short-term basis, so the business can reassess the board members as needs change.
- Avoid giving away too much equity to the advisory board. We recommend budgeting 1-1.25% of outstanding equity for the entire advisory board for the next two years.