As an entrepreneur and investor, I have also been asked to play the role of advisor.
The term “advisor” is often used without clearly defining the role and expectations of said advisor. Many entrepreneurs think that adding a roster of high profile advisors to their investment deck will lead to greater credibility and thus ultimately help their fundraising efforts.
In my experience, many entrepreneurs including myself, have a deep and diverse set of advisors and mentors. The key is to understand how to properly engage these people to create value and leverage their experience and expertise.
There are some simple guidelines to consider when engaging someone as an advisor:
- Will there be a formal relationship or is the advisor really more of a mentor? A formal relationship normally comes with some written letter or agreement outlining the advisory role
- What will be the economic value exchanged for the advisory role? It is important to clearly define the amount of advisory shares and/or cash compensation. We normally see advisory shares in the 0.20% to 1.0% range and occasionally up to 2.0% depending on the role, seniority, deliverables, etc.
- What are the expectations of the time commitment of the advisor? Many entrepreneurs complain that their advisor was very active at the beginning and then unavailable. It’s critical to discuss the advisor’s availability and how much time they will commit
- Determine the focus and/or deliverables of the advisor? This normally includes introductions to investors, help with commercial relationships, recruiting, strategic advice, corporate governance and a host of other areas where an advisor can help
Once you’ve properly framed the advisor engagement, then it’s time to work together to build your company. I think it’s important to remember the principles of reporting when dealing with advisors. It will provide a good framework to measure the effectiveness of the advisor and make sure both parties are happy with the relationship.
It’s also important that you maintain a way to terminate the relationship with the advisor if it’s not working out. There is nothing worse for an entrepreneur than feeling like they gave up a bunch of equity and they aren’t getting value. I often think there is a disconnect between entrepreneurs and advisors when they haven’t properly defined the advisor engagement. Often advisors might think they are doing a great job and the entrepreneur is actually looking for a different contribution or better results. The worse resolution of this situation is when the entrepreneur, who originally committed to giving a formal written advisor agreement, then decides 6 months or a year later that they no longer need to honor the verbal agreement. This can then be exacerbated by the entrepreneur using excuses like “the board didn’t approve your options.” If it’s not a fit, then own up to it and find an amicable dissolution. Don’t be shady.
My key takeaway is that a solid advisor can materially help your business, provide critical experience and expertise, and increase your bandwidth. But it’s important to take this relationship seriously and add the right pieces to make it successful.