By Fernando Berrocal

How do you select the right advisors for your Board of Directors?

Selecting an advisory board is one of the best investments you can make when your business is still in its early stages and looking to keep growing. Trusted advisory board members don't simply make you look good in front of the different investors available; they also fill in critical experience gaps when it's too early to make essential recruits. 

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They may often provide you with introductions and connections to a variety of people who are vital in the development of your startup (lawyers, technical professionals, etc.), and they can even introduce you to investors as you begin fundraising. More experienced founders typically have fewer advisors, but newer founders typically are bound to have more. While a figure greater than ten is likely to make investors pause, a single-digit number is usually sufficient.

It’s Not All About Signaling, Is It?

Let's start with the most obvious suggestion: If you're located in a niche or technical area, such as biotech, it's a good idea to hire domain specialists as advisors, especially if you don't have any of these professionals on your starting team. One of the other main functions of advisors is to signal reputation, which is especially very important if you lack it in a certain category. Advisory board members' primary responsibility is to assist you in filling identified gaps in your business where pain points may arise in the immediate future.

Another function of an advisor is to provide you with product and business guidance, as well as to assist you in refining your understanding of the market in which you operate. Their industry contacts can be extremely valuable in some circumstances.

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When looking for advisors, it's a good idea to use any local resources you have for referrals, such as an "accelerator" or a business organization. Don't be scared to reach out to people who aren't in your main network. The finest advisors are forward-thinking, and whether or not they have previously worked with you, they will be interested in your business if it appeals to them.  There are some things to be careful about. Be cautious of consultants who demand cash payments upfront (unless they have high-level visibility or prestige), or who offer unusual investment terms or equity options.

In some circumstances, a business will hire an advisor to help with its financial connections to attract or introduce new investors. It's the simple knowledge that unless they have a stake in your business, investors are unlikely to follow their advice. Some (less valuable) advisors will only meet with founders twice a year and have little interaction with them in between. If one of these people ends up on your advisory board, rest assured that you can terminate the advisory arrangement and their stock vesting will stop.

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Getting The Most Out of Your Advisors:

To get the most out of your advisor agreements, you'll need to vet your external board members the same way you would an employee. Don't be scared to interview them and ask for recommendations from other businesses they've advised. The percentage you'll give them will be based on their responses and how beneficial you expect them to be to your business. This will result in a share grant at the end of the process. Before you offer your advisor the share grant, make sure you spell out the engagement terms in your agreement. This will assist to establish expectations in terms of board member responsibilities, board member positions, and the fundamental startup-advisory relationship.

Is it better to invest in Stock, Options, or Cash?

You should have your advisor sign an Advisor Agreement describing their obligations, rights, and any appropriate remuneration conditions after you've chosen them. This will most likely include a declaration of your time and engagement expectations, as well as non-disclosure and non-compete agreements.  It's also worth thinking about signing an Intellectual Property (IP) assignment agreement. Most advisor agreements are thrown together quickly, but many experts recommend making yours as detailed as possible to help set expectations early.

Most advisor partnerships last one to four years, depending on the period at which their assistance would be most beneficial to the business. They'll almost always have a vesting schedule. During the first two years, while you're establishing product/market fit, product-focused advisors will be most useful.  While some organizations choose to pay advisory board members on a per-meeting or per-event basis, the majority prefer to structure their advisor remuneration as equity in the form of stock options or a stock grant. If an advisor is one of your early investors, you will still need an extra agreement if they will receive more shares.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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