As a founder, you might ask yourself, should I work with an advisor? Will it help your startup?
The answer is: It depends on the Return on Investment (ROI) -- i.e., how effective an advisor is relative to how many shares you are giving them.
When Are Advisors Usually A Good Idea?
Companies will usually get better Advisor ROI when:
You have an advisor with proven, experience-backed expertise in a specific area of your business can be incredibly helpful. For example, if you are not a very technical founder, you might have a very experienced ‘technical’ advisor who could help you interview developers and provide other technical advice and guidance -- especially helpful if you are saving money by hiring remote developers.
If you have an advisor whose participation validates the company to the public or to a specific target audience. For example, if your company has a new medical/dental/health product; having someone on-board with strong reputation in the applicable field, like an industry-leading doctor or researcher, may help make potential customers more comfortable in trying you out.
When You Need To Be More Cautious:
In our experience, low Advisor ROI situations occur most frequently when:
A new startup brings an advisor on-board, not to assist with a specific business challenge, but instead because the advisor is some kind of industry insider or hotshot and the startup has this idea – maybe fueled by the advisor – that the advisor will help them get big investors or win big clients.
Likewise, new startups often try to bring an ‘industry expert’ advisor on-board when the founder is brand-new to a specific industry. This happens all the time with founders who jump into a new industry without taking the time to develop their industry knowledge and expertise. The wishful thinking is that potential investors and business partners will magically overlook the founder’s lack of industry knowledge just because she has 3 or 4 friendly advisors she can call occasionally. Knowledgeable investors understand that this is no substitute if a founder just doesn’t have sufficient industry expertise
Why Don’t Things Work Out For Startups With Advisors?
The problem is not just low advisor effectiveness. It also has to do with how advisors are usually compensated.
Usually, an advisor will vest into a certain number of shares each month in exchange for being an advisor. But you almost never see an Advisor Agreement say that an advisor must do a certain minimum amount of work in order for that vesting to happen.
In many ways this makes sense: advisors are supposed to be important mentors and industry experts, the kind of people who are doing you a favor, not some sort of freelancer who should have to jump through hoops.
Also, most advisors would say it’s not their fault if a company they are advising can’t even find the time to ask for assistance during a particular month or two.
But when a startup has advisors brought on board for some of the not-so-great reasons we discussed above, many months can go between occasions when a startup will actually go ask an advisor to provide assistance -- not surprising since founders are usually too busy working their tails off for casual conversations.
And yet all during that time when they aren’t being asked to help, a company’s advisors get to keep vesting into their shares. Fast forward 20 or 30 months when the company has a possible exit and the founder finds out he’s given away a nice chunk of the company for no actual benefit.
To be clear, Advisor Agreements are almost always ‘at will’ arrangements that can be terminated by a startup at any time. But founders frequently refuse consider terminating an advisor arrangements that’s obviously providing little value because they are worried about creating negative buzz or causing an issue with someone influential in their industry.
How Do You Reduce Your Risks With Advisors?
A few common-sense steps you can take are:
To start with, work together with the advisor on a short-term trial basis. If the advisor is going to earn shares over time, propose that there is at least a 3 month vesting ‘cliff’ -- meaning if the Advisor Agreement is terminated before the end of 3 months, you won’t have to give the advisor any shares.
Instead of just having the advisor provide generic, nebulous ‘advice’, see if you and your advisor can come up with concrete, specific deliverables which the Advisor can be relied on to deliver each month.
Consult a lawyer before you actually enter into an Advisor Agreement to ensure that the terms you want for the arrangement are properly reflected in the legal terms and conditions.
Disclaimer: This article constitutes attorney advertising. Prior results do not guarantee a similar outcome. MGLS publishes this article for information purposes only. Nothing within is intended as legal advice.