Building your startup advisory board

What is a startup advisor?

A startup advisor is a professional who offers strategic guidance to help your company overcome challenges and reach new milestones. For entrepreneur Margot Schmorak, recruiting a circle of trusted advisors has been key to the growth of Hostfully, the San Francisco-based property management and guest experience software company she co-founded.

For many founders, building a circle of trusted advisors has become a turning point in early growth. Experienced operators consistently point to advisory relationships as a way to access perspective and expertise that an internal team may not yet have, particularly during the stretch from product-market fit to scaling.

What is an advisory board in a startup?

An advisory board in a startup consists of experienced individuals who provide non-binding strategic advice to the company's management. Advisory boards for startups usually include three to seven members and hold no legal or fiduciary authority, unlike a board of directors.

"It has helped us move faster," says Schmorak, who is Hostfully's CEO. "Our advisors act as an extension of our team—sometimes there are these hard decisions when you need to talk only to people you trust. Advisors are really great for that." They can also give you a "third-party" perspective, she adds.

Building an active startup advisory board can help startup founders fill expertise and experience gaps. But as Schmorak has learned, there are pitfalls to be avoided.

How is a startup advisor different from a mentor or a consultant?

The term "advisory board" is somewhat of a misnomer as advisors generally do not meet as a group regularly and don't have the legal and fiduciary responsibilities of a board of directors.

The key difference is authority; a board of directors governs and carries fiduciary duty, while an advisory board only counsels.

A startup advisor differs from a mentor and a consultant. A mentor typically works informally and without pay and a consultant is usually hired and paid in cash for a defined project.

What is the role of advisory in a startup?

The advisory role in a startup involves offering guidance on various business aspects, such as strategy, operations and industry insights.

Advisors:

• Tend to consult one-on-one with founders and executives as needed.
• Sign agreements with startups specifying their roles.
• Typically get compensated with equity (more on that later).

In contrast:

• Mentors are unpaid and act in an informal capacity.
• Consultants can play a similar role as advisors, but most often are hired to perform one or more specific tasks or projects and are paid in cash.

When to start finding startup advisors

Advisors tend to add the most value at specific inflection points. Experienced startup advisors and attorneys who counsel founders note that the strongest moments to bring someone on are when you start hiring key staff or need to ramp up sales and partnerships.

How do you choose a startup advisor?

Choose a startup advisor who has the relevant industry experience, a strong network and a track record of success in helping startups grow.

"Recruiting an operations person who has a wide network can help you tap into outside vendors and potential employees," says Peter Szymanski, founder of Silicon Valley Counsel. "Other advisors with industry experience and connections can help with partnerships and revenue growth."

Some startups may want to bring advisors on board to tackle distinct challenges. For instance, an electric scooter company that's trying to break into a new city may need an expert who knows how to navigate around regulatory roadblocks in its target market. Or a medical device maker could benefit from an advisor with connections to top academic institutions and government regulators.

Advisors can also help startups understand the ins and outs of legacy industries, like insurance. Kelly Fryer, former program director for the Barclays Accelerator, remembers a portfolio company that was successfully paired with an industry veteran.

"The advisor filled the gaps in their knowledge of the industry and gave them credibility," she says. "They were effective by taking a Socratic approach, helping them unpack the issues, asking questions, playing devil's advocate, but ultimately giving the founders the space to make their own decisions."

Finally, for startups in sectors that require deep subject-matter expertise, the right advisor can be invaluable.

"For a biotech company, bringing on board someone who is a physician or a researcher with deep knowledge for one hour a month could really change a company," says Ash Rust, managing partner at Sterling Road, a Bay Area venture capital firm that invests in and advises seed-stage startups. For startups in sectors that demand deep subject-matter expertise, the right advisor can be transformative.

How to find advisors for your startup

To find advisors, start with your network. Sometimes mentors can morph into formal advisors if they have proven particularly valuable and you have formed a trusted relationship with them.

Beyond your own contacts, treat every meeting with a potential angel investor as a chance to source advisor referrals. Ask whether they know anyone in your industry who could accelerate the business. Even angels who don't ultimately invest may introduce you to people who expand your network, and the conversation also shows you how that investor might contribute as a future ally.

Typically, VCs also have a network of professionals that are accessible for portfolio companies.

How do you screen your startup advisors effectively?

Screening startup advisors effectively involves treating the process like hiring a key employee. Conduct thorough interviews and reference checks to assess their industry experience and compatibility with your company's culture. Ensure there are no conflicts of interest, especially if they advise other startups in the same industry. Avoid the allure of high-profile names who may not be accessible or committed enough to contribute meaningfully.

"That big name is probably someone who is very busy, hard to access and isn't there when you need them," says Fryer. Rust agrees. "The other side of this is that there is a whole market of people who collect advisory chairs and don't do much work but retain stock," he says.

Oftentimes, startups' needs change quickly, so you shouldn't hesitate to replace advisors as priorities shift. Indeed, you may want to audit your advisory board every six months to identify whether a member is no longer needed.

Schmorak says Hostfully often recruits advisors from its extended network and then vets them as if they were staff hires. That means interviews, reference checks and ensuring a prospective advisor does not have conflicts of interest because they're advising another startup in the same industry. 

"It's a big trust exercise, and so much of recruiting advisors has to do with the right fit," she says. "It's easy as a founder to get wrapped up in this idea of loyalty to your advisors," she says. "But if you need to cycle someone out, you just have to do it."

What a startup advisory agreement should include

Once you've identified an advisor, you need a detailed agreement that includes a carefully crafted equity compensation arrangement. A startup advisory agreement should comprehensively cover key elements, including:

• Confidentiality and non-disclosure provisions to protect your intellectual property.
• Clearly outlined duties and responsibilities of the advisor.
• Specification of length of agreement to set clear expectations.
• Detailed compensation structure, including any equity arrangements.

While the duties will depend on the advisor and the nature of the startup, you should set benchmarks. "An advisor who is providing you with sales leads, you could make that 100% performance-based," says Rust. "If they're a scientist, you're potentially buying access to their time." 

How much time should a founder expect from an advisor?

The amount of time a founder should expect from an advisor can vary, but a good rule of thumb is approximately 12-15 hours per quarter. Access to the advisor is vital, especially when the entrepreneur needs quick answers to pressing questions.

Beyond scheduled hours, availability matters most when you need a fast answer. Experienced advisors often describe being on call for a quick conversation or an idea to bounce around—a founder might phone on the way to a meeting to talk through strategy and walk away with sharper talking points.

One of the most important parts of any advisory agreement—and one that will affect the future of your company—is the compensation component.

How should you compensate a startup advisory board?

Compensating a startup advisory board typically involves offering equity, which aligns the advisor's interests with the company's success. An advisor may receive between 0.25% and 1% of shares, depending on the startup's stage and the nature of the advice. Implementing a vesting schedule, such as a two-year plan with a six-month cliff, ensures value alignment and flexibility in case the advisor's contributions don't meet expectations.

One challenge is judging who will genuinely show up. Founders frequently note that it's hard to tell in advance who will commit the time and effort the equity is meant to reward, which is one reason vesting structures matter.

Founders should be especially cautious about awarding equity to advisors in a startup's early days, because they could end up owning a significant share of the company.

"That can become a problem later when you're doing an option pool and trying to hire a high-profile executive," says Rust. Schmorak concurs, "I would just be really mindful of how much equity you're giving away at an early stage. Having the equity to give to employees can be much more meaningful."

What are the vesting schedules and cliffs in advisor compensation?

Vesting schedules and cliffs are mechanisms to manage equity distribution over time. A vesting schedule specifies the timeline over which an advisor earns their equity shares, typically over two years. A cliff is an initial period, often six months, during which no equity is earned. If the advisor departs before the cliff ends, they receive no equity, ensuring commitment before significant equity is granted. There are ways to structure such compensation that ensures founders get value for those shares and still retain the flexibility to replace advisors, all without losing equity.

Conclusion

There are times when an advisor proves so valuable to a startup that founders will want them on staff. Schmorak says at least one of the company's former advisors is "now a key member of our team." 

But she says, "Founders considering such a shift must make sure that the advisor is willing to make the commitment required of a full-time employee."  

"We've always treated these events uniquely because of different contexts," Schmorak says. "The most important thing is to realign on career goals and make sure that the compensation that the person will get—and accrue, if formerly an advisor—makes sense with the goals of the company." 

Your startup needs will change over time, and you'll need to rely on an expert's perspective that your immediate team might lack. When a situation like this arises, that's the time you should look to your advisory board. 

Advisors are a valuable resource that can provide the right help at the right time for your startup. But, keep in mind that an advisory board is not about bragging rights. It's about finding dedicated allies with specific skills who can help you reach major milestones and get to the next level.