This document provides advice on establishing an effective advisory board for a start-up company. It recommends choosing advisors to fill specific capability gaps, limiting the board to 5 members or less. Advisors should be able to challenge the team's thinking. The document stresses the importance of clearly outlining each advisor's deliverables, commitments, compensation structure, and process for terminating the arrangement. It also advises keeping advisors engaged by providing regular updates and involving them in company events.

1. MANAGING
YOUR START-UP
COMPENSATION, COMPOSITION, AND
ADVISORY BOARD
DELIVERABLES

2. Do not engage advisors because you
personally like them, because they
inspire you, or to impress.
Engage advisors because your business
has a capability gap to fill, and you
cannot afford to hire a full-time, qualified
resource, or because the gap is
temporary and it doesn’t make sense to
hire a permanent resource
01CHOOSE THE RIGHT TEAM

3. Start-ups often lack similar capabilities:
1. An industry-specific, well-connected rain
maker who can drive biz dev
2. A highly-experienced product
development specialist who can drive
unique, differentiating R&D
3. An industry-specific operations / biz
mgmt / manufacturing SME who can
ensure realistic execution
4. A strategy and/or financing guru who
can pull executives out of firefighting
01CHOOSE THE RIGHT TEAM

4. So an advisory board with those four
members is often a good mix.
But whatever the case, before you reach
out to potential advisors, know what skills
gaps you are trying to remediate against
and recruit for those skills.
I wouldn’t ever go beyond 5 advisors at
any one time.
01CHOOSE THE RIGHT TEAM

5. Finally, while you want partners you can
work with effectively, yes-men are not too
useful.
Find advisors who can constructively
challenge.
01CHOOSE THE RIGHT TEAM

6. For anyone to be successful at any job,
there needs to be a detailed, clear job
description (JD) with specific deliverables
attached to SMART goals, that is agreed
to by all stakeholders.
An advisor is no different. Be clear with
expectations.
02KNOW WHAT YOU EXPECT

7. Advisors may go above and beyond the
JD at their discretion (and usually will),
but should not be required to. And try not
to expect capabilities they are not
specialized for
So, it is the management teams
responsibility to be explicit and all-
inclusive in the JD.
All stakeholders (esp. Founders) need to
sign off on the JD.
02KNOW WHAT YOU EXPECT

8. Here’s an example of what I mean…
02KNOW WHAT YOU EXPECT
ADVISOR EXECUTIVES
Provide at least 3 sales
leads per quarter
Provide sales & marketing
plan / targets and follow-up,
protecting the advisors
personal brand
Meet with team at least
once per month
Provide detailed agenda &
invites 2-weeks in advance.
Drive the meetings
Identify 1 key hire per
quarter
Provide recruiting plan and
follow up with leads
Support executives through
due diligence by attending
at least 3 meetings per
month during roadshows
Schedule meetings and brief
advisor well in advance (2
weeks)

9. It is important that you have a realistic
and fair understanding of the
commitment that the advisor is agreeing
to and that the advisor is incentivized to
deliver.
Since you will be asking the advisor to
work for free in exchange for equity or
options, compensation is just a valuation
and return on investment discussion (I
strongly recommend against paying
monetary comp)
03AGREE ON COMMITMENT

10. Here is an example of how you might
ground the negotiation in simple math…03AGREE ON COMMITMENT
ASSUMPTIONS VALUE HOW DID I CALUCLATE THIS NUMBER?
Forecasted profit in year of exit (not revenue) $ 2,500,000 Start-up fills this out. I’m just using any old number here
Profit multiplier 4x Negotiate this with advisor, but should be based on industry norms
Forecasted valuation at exit $10,000,000 Forecasted profit x profit multiplier
Original equity granted to advisor 3% Start-up decides this as the offer
Final equity of advisor after expected dilution 2.73% Be reasonable. Most start-ups need 2 rounds, each diluting all shareholders by 30%
Hourly rate that advisor charges for their time $500 Advisor needs to say what their hourly rate is
Returns for advisor on exit (forecast of what they’d get) $273,000 Forecasted valuation on exit x Final equity after dilution
WORKLOAD CALCULATION METHOD 1
What returns advisor expects from man-hours invested 10x Negotiate with the advisor. What returns do they expect on their investment of time
given the risk that start-up may never exit
How much advisor would invest to get expected returns $27,300 Returns for advisor on exit / returns advisor expects from man-hours invested
Consulting hours start-up should expect from advisor 55 Expected investment assuming expected returns / hourly rate
WORKLOAD CALCULATION METHOD 2
Discount rate (risk that the advisor will get nothing, no exit) 0.9 How risky is it that there is noe xit and investor gets nothing?
NPV of forecasted returns (assumes 3 years to exit) $39,801 In Excel, use = NPV([discount rate],0,0,[Returns for advisor on exit])
Consulting hours start-up should expect from advisor 80 NPV of expected returns / hourly rate

11. Like any good marriage, your relationship
with advisors should start with a plan for
how you’ll part ways if it is not working out.
Because everyone thinks more rationally
and fairly at the start.
• What happens if advisor misses targets?
• What happens if company changes its strategy
and advisor is less relevant?
• What happens if advisor wants to leave early
due life events?
• Specify notice period and processes for
breaking the contract early
04DO A PRENUP

12. Some of this can be addressed through a
vesting schedule, where advisors get
shares based on milestones such as…
1/3 of the shares (rounded down to the nearest whole
number) will be issued after six months of fulfilling the
role of an advisor. All remaining shares shall vest on a
pro rata basis monthly over a 1.5 year period with a 3-
month cliff period.
You might also consider granting options
rather than preferred or common shares.
04DO A PRENUP

13. • Specify whether you cover expenses
incurred by advisor in fulfilment of their
duties. They should not bear that burden
as they are already carrying valuation risk
• Make sure to deal with liability (i.e.:
Advisor may not enter into contracts on
behalf of company)
• Cover NDA, non-poaching, conflicts of
interest, and IP as you would in any
employment contract
05DOT I’S & CROSS T’S

14. If you do not engage your advisors, they
cannot help you.
If you decide that you need advisors, it is
the executive team’s responsibility to
provide regular status updates and any
other material required for the advisor to
succeed at their job.
Also, get them involved in company
events whenever you can. Market them
in your collateral.
06KEEP THEM ENGAGED

15. 1. Choose the right team
2. Know what you expect
3. Agree on commitment
4. Do a Prenup
5. Dot the i’s and cross the t’s
6. Keep them engaged

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