• How-to

WE all need a sounding board to bounce off our thoughts and get good advice. For startups, it is a valuable management tool to have an experienced person who has ‘been there, done that’ to provide counsel. Some informal ways would be having friends or a previous employer/boss you trust to offer advice. But they might not be experts who understand your landscape.

Who fits the bill?
A person who is experienced in your industry or specific function is beneficial. Depending on the needs of the business, you could have more than one advisor and create an advisory board with diverse and complementary skills. I also believe that the advisor is for the CEO rather than ‘for’ the company. An advisor is different from a director on the board, since it is not a legal position and carries no actual decision-making powers, legal obligations, rights or duties.

Why do you need an advisor?
A trustworthy advisor is someone you can lean on for advice or critical feedback. Choose the right advisor based on your need for the advisor’s experience, opening doors for sales, building credibility, brand etc. Think twice when you want to rope in a celebrity advisor; they are high maintenance.

Needs of engagement
Identify if you need an intense, hands-on help or an occasional discussion. Also, whether you need him/her for specific aspects of the business or generic advice. This helps in settling expectations with the advisor and time commitment. However, don’t expect the world of them. This exercise also helps in deciding whether it has to be a formal engagement. Ensure they are available and accessible when you really need them, otherwise it is just not worth the effort.

Compensation
When you expect ad-hoc help, such as providing introductions or providing some quick inputs/opinions, an advisor may be willing to spend the time in ‘helping’ without any compensation. For deeper, meaningful engagements please have a discussion on the compensation expectations of the advisor.

The compensation could be coffee/dinner, covering their expenses, honorarium cash or equity, or a combination of these. For a bootstrapping startup, the compensation is usually in the form of sweat equity either allotted at one go or at staggered intervals. The equity typically ranges between 2-5 percent.

How many is too many?
It is really up to you to reap the benefit of the advisor’s knowledge. You need to engage with the advisor and that requires energy and effort on your part.

Agreement
If there are specific performance metrics expected of the advisor (which is usually not the case) or shareholder duties (typically restrictions on share transfer, drag along) you may want to have an agreement with the advisor. In a startup, I have seen an advisor who wanted the shares to be allotted upfront but took offence to signing up an agreement because it then meant he was expected to perform.

What do advisors get out it?
They are definitely not in it for the compensation. It is usually because they are thrilled at sharing their experience, establishing their thought leadership or just the kick of being called an advisor. Go ahead, have a carefully chosen counsel(s) that you can trust and lean on in your startup journey.

Disclaimer: This article is for informational purposes only and is not a legal advice or opinion.

SHARDA BALAJI is the Founder of NovoJuris, legal counselors focused on startups and SMEs in the technology space.

©Entrepreneur December 2010

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advisor, advisory board, How-to, NovoJuris, Sharda Balaji