I’m writing this blog post instead of writing an email. It would be an email to a fabulous proptech company at which I am the Chairman (Chairwoman? Chairperson? nah, I’m cool with Chairman). I figure I may as well write this advice down once and scale it, rather than rewrite it again and again for each company I advise in the future.
Are NEDs different from Advisory Board members?
Lots of companies get this confused, understandably so as both imply they are “Board” related. However, they are very different and should be thought of very differently.
An NED is a Non-Executive Director. Is someone non-executive, i.e. not a staff member of the company, who sits on the Board of Directors. This can (and likely will) include your investors, and should also include a non-investor representative. This type of independent NED or independent Board member, as they are interchangeably called, are really important, as they keep your Board meetings from being about purely financial matters, and make it more likely you’ll be able to make your Board meetings more strategic in nature, and more value-adding to the founders.
In order to be a part of your Board of Directors, they need to become a company Director. This is a critical point: being a Director has serious responsibilities attached to it. In the UK, they need to be registered at Companies House, and they carry potential liability for the actions of the company. They have a fiduciary duty to behave in the best interests of the shareholders, and a moral duty to behave in the best interests of the company and the impact it has in the world. They are responsible for incentivising the executive team, for holding them to account, and for carrying out governance tasks around budgetary approvals, processes and systems, and executive hiring/firing. It should not be taken lightly.
An Advisory Board member is quite different. It is a misleading name, in a way, as the “Board” in this title does not refer to the same Board as that which an NED sits on. An “Advisory Board” is an informal arrangement, that can change regularly, and has no fiduciary or governance responsibility. They don’t even actually need to meet as a group in the form of a Board meeting, they can just be an eclectic group of individuals that are on call to support the CEO and exec team on request.
Is there a difference in how they are compensated?
Yes, generally. NED’s carry more responsibility and risk, and so are usually compensated more generously, with cash and/or stock options. Advisory Board members have a more ad hoc contribution, with little risk or responsibility, so are justifiably compensated less.
Do I need an Advisory Board?
No, you don’t *need* one. If you are a charming and savvy entrepreneur, you can usually get most of the benefits an Advisory Board member can give you for free. Intros to investors, intros to potential customers, industry knowledge… these are all things that with the right network and effort, do not need compensation to acquire.
However, if you are starting out, an Advisory Board can be helpful to accelerate the speed of intros and the likelihood of them converting. The main reason to get an Advisory Board early on, though, is legitimacy within your market, intros to investors, deep sector knowledge, or trusted ongoing coaching and mentoring.
In my early years at Skimlinks, I chose my Advisory Board members for all these reasons:
- Oren Michels and Scott Rafer – these two men came as a unit, and I trusted them both deeply. They were friends and gave of their time and expertise for free anyway, but I asked them to be Advisors, because a) they knew *everyone* in Silicon Valley, b) everyone liked and respected their judgements, and c) they were incredible mentors, teaching me how to negotiate, how to pitch, how to sell… They were able to introduce me to investors and to potential customers, and a warm intro from them held a great deal of sway.
- Richard Jalichandra – he was CEO of Technorati at the time, and I met him when I went to pitch Skimlinks to him as a potential customer. Instead, we hit it off immediately. He has an incredible energy and I warmed to him, and I guess he felt the same. He also knew the adtech industry well, having worked across both corporates and startups in the sector, and was open and helpful with his knowledge.
- Gokul Rajaram – Gokul was essentially the inventor of AdWords, and was probably the most respected and liked product person in Silicon Valley, if not the world. I could not believe my luck that a) I got to meet him, b) we hit it off, and c) he agreed to join my Advisory Board. Citing his name gave Skimlinks instant legitimacy to anyone I met in the Valley, and as I was trying to succeed in being a UK-headquartered company with global ambitions, this was an important place to make it big. Not only did Gokul give me legitimacy just because of his golden reputation, but he gave me a meeting every few months when I was in San Francisco, and we used that time to explore my strategic vision and product roadmap. He is also just an awesomely kind person to know.
- Angus Bankes – in our first year, we were a young team trying to do a lot with a small budget. Very quickly I realised we needed more help with scaling our technology, and I couldn’t afford someone full-time. I was introduced to Angus Bankes, who had been founder of MoreOver (solving similar-ish tech problems for similar-ish customers). We couldn’t afford to pay him what he was worth on market rates, but we agreed a combo of stock options and day rate, and he worked part-time to help us get through our early scaling issues. He turned out to be gold, as he not only provided strategic tech guidance, he introduced us to a bunch of investors and customers.
So you can see I had a good balance of Advisors that contributed across all the key areas: operational knowledge, sector knowledge, mentoring, investor intros, legitimacy, strategic input.
How are Advisory Board members compensated?
It varies obviously how useful they can be, and at what stage you are at in the business. Usually 0.1-0.5% in stock options is normal, vesting over a few years. If you are at an early stage, and all they are expected to contribute is to take a meeting with you when you ask for it, you don’t need to pay them in addition to their stock options.
If they are meeting with you very regularly for coaching or mentoring sessions, or if they are actively doing work regularly on your behalf, you may consider paying them an hourly or pro-rated daily rate too.
If they are helping you fund raise, sometimes they ask for a % fee for any successful introductions. I’m not usually a fan of this… My view is I’ve been helped by so many people over the years, and I happily do intros to investors for founders I like. I’d be wary of someone that wants to be on your Advisory Board and wants a finders fee for VC intros… they can be good, but most serious and respected people won’t ask for it.
How many should I have?
It varies, and the other important point is that you will likely have different Advisory Board members for different stages of your journey. I think 3-4 is usually more than enough at any one stage, and I think you probably want to revise your list every 2-3 years. For example, once Skimlinks had achieved legitimacy in the US, had solid investors behind it, and an experienced team, our needs for Advisory Board members evolved. I then focused on Advisors that would be able to provide strategic input and customer intros to some new product areas we were exploring. However, at this stage, I only took on 1 Advisor, and for any other advice that we needed, I managed to get it for free or we paid for it.
How do I use my Advisory Board
I have heard of some founders actually holding “board” meetings for Advisors, but I generally think this is unnecessary and not particularly helpful. If you pick well, your Advisors will be so diverse and almost unrelated, that a one hour meeting with all of them would not be as useful to you as an hour of each of their time separately. All you need to do is agree as part of your Advisory Board agreement that they are getting stock options on the condition that they make themselves available for face-to-face meetings with the CEO on request every 3-6 months, and for email responses and intros as needed.
What happens if they don’t perform?
If they are really flagrantly not responding when you reach out, and refusing to meet with you, you can terminate their agreement and they then can choose to exercise the subset of stock options that have vested. But in reality, it is on you to manage your Advisory Board relationships and get the most out of them.
OK, now what?
The main thing to remember is that you don’t *need* them. There are always so many people circling young startups, some of them legitimate and of genuine value, many are charlatans sniffing around for opportunities to own a slice of your company on their path to building a portfolio of companies they can “advise”. Be wary. Root out if they have solid startup or sector experience, and validate through independent references how well-respected and connected they really are. If the only thing they are able to provide is some sector experience and some introductions… just think about it. You really want to focus your Advisory Board on a small number of really impactful and respected Advisors, and for others, it may be better to offer a different arrangement: a bounty for leads or intros to investors, or a relationship where they are happy to mentor you unofficially on a sporadic basis. Why? Because your equity is precious. Don’t give it up easily. Save it for employees and to raise capital. I am very very reluctant to use stock to pay for services. Why? Because the more complex your cap table, the more minor players that aren’t going to add value for the long term, the more complicated everything you do going forward will be. Keep it simple, and as high-end and/or value-adding as you can get.