Advisors are people who have network, reputation, great skills and significant work experiences. They can be very useful, but sometimes they can also prove to be inadequate or your relationship with them may not work. Here are some simple advices to chose an advisor and live together happily.
HOW SHOULD HE BE
- Competence: Find someone who has experience in the sector in which your startup operates and has a network that can be useful to find both the first customers and the investors.
- Big names: Important people are quite a showpiece but very often they are super busy and won’t pay much attention to you.
- Professionals: avoid chosing a lawyer or an accountant as an advisor… unless your startup is a software for lawyers or accountants. What kind of advisoring could he provide otherwise? On how to make a contract? Not strategic at all.
- Advisor by profession: there are people around who do not have much to do and in their spare time they act as experts about startups collecting charges as advisors or board members here, there and everywhere. Avoid them, professional investors know them or quickly smell them and you’ll end up giving the impression of having been fooled.
- Skin in the game: the best advisors are those who also invests in the startup. They demonstrate to prospective investors that there is someone who knows about business and has invested (even a little, that’s okay). Moreover, they will also be aligned to your goals and will surely put more effort as they are risking their own money. You will instead have a problem if you have found someone largely experienced in your industry who serves as an advisor but has not invested. You must be able to justify this and be very convincing.
WHERE TO FIND HIM:
- Have a look in your network
- If you have no suitable candidate who could be reached directly or indirectly, then you just have to try to get to know some, then locate your target and call, write or try to stalk them at some event
- Some professional investors can help in the search. As an example, the acceleration program LUISS ENLABS of LVenture Group has a board of advisors of over 50 experts in various fields, among which the accelerated startups can choose their advisors
- Remember that if you are smart people doing something meaningful, then experienced people just as smart as you will offer to give you a hand. Contrarily, if experts and smart do not offer to help (even without necessarily be your advisor, but only with some help), there may then be a good chance that you are not working on something interesting
WHAT DOES THE ADVISOR DO FOR YOU
The advisor recommends based on his experience. From product development, to strategy, revenues development and fundraising he can help you:
- Find the first customers
- Raise money from investors
- Attract talents and hire the right people
- Making strategic partnerships
- Solving issues specific to your business
HOW MUCH SHOULD YOU PAY THE ADVISOR
- The best thing, as I said before, is that the advisor pays you, meaning that he invests in your startup. No need to put hundreds of thousands of Euros, 10k are enough to prove that he believes in you. It is an important signal for investors who follow (provided that the advisor is a person capable and expert in the field where the startup operates) .
- There may, however, be experienced and valuable people that cannot afford to invest. In such cases, you must work out a fee. The advisors should not be paid for the work they do, but for the results they will lead to and the value they will create for the company. Therefore, to make the advisor aligned to the objectives, the best thing is that his remuneration is a share of the company. Instead of, or in combination, you can agree on a success fee if he enables you to close a contract with a customer or gets you an investor.
- The fee depends on the extent of the contribution from him: does he only introduce you to potential customers or does he have intimate connections with them? Does he introduce you to investors or does he collects money for you? Let’s define three classes Adivisor: Standard, Expert, Star, based on the following criteria:
What to Look for in an Advisor
|Network of investors||High|
|Attraction of talents||Low|
- I let the general advisoring fall under low priority because I assume that the commitment of the advisor must be especially in business development and fundraising, but if he should also give you the vision, strategy, tell you how to make the product and how to run a business then you probably have a problem of skills in the founding team.
- Therefore, depending on the stage of development of the startup and the type of advisor we can then draw up a table indicating the portion to be given to the advisor:
Share to give the Advisor
|Type of Advisor||Pre-Seed||Seed||Series A|
HOW TO REACH AGREEMENTS WITH THE ADVISOR
- First of all test the relationship: get to know each other and have a trial period together. Sometimes I see Advisors who are very excited at the beginning and after less than a month the startup has to put a photo on the milk carton to find its missing Advisor. So do not give away the equity immediately, first, establish a relationship and understand if it can work.
- Remember that if you give 1% it means that if one day you sell your company at €10 million, the advisor will earn €100k. But it often happens that you have to do other investment rounds and the 1% is diluted. The advisor can easily lose motivation, both for as he sees his share diluted, and because the timing of exit may be long (averagely 5/6 years). This is why, as I said before, it is important that the advisor is also an investor, that way you are guaranteed a greater committment.
- If he cannot be an investor, try to keep him engaged with your startup, perhaps through a mechanism of stock options with a vesting of the shares of 1 or 2 years. No more, the value of the advisor focuses on the short term, you’ll need it to start, in the long term it doesn’t make sense.
- Agree on the commitment: make an agreement in which you specify what does the advisor do in exchange for the equity. The more detailed, the better. Write for example that the advisor is committed to meet the team once a month, is available at a weekly call, will introduce a certain number of potential customers, etc … You can take a cue from some templates to draft a letter of agreement: FAST Founder of Dating and Seedsummit template.
END OF ADVISORING
The termination of advisornig is when the advisor stops bringing value to the company. This can happen for several reasons:
- You have passed the critical initial phase and the startup can walk on its own feet
- You have pivoted in another field that is not the ground of the advisor
- Have ceded control of the company (sales, recapitalization, …) and the advisors are no longer useful or desired
- You have chosen the wrong advisor
The end of the relationship must be managed in a mature manner, and in the case of dressing stock options it is better if the terms and the time duration of the option are very clear in the original agreement.