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Presented on 6-24-10 at the Yale Entrepreneurship Institute to their summer incubator startups.
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Advisorsfor Early Stage
StartupsDavid Shen
David Shen Ventures, LLC
About Me
About Me
About Me
About Me
About Me
…and more…
Advisors
What Does an Advisor Do?
• Gives you advice on everything you do
• Teaches you things you don’t know• Keeps you out of trouble• Makes important introductions• Can help you fund raise and/or hire• Can add to your positive reputation
Why Advisors?
• In addition to everything on the previous slide…
• It’s hard to do a startup by yourself, co-founders and your team
• You can’t know everything (even when you think you do)
• You often get myopic when you’re heads down 24/7
Who’s the Typical Advisor?
• Typically someone who’s been in the industry for some time so he/she has a lot of experience and contacts– Can come from either the same industry
or a target industry for your business– Have a lot of knowledge about aspects
of the business – ie. strategy, operations, sales, product
What Makes a Great Advisor?
• Besides experience + contacts…• Willing to be engaged with your
project• Time to be engaged with your project• Great teacher• Personality aspects
– Comfortable with influence, doesn’t get mad when you don’t listen/disagree/etc, keeps throwing ideas at you
Early Stage Startup Advisors
• Early stage is different than later stage• Think about how a startup operates:
– Lean vs. more resources– Searching for biz model vs. extending
existing one– Adapt/creative/pivot vs.
incremental/expand
• Startup folks require different personalities, skills, and experiences
Early Stage Startup Advisors
• Company needs are different, and type of advisor you’ll need can be different
• Advisors who are experienced with startups and how they operate will be better as advisors of strategy and product
• Advisors for industry info and contacts, less necessary for startup mentality
Depth of Involvement
• The aloof advisor: infrequent, once a quarter, or never
• The active advisor: engaged, frequent phone calls/emails/meetings on demand
• The “employee” advisor: is doing actual work, up to full time
Involvement Driven By…
• Advisor– Available time– Desire for engagement– Incentives
• YOU– Relationship with advisors– Making time for advisors
Involvement: Advisor
• Many are just too busy to engage– Busy personal and corporate lives– Hard to contact and get responses
• Incentives– Generally, more compensation can drive
more involvement but not always
• Try to find those with time and desire to help you
Involvement: YOU
• Traditional way: form advisory board, meet once a quarter
• Other ways:– On-demand: negotiations, email, phone,
reviews and meetings– Would not recommend setting up a
standing weekly meeting
• Set the relationship from the beginning
Involvement: YOU• Don’t wait to contact advisor!• Be aggressive in engaging them• Always be respectful of time and what
you’re asking them for– Ex. Phone calls, emails, live meetings,
introductions
• BAD: you don’t make time to engage advisors you worked so hard to find and sign up
Involvement: YOU
• Assume that you’ll be giving compensation to advisors for time spent that is not regular– Do not get paranoid about whether
someone is going to do the work and make them show up weekly. This is NOT how advisors work!
– Instead if they do not deliver, then just fire them (more on this later)
Length of Engagement
• Advisor terms are typically 1 or 2 years
• Personal experience says one year is too short, and 2 years is about right
• If on-demand, typical activity is heavy in the beginning, which tapers off to on demand
Advisor Compensation• Early stage: recommend options as
payment– Later stage: can pay in options and/or cash
• Want alignment in goals – options best for that
• How much?– Range: .1% to 1% (or even higher) of
common stock pool at early stage– Ex. 8000 to 100,000 options
Advisor Compensation
• Typical payment schedule is vesting monthly over the term
• Expect that there will be months where there will be little or no interaction with advisors– They are on-call when you need them,
not “paid” hourly (typically)
Advisors Are NOT Consultants
• Those pesky lawyers and their contractor/consulting agreements
• Consultants are mercenaries, advisors are not.
• You should treat advisors like board members• Importance of indemnification
• Bottom line: Advisors are important, honored individuals and should be treated as such, not mercenary consultants
Advisor Agreement
• Reflection of your relationship with them– If you’re putting them above
consultants, then don’t give them a typical company friendly consulting agreement!
• Advisor agreement should have some favorable terms
Advisor Agr vs. Consulting Agr
Advisor Agreement• Expenses covered
• Confidentiality has capped time limit (~2-5 years)
• Indemnification• Non-exclusivity
• Paid in options typically, with change in control accelerated vesting clause
• Vesting over term
Consulting Agreement• Expenses billed or within
budget• Confidentiality in perpetuity
• No indemnification• Can’t work for competitors
ever• Payment in cash
• Billed hourly for services (sometimes by project)
“Firing” Advisors
• It does happen• Many reasons:
– They aren’t delivering what you want them to deliver
– They aren’t engaged– Strategy shift means that you need someone else
• No consistent process here, very ad hoc on the entrepreneur on reasons to fire (or not)
• DO NOT FIRE simply if you are not talking to them frequently
How Do I Find an Advisor?
• NETWORK NETWORK NETWORK• If you can’t do that you’re in trouble
anyways…
Signing Them Up• Once you find someone…• Convince them that your project is
awesome and that they will get a lot out of being involved– Personal satisfaction– Options upside– Ego from being involved and from those
who want their expertise– Etc.
Signing Them Up
• If you can, check references– Talk to others who have worked with them– Some people weren’t made to be good
advisors• Ex. Personality aspects, too busy, not engaged
• Prepare advisor agreement and compensation
• Get signed, go to work!
Summary• Advisors are very useful to startups• Help can be gained without use of cash• Find advisors who were entrepreneurs
and/or know how startups work• Engaged, active advisors are better than
passive ones• You define/drive the relationship, don’t
waste the opportunity to use your advisors• Advisors ARE NOT consultants! Treat them
better!
Questions? Comments?
EMAIL: [email protected]