Advisors for Early Stage Startups at Yale

Advisors for Early Stage Startups David Shen David Shen Ventures, LLC

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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: dshen@davidshenventures.com

Advisors for Early Stage Startups at Yale

by dshen on Jun 24, 2010

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Advisors for Early Stage Startups at Yale — Presentation Transcript