Managing Start-up Advisors

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Managing Start-up Advisors

  1. MANAGING YOUR START-UP COMPENSATION, COMPOSITION, AND ADVISORY BOARD DELIVERABLES
  2. Do not engage advisors because you personally like them, because they inspire you, or to impress. Engage advisors because your business has a capability gap to fill, and you cannot afford to hire a full-time, qualified resource, or because the gap is temporary and it doesn’t make sense to hire a permanent resource 01CHOOSE THE RIGHT TEAM
  3. Start-ups often lack similar capabilities: 1. An industry-specific, well-connected rain maker who can drive biz dev 2. A highly-experienced product development specialist who can drive unique, differentiating R&D 3. An industry-specific operations / biz mgmt / manufacturing SME who can ensure realistic execution 4. A strategy and/or financing guru who can pull executives out of firefighting 01CHOOSE THE RIGHT TEAM
  4. So an advisory board with those four members is often a good mix. But whatever the case, before you reach out to potential advisors, know what skills gaps you are trying to remediate against and recruit for those skills. I wouldn’t ever go beyond 5 advisors at any one time. 01CHOOSE THE RIGHT TEAM
  5. Finally, while you want partners you can work with effectively, yes-men are not too useful. Find advisors who can constructively challenge. 01CHOOSE THE RIGHT TEAM
  6. For anyone to be successful at any job, there needs to be a detailed, clear job description (JD) with specific deliverables attached to SMART goals, that is agreed to by all stakeholders. An advisor is no different. Be clear with expectations. 02KNOW WHAT YOU EXPECT
  7. Advisors may go above and beyond the JD at their discretion (and usually will), but should not be required to. And try not to expect capabilities they are not specialized for So, it is the management teams responsibility to be explicit and all- inclusive in the JD. All stakeholders (esp. Founders) need to sign off on the JD. 02KNOW WHAT YOU EXPECT
  8. Here’s an example of what I mean… 02KNOW WHAT YOU EXPECT ADVISOR EXECUTIVES Provide at least 3 sales leads per quarter Provide sales & marketing plan / targets and follow-up, protecting the advisors personal brand Meet with team at least once per month Provide detailed agenda & invites 2-weeks in advance. Drive the meetings Identify 1 key hire per quarter Provide recruiting plan and follow up with leads Support executives through due diligence by attending at least 3 meetings per month during roadshows Schedule meetings and brief advisor well in advance (2 weeks)
  9. It is important that you have a realistic and fair understanding of the commitment that the advisor is agreeing to and that the advisor is incentivized to deliver. Since you will be asking the advisor to work for free in exchange for equity or options, compensation is just a valuation and return on investment discussion (I strongly recommend against paying monetary comp) 03AGREE ON COMMITMENT
  10. Here is an example of how you might ground the negotiation in simple math…03AGREE ON COMMITMENT ASSUMPTIONS VALUE HOW DID I CALUCLATE THIS NUMBER? Forecasted profit in year of exit (not revenue) $ 2,500,000 Start-up fills this out. I’m just using any old number here Profit multiplier 4x Negotiate this with advisor, but should be based on industry norms Forecasted valuation at exit $10,000,000 Forecasted profit x profit multiplier Original equity granted to advisor 3% Start-up decides this as the offer Final equity of advisor after expected dilution 2.73% Be reasonable. Most start-ups need 2 rounds, each diluting all shareholders by 30% Hourly rate that advisor charges for their time $500 Advisor needs to say what their hourly rate is Returns for advisor on exit (forecast of what they’d get) $273,000 Forecasted valuation on exit x Final equity after dilution WORKLOAD CALCULATION METHOD 1 What returns advisor expects from man-hours invested 10x Negotiate with the advisor. What returns do they expect on their investment of time given the risk that start-up may never exit How much advisor would invest to get expected returns $27,300 Returns for advisor on exit / returns advisor expects from man-hours invested Consulting hours start-up should expect from advisor 55 Expected investment assuming expected returns / hourly rate WORKLOAD CALCULATION METHOD 2 Discount rate (risk that the advisor will get nothing, no exit) 0.9 How risky is it that there is noe xit and investor gets nothing? NPV of forecasted returns (assumes 3 years to exit) $39,801 In Excel, use = NPV([discount rate],0,0,[Returns for advisor on exit]) Consulting hours start-up should expect from advisor 80 NPV of expected returns / hourly rate
  11. Like any good marriage, your relationship with advisors should start with a plan for how you’ll part ways if it is not working out. Because everyone thinks more rationally and fairly at the start. • What happens if advisor misses targets? • What happens if company changes its strategy and advisor is less relevant? • What happens if advisor wants to leave early due life events? • Specify notice period and processes for breaking the contract early 04DO A PRENUP
  12. Some of this can be addressed through a vesting schedule, where advisors get shares based on milestones such as… 1/3 of the shares (rounded down to the nearest whole number) will be issued after six months of fulfilling the role of an advisor. All remaining shares shall vest on a pro rata basis monthly over a 1.5 year period with a 3- month cliff period. You might also consider granting options rather than preferred or common shares. 04DO A PRENUP
  13. • Specify whether you cover expenses incurred by advisor in fulfilment of their duties. They should not bear that burden as they are already carrying valuation risk • Make sure to deal with liability (i.e.: Advisor may not enter into contracts on behalf of company) • Cover NDA, non-poaching, conflicts of interest, and IP as you would in any employment contract 05DOT I’S & CROSS T’S
  14. If you do not engage your advisors, they cannot help you. If you decide that you need advisors, it is the executive team’s responsibility to provide regular status updates and any other material required for the advisor to succeed at their job. Also, get them involved in company events whenever you can. Market them in your collateral. 06KEEP THEM ENGAGED
  15. 1. Choose the right team 2. Know what you expect 3. Agree on commitment 4. Do a Prenup 5. Dot the i’s and cross the t’s 6. Keep them engaged
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