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Why Every Entrepreneur Should have an Advisory Board

We often see early entrepreneurs relying on an informal network of advisors instead of setting up a formal advisory board, but an advisory board is an invaluable tool that every entrepreneur should have from the inception of the business. There are about as many reasons that you should have an advisory board as there are excuses for not setting one up, but here are the reasons we think are most relevant to the high-growth, investor oriented, early-stage start-ups we see here at the UVA LVG Seed Fund.

You need people who will CHALLENGE YOU AND THE MODEL

In the early stages of a start-up, an entrepreneurs trusted advisors are likely to be people they already know – maybe even your friends, family, teachers.  This pre-established personal relationship can jeopardize the frankness of these advisors.  Entrepreneurs are known to get so excited about their ideas that they charge forward with a single-minded focus which can be both good and bad. The bad is that this may stop the entrepreneur from asking for advice, and if your advisors are close to you, it can also stop them from giving the advice for fear they will damage the relationship with the entrepreneur.

But, at this stage – maybe more so than at any other – an entrepreneur needs someone who will tell the truth without sugar coating it.  You need advisors that feel comfortable giving you tough advice when it is warranted.  You need honest feedback about the strategies and tactics you are implementing.

Formalizing the relationship will help establish in the advisor’s mind that this is something they should be actively working on, not just thinking about when you come to them with a problem. Put together an agreement that outlines their role, your expectations and how you are going to compensate them.  Hold them accountable just as they will hold you accountable.  This will make it clear that this is a business relationship, not a personal one and will make sure each of you keep your eyes on the goals and objectives of the company.

In addition, you need regular meetings so that you can sit down and digest things with your board. Consistency is key, and knowing that you will have a regular meeting will remind you about what you're supposed to be working on, allow you to evaluate their advice with the benefit of hindsight, and prompt you to bring them new ideas and challenges. By sitting down with your advisors on a consistent schedule and as a group, they will be able to engage with one another and challenge not just your ideas, but the group’s ideas, something that does not happen when you just call up one person at a time.  Think of the value of leveraging multiple smart, experienced minds in the room at one time versus just one on one!

It is easier (and cheaper) than you think

Establishing an advisory board doesn't have to cost much but you should pay for the experience and network.  Giving equity – as options that will vest - is the most common form of payment and this makes the advisor a partner. They gain only when the company succeeds. Goals are aligned.

How much depends on a number of factors - your desire to have the person involved, his/her experience and most importantly their role going forward.  What will they do for the company? How critical are they to achieving that next milestone? What level do they feel motivated?  In my experience, option/equity awards are all over the place but have commonly been in the range of one quarter of one percent to one half of one percent. 

I would advise against paying cash for an advisor.  Certainly reimburse expenses – pre-approved by you – but I have found paying cash makes the advisor a vendor versus a partner which may not be as productive.

The goal is simply to get people you trust, respect and have the skills you need to grow your business. Make sure they are actively and consistently involved in your decision making process – use them, their experience and network to help move the company forward. Setting up a board might sound like a headache, but a recurring meeting with a few trusted advisors every few weeks may be enough to help keep you on track.

Credibility, Experience, Connections

seasoned board will lend their credibility to your enterprise. After all, if these sophisticated people are willing to spend their time and energy advising you, it shows that they have confidence in you and your company.  And, if you have your heart set on getting investors, having a board will not only show that you've found influential people who back you, it will also give you credibility as a serious business person who understands the value of good advice - this can be especially valuable to entrepreneurs who don't have prior business experience.

Your board members will have the benefit of past experiences -they've been through this before and will be able to tell you why what they did worked or didn't work and what they would have done differently.  Identify what you need in order to achieve that next milestone that brings about a value inflection point.  Then select board members who bring those skills and experiences that address these challenges and needs so that their experiences/knowledge can help you to overcome those issues and move the company ahead avoiding costly mistakes.  Use their experience, and learn from their missteps instead of learning them on your own.  

A well-chosen board can also help you get funding.  It is difficult to raise funding in today’s environment and connections are more important than ever to get you in front of investors.  Asking someone to be on your board is a great way to get them to later introduce you to investors they may know - though you should be sure not to make them feel like you expect this.  Moreover, if they've raised money before or are investors themselves, they will know what investors are looking for and will be able to help guide you through this process - they might even invest!  On this note, an area where experienced entrepreneurs can really help unseasoned entrepreneurs is with pitching to potential investors, they can help you design your pitch for your audience and then you can present it to them for critique.

Accountability and Encouragement

Regular meetings will force you to be prepared and make sure that you're working toward your goals because your board will hold you accountable if you don't.  One reason that early entrepreneurs avoid forming a board is because they don't want the accountability- after all, they decided to create their own company so that they wouldn't have to answer to anyone but themselves. Problem is that often they find themselves running in circles because they are unsure of what next steps to take.  A  board will help keep you on track- they aren't going to waste their time sitting down with you every few weeks if you come to every meeting explaining how you haven't hit your goals because you spent your time researching and re-researching the same problem you spoke with them about last time.  Accountability is good for your business!

One of the most difficult things about being an entrepreneur is that all of a sudden every decision comes down to your own judgment.  Knowing that if your decision ends up being wrong, it is 100% your fault can be somewhat paralyzing.  Many promising companies fail to take off because the entrepreneur gets caught up in the minutia of every decision and never end up making one.  Sometimes you just need someone to say, “Enough! You have enough information, now it's time to make a decision."

A board can also be a valuable source of encouragement and support. When you've finally made that decision you were dreading and you are in the middle of implementing it, it can be incredibly helpful just to have someone tell you, “Yeah, I've been there, you'll survive." This encouragement could even be the difference between giving up on your business and having the strength to try again.

You might think that you don’t need a board because you are not “there” yet, because you are “too busy” or even because you are still trying to nail down your business plan.  It is never too early to get a board together, though, and your board may enjoy being involved in the early stages of your company because this allows them to grow with the company and become more invested over time.

Spending the time to get an Advisory Board is sure to be one of the best business decisions you will ever make.

Remember we at LVG can help in forming an Advisory Board so feel free to call, email or drop by anytime to discuss your thoughts in this critical area for your technology development or company.