Who’s advising your startup? Insights on the value and significance of having strategic advisors early on

by Zach Robins

Doug Ramler Gray Plant MootyDoug Ramler is a principal at the Minneapolis-based law firm of Gray Plant Mooty where he represents start-up and emerging companies in organizational, finance, governance, SEC compliance, and contractual matters. He is a co-chair of the firm’s Entrepreneurial Services team.

Mr. Ramler represents multiple Minnesota (and beyond) technology startup companies including distributed commerce network Alvenda, Inc, which raised $5 million in venture capital in January, 2010 and Sajan, Inc, a cloud-based translation management software company, which completed a reverse merger in March, 2010.   Gray Plant Mooty is also a TECHdotMN community sponsor.

I spoke to Doug about the importance of advisory boards for startup companies.  What follows are excerpts from our interview.


Zach Robins (“ZR”): What types of companies could benefit from an advisory board?

Doug Ramler (“DR”): Early stage companies can always benefit from the wisdom of those who have “been there done that”. The less experience an entrepreneur has, the more he/she stands to gain from having advisors.

ZR: At what point should founders bring together a board of advisors?

DR: The earlier, the better.  Ideally, at the founding stage to discuss the business plan and business model.

ZR: Why should founders build an advisory board?

DR: It is amazing how much experience is out there if you look for it.  People have had a lot of successes and mistakes.  This experience can increase a young company’s likelihood of success.  Also, founders can lose perspective because they are so close to the business. This “tunnel vision” can turn into missed opportunities for the business.

ZR: How do founders meet potential advisors?

DR: Potential advisors are everywhere. It is largely about networking and talking to respected professionals. Get suggestions from these professionals.  Once a founder gets a referral, do some diligence and learn about the suggested advisor. Then meet those people by scheduling a meeting or attend events they may be at.  Approach the potential advisor and say you are interested in learning about what they have done.  Don’t necessarily say, “I want you on my board.”  Send the business plan after the first meeting, as opposed to, “Here’s my plan, do you want to be an advisor.” Most importantly, get comfortable with them to determine if they would be a strong advisor.

ZR: How does a startup company know who will make for a good advisor?

DR: The more engaged the advisor is, the more valuable they will be to the startup over the long run.  Establishing format, routine and consistency is  key to maximizing the relationship. Of course, the more relevant the advisors experience and expertise, the more valuable role they play.   Founders should seek strategic advisors whenever possible.

ZR: What can the company offer an advisor?

DR: Most experienced entrepreneurs and executive want to give back as long as the demands are not unreasonable. The vast majority of advisors have had people help them and understand that giving back is a part of the cycle. If the company gives options or equity to the advisor, that is appreciated.

ZR: How should the board be formally constructed?

DR: Most companies will start with an advisory board. Alternatively, sometimes a company will setup a technical board or a scientific board. The advisory board will be a precursor to the board of directors. This is often done because young companies cannot afford directors and officers liability insurance (D&O). Once you establish a formal board of directors, there are fiduciary duties. But, as an advisor, you are an outside consultant offering advice with no fiduciary duties. Founders learn about advisors and advisors learn about companies – it acts as a testing period. Investors like to see a team of experienced advisors (“grey hairs”). This is valuable and looked upon favorably, and is especially important for a young startup company.

ZR: Do you think startups could benefit from a centralized list of advisors?

DR: Advisors may not want to be on a list because they may be inundated.  There is something about an entrepreneur winding through people to find someone.  It is better to be sought out rather than just out there for everyone.  There are a number of matching sites – but that hasn’t been a big thing in the Midwest.

ZR: Is the advisory board and board of directors comprised of the same people?

DR: I was on a company advisory board that provided helpful advice and then once the company launched, it sought directors who could provide different advice. It is pretty natural for companies to “trade up” in this way.  As an attorney, I am probably more helpful at an early stage.  In the end, it’s about building the business.  Advisors need to do more than just advise and attend meetings. Advisors need to help with identifying customers, building business and raising capital. Just as entrepreneurs wear many hats, so do advisors!

ZR: Is there proper documentation to provide advisors?

DR: Yes we routinely use an advisory board agreement, which says that the advisor is not a director, doesn’t have protections under state law, and doesn’t have fiduciary duties.  This document has a non-disclosure component.  It’s about setting the expectations.  It is still okay to pursue advisors even absent this document. However, understand that what you disclose may not be protected.  A founder can provide a non-disclosure agreement at a later point, but once disclosed it’s difficult to get information back into the bottle; best to do it up front.

Comments

  • http://openswipe.com/ Casey Allen

    Very valuable stuff, guys.

    Doug, in The Valley it's common for advisors to get a few points in the form of stock options. In tech startups, how often do you see that here in MN?

  • susanchammond

    Good information. My experience with technology based start-ups is once venture capital money is received there is a board of directors and the VC's aren't always pleased that there is another group advising the company. I'd be curious to know what other people have experienced.

    Susan C Hammond
    http://www.advisoryboardkit.com

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