Learn what to focus on when putting together an advisory board to reassure investors and help the company gain funding.
An investable startup is a company that has a unique value proposition, an attractive market size, a stellar management team, and a great pitch deck. Many investors think that the management and advisory teams are the most important part of a startup. Some investors even prefer you to present the team first in pitch decks. In short, advisors and management teams are an essential part of any startup's success. This article will help you understand what makes a great advisory board, and how to build a management team that will attract investors.
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When you are building an advisory board for your startup, it is important to note the differences between your advisory board and one of a more mature company. As a startup, your advisors must be able to help you move your business forward, and look good to investors during presentations. This means you should be able to display your advisors (or at least a majority of them) in pitch decks and be able to strongly defend their place on your board.
These advisors should be able to utilize their network in order to further your business. This could include making phone calls to their network, helping you create connections, and making introductions.
It is also important to recognize the difference between mentors and an advisory board. Mentors are looking to further you and your career individually. They could be past or current employers, professors, etc. Advisors are typically compensated for their services to your company, and are responsible for furthering the company’s success, not your personal success. This is especially important when your personal interests start to diverge from your startup’s interests. This is why mentors and advisors should be treated separately.
The best types of advisory boards are formed when you start to understand the gaps in your management team’s strength. For example, maybe you are a CEO of a startup that wants to enter the technology sphere. You are great at marketing, sales, and operations, but need someone to fill the CTO role. The problem is that a full-time CTO might not want to join your team if you haven’t secured funding yet. This would be a great opportunity to have a technology-trained individual on your advisory board. This person could help you receive funding and fill in your understanding gaps in order to help receive the funding to attract a full-time CTO.
After you assess what type of person would best fill in your gaps of understanding, you want to start searching for board members that have had success in the space. They may have been successful through a traditional startup exit or something less conventional to your line of work, like an officer at a public company. When interviewing potential advisors, you should try to ask yourself: Would they create value for my company through their past experiences and connections?
Compensation for advisory teams can vary greatly across startups as they travel through different points in their life cycle. One of the traditional compensation packages is for startup advisors to receive 0.25% of the cap table. The cap table is the detailing of the total stockholder’s equity for the startup.
If there is cash compensation, it is usually relatively low at around a couple hundred dollars per quarter. That being said, advisors should not be expected to participate in the day to day activities of the business, but rather the long term check ins and quarterly meetings. These financial and procedural matters should be agreed upon before officially naming your advisors, and especially before presenting your advisors to investors.
Advisors can also be compensated differently depending on their function in the business. In this case, you might want to change their compensation (equity or cash) in order to reflect that change in function. Keep in mind that advisory shareholders might request to see the company books, in which case they would be able to see the compensation for all other advisory board members.
One of the best times to show off your advisory board members is within your pitch deck. Similar to how you might include a “Our Team” slide, you should also include a slide that details your advisory board. This is your chance to highlight the skills and past experiences of the members on the board that have worked in the industry before. For example, you might add beneath an advisor’s headshot “2 successful exits and 15 years in the industry.” Or you could add where they have worked before, such as “Top sales person at LG with deep industry connections.”
Choosing where to place your Team slide (both management and advisory board) should depend on the accomplishments of your team. If you believe the employees and advisors alone will be able to sell the startup to investors, you might want to add them as one of the first few slides in your presentation. If your team has a stellar history and a great reputation, investors might want to see that first as it highlights an important strength of your startup: the people. Some of the main people you would want to include on a Team slide would be your CEO, VP of Sales and Marketing (or equivalent), CTO (if in the tech sphere), COO, CFO (can be fractional).
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Arguably more important than the advisory board is the startup's management team. Investors might take special interest in is employee salaries. Oftentimes red flags will go up if they see a new employee coming from the corporate world into the startup world. Usually these employees are paid a very high rate (the corporate rate) because they are accustomed to a certain payrange, and that can cause some issues for your company and future investors.
The best principle to live by is honesty. Have honest conversations with employees and potential employees about their payrange, and how long you believe it will take before an exit opportunity presents itself. You can also discuss adding higher paid employees as part-time workers instead of committing immediately to paying a full salary. Another approach is to start adding benefits or equity plans for employees in order to compete in today’s fierce job market. If you do decide to add additional benefits (besides base pay) you would want to make sure you document all of the extra benefits, and their associated cost. This way you can add up your total compensation and keep track of its changes throughout multiple years.
You also might want to build a model that includes current equity holders and is able to track changes over the course of multiple funding rounds. Taking into account the equity given to investors, it might be surprising to see the dilution occurring for early shareholders (such as the founders).
In addition to management, investors will want to know how employees are treated at your company. The main phrase to remember when dealing with company liabilities is “keep it clean!” When you keep your infrastructure clean, if an issue arises it is easier to sort out. This includes paying all of your required insurance (workers comp, contractor’s insurance, etc), having an Human Resources (or fractional HR) person/department, and understanding the local compliance laws in your state. In order to be up to date on these things you might consider hiring a lawyer or a consultant to help you navigate these initial waters.
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Intellectual property (IP) is one of the most important parts of a tech business. Improper IP practices can lead to botched mergers or acquisition deals, as the buyer does not want to invest in a business with IP they might not be able to use. The first step that most startups take to protect themselves is to have their employees sign a Proprietary Inventions and Assignments Agreement (PIAA). PIAAs generally have employees agree that they will assign their IP to the company. It is essential that these agreements are specific and airtight. This prevents IP from being issues for investors/buyers down the road. You should also have agreements with your contractors in order to assign their work to your company. When in doubt, try to keep it clean!
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Finding a helpful and productive advisory board to guide your business is one of the most important steps when creating a startup. Advisory boards can help fill gaps in management, attract investors, and provide much needed guidance when running your business. The management team is also an essential part of any business, especially startups. Ensuring that your team is compensated appropriately and with limited liabilities is essential is ensuring your company remains investable.
This content comes from a webinar, Creating an Investable Startup: Executive Team and Advisory Boards - Part 3 of 4, featuring Laura Beken (SBDC Business Consultant), Monica Alfisi (Certified Business Performance Advisor, Insperity), and Paige Smith (Associate Attorney, Stradling Law) in partnership with the SBDC @ UCI Beall Applied Innovation and University Lab Partners.
📽️ Watch the full webinar here.
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