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Friday
Aug282015

Advisors and Board Members

As a partner in DeveloperTown, I have an interesting role when it comes to our clients. Part of our pitch to our clients is that we are more than a vendor - we want to be a partner. In many cases we want to have skin in the game in the form of an investment, but even without an investment we really want to play a leadership role when it comes to technology and determining product-market-fit. Most of the time, this leadership or advisor role is informal. By choosing us as a technology partner, you get some portion of our leadership team engaged in your business (for better or worse). However, at times, it can be unclear how much of an advisor our client is expecting and/or looking for, and how much we are prepared to provide. When things are informal, there’s a chance for missed expectations. I hate mismanaged expectations. So occasionally, it makes sense to formalize the relationship so everyone’s on the same page. 

In many cases this can mean just taking the time to draft a simple email making expectations clear: here’s what I think I can do as part of our existing relationship and here’s what I think that means you (the entrepreneur) need to do as part of our existing relationship. In other cases, it makes sense to ratchet things up a bit in formality and make the relationship a formal advisor or board role. But what does it mean to be an advisor to an entrepreneur or a business? And what does it mean to be a board member? If you’re that entrepreneur, what should you expect? As with all things, there’s no “right” answer to that question. It depends…

I built a career as an individual contributor. I started consulting in college and (largely) never looked back. I was a hired gun who came in and crushed specific and targeted problems in your software or identified and fixed systemic problems with your team or process. For most projects, I didn’t care about long term implications or where the company was trying to go. I wanted to get in, deliver a ridiculous amount of value so you would hire me again in the future without thinking twice, and get out before the honeymoon ended. (The honeymoon always ends.) I had tremendous luxury of short-term focus.

It’s only in the last four years that I’ve started to really see the value I provide shifting from short-term focus on the long game. I’m no longer trying to help solve a specific problem or trying to coach a team to a slightly higher level of performance. Now I see my role as trying to secure a long-term better outcome for my clients. If I’m successful, their choice to leverage me and my team will result in less long term pain and a higher return for their company. When I think about a client now, I think about a five to seven year relationship. Sure, it’s more intense in the first two years, but they aren’t choosing me because they just want to render an application screen in a browser - they can do that much cheaper overseas or by posting a project on Elance. 

They are choosing DeveloperTown (and me) because they feel like the partnership will yield a long term determinant shift in their outcomes. They want a partner. They want someone to hold them accountable. Someone to tell them when they are making a mistake. Someone who can help guide them through discussions around open-source licensing, terms and conditions, cloud hosting, security audits, long-term maintenance costs, and when to take a risk to build or leverage bleeding-edge super-cool technology. They (hopefully) know we will be wrong sometimes, but they believe they are better off in the long run with us in their corner.

Managing Expectations of the Relationship

But what does that mean? What does it mean to have DeveloperTown - or one of it’s partners - in your corner? What should you expect? What should we expect?

Your mileage may vary, but the following what I think it means for us to be an advisor at DeveloperTown. I’ll take the liberty to speak for my partners, because I know that we share some simple values that drive our decision-making when it comes to selecting and supporting our clients. We know where we add value, and where we don’t. And we know the types of clients we work well with.

Table stakes: The following are the bare minimum for any partnership relationship and/or advisor relationship:

•       Direct Access: You should feel free to contact me any time, via any method. I’m obligated to pickup, or follow up quickly. If I’m not doing that, I’m not living up to my side of the relationship.

•       Honest Feedback: I owe it to you to be honest. If your baby is ugly, I’ll tell you. If I don’t know the answer, I’ll tell you. If there’s someone more competent than me to answer that question, I’ll tell you who they are. I’m not here only to make you feel good about the relationship. I’m assuming you reached out to me for some strange reason because you thought I could help you raise your game through honest and direct feedback.

•       Expertise: There’s some reason you’re coming to me for advice and/or you want to work with me. I have some cool skills and experiences to leverage in how to build software, how to think about product roadmaps, and how to coach teams to higher levels of performance. My partners (and here I include all the DeveloperTown partners and associate partners) have jaw-dropping experience building and launching companies, raising capital, designing products and user experiences, architecting and implementing massive, complex, and simple systems, and crafting product-market fit. We know stuff. I owe it to you to have some answers from time to time - with strong opinions. In areas where I’ve spent my 10,000 hours, I have strong opinions earned through experience. In other areas, I have ideas based on theory and intuition. I owe it to you to let you know which is which.

•       Network Access: You choose partners and advisors in part for who they know and what doors they can open for you. You’re always welcome to ask to leverage that. I always reserve the right to say no if I feel for some reason it’s not appropriate or if for some reason I feel it’s not a good idea for you. But you should ask. Can I help you find a customer? Can I help you find funding? Can I help you find another partner? Or can I help you find someone in the same boat you’re in so you can share stress and stories? All of those are valid. Ask me who I know. And I’ll - occasionally - ask you if I can introduce you to someone if it occurs to me to do so.

•       Caring: I can only have a limited number of professional contacts “active” at any point in time in my life. I’m blessed to know a lot of people, and at points in my life I’ve had deep rich meaningful relationships with people whom I now rarely talk to. I cherish those past relationships, but I recognize I can’t keep all of them “active” all of the time. So I make sure that I invest the time it takes to keep a relationship healthy while I have it, and because I’m making that investment it means I’m incredibly picky about when I do so. If I’m talking to you on a regular basis, it’s because I truly care about you. I don’t have room in my life for empty relationships. I’m looking for you to make me a better person, and I’ll do my best to return the favor.

•       Disclosure of Conflicts: I work with a lot of technology companies. Here’s a shocking bit of news to most founders… your software isn’t unique. There may be some small (and I mean small) secret sauce in your product or business that is truly unique to you, but in our experience with SaaS products the vast majority of your code, technology, business process, and data is very likely a commodity. It’s all about execution: delivery, quality, responding to feedback, adapting to market conditions, timing, leadership, getting things done, closing, and luck. If you accept that as a given - then as soon as I’m working on two software projects at once (and I’m normally working on 10+ at any given time) then I’m going to have conflicts to manage. The great news is, almost none of them matter. The bad news is, sometimes they do. Here’s my commitment to you:

 

  1. I’ll never take two clients in the same space at the same time who compete or significantly overlap in secret sauce. That’s a violation of ethics (and likely our contract).
  2. If, due to some twist of fate and the markets, an existing client ends up pivoting into your space and they are now a competitor or have significant overlap, I’ll disclose it immediately and work with both of you to resolve it.
  3. If for some other reason I can’t or shouldn’t work with you then I’ll say so. That includes if my sister is your CFO. If I’ve personally invested capital in your competitor even though I’m not working with them as an advisor. Or if I harbor some unexplainable ill will to everyone in your industry (telemarketing comes to mind). It’s not a good fit. I’ll speak up.
  4. If it ever even remotely occurs to me that I should disclose something because it might tangentially matter, I’ll do it. Better safe than sorry. You can always tell me you don’t care and we can move on.

 

That list feel kinda soft? Does it feel kinda like a “So what?” list? That’s because it is. There’s nothing earth shattering in there. It’s basic stuff. But over the last four years I’ve seen formal relationships between entrepreneurs and their advisors where those basic “table stakes” criteria were not met. I’ve seen people who don’t like each other try to work together. I’ve seen egos get in the way. (Sometimes mine.) I’ve seen people block access and avoid contact and follow up. I’ve seen people ignore conflicts of interest. If you don’t have these things - you don’t have an advisor or a partner. You have something else. Fix it. Life’s too short and your time and money are too valuable to waste time working with those people. 

In the next list, you’ll see a more common advisor task list or job description. These responsibilities are less responsibilities or the relationship, and more responsibilities of the role. In many cases, these are the types of things you need to make explicit. You can’t just assume because you ask someone to be an advisor that they can, will, or should do all of these things. You need to ask. You should likely make it formal some way (aka, write it down).

Formal Advisor and/or Board Relationships: The following is more run-of-the-mill for what you’d expect to see on a list of “responsibilities” for an advisor.

•       Mission and Objectives: Someone who’s involved as an advisor or board member should understand the business you’re in, your mission, goals, and objectives. I should know what’s driving you as the entrepreneur, what’s driving your industry in general, and I should care about the outcomes. Does your mission and the way you’re changing the world resonate with me? I don’t need to be as passionate as you - and I won’t be - but I should share your vision for what the future looks like if you’re successful.

•       Confidentiality: What happens in the boardroom, stays in the board room. Or on the conference call. Or in the email thread. Or in the bar after work after a really long day of meetings. Being an advisor of any sort means you’re going to share stories, fears, and difficult situations. You have every reason to expect that all of that information is private and will not be repeated - even to other advisors or board members without your permission.

•       Meeting Attendance: Most board or advisory roles come with some formal agreement on how much time will be required for the role. This could be as frequent as weekly or bi-weekly face-to-face coaching sessions. Or it could be as infrequent as once a year attendance at an annual strategic planning session. And likely it will include some regular monthly or quarterly participation in a face-to-face meeting or call-in meeting.  Make it explicit. How frequent are the meetings? How long will they be? What’s the expectation for face-to-face interaction versus the ability to Skype or dial-in? What are the rules of engagement for how meetings will get scheduled (advance notice, location expectations, etc) so there aren’t surprises when the first meeting shows up on the calendar.

•       Assistance in Preparing Key Artifacts: From time to time, you’ll ask for help drafting a document, spreadsheet or presentation. That help might be a simple review, it might be coaching on how to do it, it might be sharing a template, or it might be locking myself in a room with you for five hours to “pound it out.” Again, there’s a good chance I know something you don’t. That’s why you’re asking me to be involved. Make sure it’s clear what the expectation is around this level of involvement. Do I really have the skills you need to do this? Or do you just think I do because you think someone in my role should know this? You need to ask me. In addition to the skills, I also need the time. This level of involvement - while sporadic - can take a lot of time. In many cases, if I weren’t your advisor, this would be billable work. You’d likely be paying me a lot of money for those five hours locked in a room, and I’d get to set the terms of when and where. As an advisor, I loose some of my flexibility to say “no” and just pass on the work. I’m obligated to try to squeeze in the work - which means less time on my full time job, my family, and my emerging whiskey collection.

•       In Person Support: In my role as an advisor, you may ask me to help you with certain meetings. Sometimes that means peeping materials, in many cases it’s going to mean you’re going to ask me to tag along to the actual meeting. Sometimes it’s simply to increase your street-cred. (i.e. “Look, I’m for-realizies. I have a technology partner. See, Mike’s right there.”) In other cases it’s because you want me to participate in the meeting. (i.e. “That’s a great question. Mike, can you explain how collaborative filtering works and what steps we are taking to develop and protect that intellectual property?”) In either case, I’m going somewhere with you. And it’s not rare for certain advisors or board members to do this. You’ll have financial advisors you’ll take to meetings where you raise capital. You’ll have advisors you take with you on key sales calls or partner meetings. Make it explicit when you’re envisioning this type of support. It’s a big ask - perhaps the biggest.

•       Email and Online Threads: As an advisor or board member, I know I’m going to be interacting with you via email and/or online threads. I don’t just have to read them, I have to participate in email discussions and give feedback when requested. Sometimes I’ll get to punt because it’s not my area of expertise. But I owe it to you to read everything you send and to make an honest effort to respond where appropriate. This can take a lot of time. As the entrepreneur, you need to be cautious about over-taxing me with too many questions and requests for feedback. It’s easy for this “cost” to get out of control. It’s cheap and easy to send an email, which makes it an easy communication channel to abuse.

•       Talent Screening: If you’re working with me, there’s a really really good chance that at some point you’re going to be hiring either other technology vendors or full time technology staff. From time to time, you’re likely going to ask me to talk to them. Sometimes it may just be a quick verbal vetting process, in other cases you may want me to do the full court press to grill someone and/or play the “bad cop.” In many cases, you’re going to ask me about what’s reasonable in terms of compensation, intellectual property rights assignments and limitations on liability, engagement processes, and other stuff related to hiring and managing technical people. I just assume I’ll be asked for referrals and the occasional “Have you worked with or are you familiar with XXX?” But at the point it goes past some simple questions, it’s real work. It takes time to read contracts, interview candidates, and beat my network to drum up candidates and partners. Make sure I know that you’re expecting that level of engagement from me.

You should have noticed a broad range of engagement in there. On one end of the spectrum, my involvement might be to call into a meeting once a year and possibly answering an email once a month. On the other end of the spectrum, my involvement might be monthly meetings, regular emails, helping you draft documents, and attending key business meetings with you to help you close deals. Further, what you need may change over time. In your first year of business, you may need a lot of my time. In your fifth year, you may be sick of me and may only want to see me once a year at your annual planning meeting in Las Vegas. (I’m hoping it’s in Vegas; I’m much more likely to attend in person if it’s in Vegas.)

What’s the difference between and Advisor and Board Member?

Up to this point, I’ve ignored the difference between and advisor and a board member. That’s mostly because for me personally, there’s little distinction. I’m on a couple of advisory teams, and I’ve been a board member in a couple of different for-profit and not-for-profit organizations. Day-to-day they feel the same to me. Someone comes to me and asks me to be involved, we discuss what that involvement means, and we figure out how to make it work. However, they aren’t the same. Here are the differences you should care about.

First, you pick your advisors. Sometimes you don’t get to pick your board. Your board might be selected for you by your investors, your partners, or your leadership team (if you’re an intrepreneur working in a new business unit or wholly-owned venture). You’ll often have a say in board members - but maybe not. It’s sometimes just part of the deal. So you need to be sure what the expectations are. They will also have expectations of you (which I didn’t really list above). Advisors on the other hand can be formal or informal teams, and you almost always have complete control over the makeup of that team.

Second, board membership is typically tied to a formal governance structure in the company, meaning there are both fiduciary responsibly and liability concerns. While advisors certainly have a responsibility to care about shareholder value, it’s not the same as the legal teeth that comes with being a board member. Fiduciary responsibility means you have a very real legal and ethical tie to the outcomes of the company you’re serving. It’s more than “I trust you, can you give me advice…”. It’s more like “Your neck is on the line to act in the best interest of the company and it’s shareholders…”. That may or may not align with what’s best for you - the entrepreneur. Because a board member has a formal governance role in the organization and has fiduciary responsibility, it also means they pickup liability. This is where Directors and Officers (D&O) liability insurance comes in. D&O insurance provides some protection to officers and directors should legal action be brought against them personally for wrongful acts in their capacity as a director or officer. If you have formal board members, you should expect this insurance to be a requirement for their participation. 

In both cases, you should likely have some idea of a commitment period for each role. When you setup a relationship like this, it should be clear how long the tour of duty is. Are you asking me to be involved for a year? Five years? Until a key business milestone like product launch or IPO? Regardless of what we agree on, advisor commitments are often informal. If an advisor drops out, it’s likely not a huge deal. There’s a hit to the relationship, and assuming they were providing value there’s now a scramble to fill the gap, but the world won’t end. However, board member seats often have formal commitment lengths, voting rights, and other governance associated with them. So when a board member needs to vacate there seat it’s a bigger deal. In many cases, there’s language around how, when, and why that happens.

What does all that mean? It means an advisor is an informal commitment and a board member is a formal one. I can commit to be an advisor willy-nilly. The only constraint it my time and your respect for me if I can’t live up to my commitment to you. However, I can’t just commit to be a board member. That has legal implications to me, you, my company, and others around me. I do it - as do my partners - but it’s a much more measured decision and we want to make sure it’s the absolute right fit for all parties involved.   

How do you compensate advisors and board members?

For board members, many times compensation will be defined as part of the process of forming the board. If you’re raising capital, it may be assumed to be part of the round - and so there isn’t a formal execration of compensation for those investors to have a seat. In other cases, were your existing board made up of investors tells you to go out and find an independent board member or two, where you do compensate them. It will depend on the specific situation you’re in. In most cases where you’re dealing with advisors, it’s almost always completely up to you.

Based on the topics discussed above, as you can imagine the biggest driving factors involved in the decision to compensate and advisor or board member are: the specific duties and responsibilities you’re looking for the person to take on, the length of the relationship, and the formality of the role. There are two other big components to the compensation discussion.

The first component is the credibility of the person your asking and their relationship with your industry or problem-space. What other intangible benefits are you getting by having their name associated with your project? For example, if you’re launching a SaaS business to change the way people buy and sell cars online, then having former General Motors CEO Dan Akerson as an advisor is a fairly big deal. Regardless of his level of involvement, his name is worth something. In many cases you’re not only asking people because you want their feedback, you also want the credibility that comes with having them involved. That residual credibility is worth something. They are putting their reputation and connections on the line by being involved.

The second component is the maturity of your company. Imagine a continuum where on the left end of the axis you have a one-person company with no product in the marketplace, about halfway through you have a small company that’s raised $500k in venture capital with a small team working diligently to iterate on feedback from their early beta users, and on the right end you have a company that’s just successfully raised $2M in series A capital. Where are you on that continuum? The closer you are to the left, the more risky you are to someone who’s coming on as an advisor. You’re less well known. It’s more likely you’re going to fail. It’s less likely their involvement will result in a real return for their time.

How do these two factors come into play? The more weight an advisor has behind their name, connections, or knowledge, the more they are worth. The less mature your company or venture, the greater the risk and the more you’ll likely have to compensate to get them involved. But should you use cash or equity? If you use equity, how much? There are two ways to approach this.

Option A: Cash Math

If you assume the role you will be asking your advisor to play is an important and highly valuable one, then you can easily assume you’d pay $150 to $250 per hour for that time. Given the people I know who serve as advisors, many of them would earn that rate doing any sort of consulting work. For me, that’s certainly in the range of my market rate depending on the type of consulting I’m doing. So if you start there, you can figure out how many hours you’re asking for during a month/quarter/year and multiply it out. So if you’re thinking one formal meeting a quarter, with some ad hoc involvement and email feedback, then you might be talking 8 hours for a full day of meetings once a quarter (that bakes in some travel time) and an average of an hour a week for phone and email follow up. That would be 84 hours annually. At $200 per hour, that would be $16,800 per year.

Seem like a lot? It is. But can easily be worth it. This is why most early stage companies compensate with equity.

Option B: Equity Math

Compensating with equity can either be simpler or it can be messy. One way to do it is to take your expectations for the cash value of the involvement (that would be something like the $16k from above) and then act as if the individual invested that amount against some pre-money valuation of your company. This is a fine thing to do if you have an established valuation, but if you don’t… it’s awkward. Well, perhaps it’s all around awkward. If you’re asking me to be an advisor, I don’t want to argue about the value of my time with you (aka, don’t make me negotiate a rate), and I don’t want to argue about the value of your company. I want to be an advisor, not an investor. There’s an easier way.

If you don’t have any institutional investors yet (your only investors are angels, friends, and family - or you don’t have investors), then you can simplify all of this by simply offering a fixed percentage to advisors for an agreed upon period of time. It’s a sliding scale. If you’re asking for a one or two year commitment, with minimal structured interaction (a quarterly meeting with mostly informal feedback) then offer me a half a percent to one percent to be an advisor. If you’re expectation is that I’m attending sales or management meetings with you, or you’re going to heavily leverage my rolodex (is that still a thing? LinkedIn?) to get capital or customers, or if you’re looking for a longer term commitment (three to five years) then you should increase that to something between two and five percent.

How to ask them to join

If you want to ask someone to be an advisor or board member, the best place to start is just to jump on the phone (or take them out to lunch) and simply ask. Be sure you know what level of commitment you’re asking for; and have an idea of how you’d like to compensate them before you ask. They shouldn’t have to pull that information from you. You should already have in idea of what you are looking for and what you’re looking to pay for it. It’s unfair to make them feel like they are negotiating from the start (on either the role they could play, or what they might be worth).

As you ask, you need to be aware that sometimes they may say no. In many cases, they may not have the time to commit. As an advisor or board member, once you compensate me there are real responsibilities that I’m taking on as part of that equation. I may like you and your company, and still not want to take those on. You should respect that a good number of people will say no, simply because they don’t want the responsibility. In some cases they still may say yes on an informal basis, but will request you don’t compensate them. This also holds true for conflicts that might prevent a potential advisor or board member from committing.

Over time, you may also need to change the makeup of your existing board. In some cases your advisors or board members will be self aware enough to know when to step away. They might recognize that the connections they can provide are no longer the right connections. Or that their experience, while relevant at 25 employees isn’t as relevant at 100 employees. It’s awesome when an advisor recognizes they’ve outgrown you, because they will initiate the breakup. In other cases, you might simply structure board composition into your initial engagement with them. I’m a big fan of term expectations (one to five years), and if you plan to keep them past that you re-ask at the end of the term.

If at some point you recognize it’s not working out any longer - or at least you’re not getting the same value you once were - and the advisor hasn’t come to that conclusion on their own - then you owe it to them to have a frank conversation. It’s not a “bad” conversation. It can be a positive meeting. You should take the initiative to set it up and deliver the feedback before you start to feel resentment that they are still around “taking up a seat” at the table. That’s the worst case outcome, far worse than short term hurt feelings because your business has moved in a different direction and/or has different needs today than it did two years ago.

 

 

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