Why assemble an advisory board?

(Editor’s note: Chase is busy building Pixsy, a company in the competitive video search industry. This is his first installment, of what we hope will be several about how to build a start-up from scratch.)

Building a start-up company from scratch, for the first time, presents some interesting challenges. There are typical questions that you would expect; like how to secure investments, how to make money, how to find an office, etc. And, then there are the less obvious ones like who do you align with and where should you turn for guidance. This may be the most important question because of how it will affect the business in terms of staffing, growth, business partnerships and in some cases, the roadmap for the company.

Some people say, “don’t worry about an advisory board, they’ll take up too much time and become a distraction, just focus on the essentials.” Of course you must stay focused and concentrate on building the business. However, I’d argue that an advisory board is one of those “essentials”. For example, in the early days of building Pixsy we’d have potential customers going through the “About” section of our site and checking out our advisory board. One of these potential customers recognized some of our advisors. This helped us close that customer.

There are a variety of benefits to assembling an advisory board during the early stages of company formation:

• Recognized industry thought leaders add immediate validation and credibility to the venture at a stage when there is typically none;
• Advisors can open doors, make introductions, and assist with strategy and business planning;
• Advisors add value in making introductions to sources of capital, or serving as a due diligence reference during fundraising;
• Advisors know people and people know advisors, it’s that simple. The more third parties talking about your venture the better.

One of our most valuable advisors is an entrepreneur who’s been through the startup process multiple times. As a seasoned entrepreneur, he brings extremely important insight into critical issues around building a business (e.g. hiring, fund raising, legal, etc). Since entrepreneurs don’t really have a “boss” to help answer difficult questions, advisors often serve as an invaluable resource when challenging issues arise. This particular advisory has helped us, in the background, manage the negotiation process with a variety of financial partners.

Keep in mind that not all advisors are equal and they’re all very different, just as every person is different. While their advice is usually intelligent and grounded in experience; it is, nevertheless, just their advice. You’ve got to always follow your own instincts.

Advisor compensation is typically awarded in the form of stock options. Every advisor is compensated differently, based on how much anticipated time or effort they’ll put into the business. The general rule of thumb for advisor stock compensation is anywhere from .1% to .25%, in the form of stock options.

Advisor participation levels vary greatly, from business to business. Some advisory board members lend influence through their name recognition, while others are active and hands on in helping with the growth of the business. Some you’ll speak with on a weekly basis, others you may only speak with every three or four months. All of them, however, are only as good as the entrepreneur who is utilizing them as a resource.

Ultimately, everything in a startup is about value creation, and advisory boards are an important piece of the puzzle that help you continually create it.