Great businesses are built with a lot of effort and a handful of key decisions. Effective relationships with mentors, advisors, and directors are based upon four main areas of concern and agreement between the parties; the Relationship, Value, Time Horizon, and Compensation.
Relationship: A mentor is an informal relationship. Mentors are committed and generous with advice, experience, or introductions, but don’t guarantee any specific amounts of time, regularly scheduled meetings or deliverables.
Warning: Mentors don’t purposefully use their relationship as bait to hook you into a paid engagement for consulting services. This doesn’t prevent transactional relationships or business partnerships evolving from the initial mentor/mentee dynamic, but the intention of the initial relationship is not transactional or with an alternative agenda.
Value: To the entrepreneur a wide variety of mentors is smart, because it will expose you to several (sometimes conflicting) opinions (i.e. mentor whiplash). This deepens your experience in critical thinking and decision making, and builds confidence as you learn to trust your gut and live with the outcomes.
The Value of being a mentor is to truly give back to your fellow entrepreneurs in a spirit of generosity, being a model of resilience they can latch onto when times are tough and they feel alone.
Time Horizon: Completely organic and unpredictable. Some mentor/mentee relationships begin and end over a 20 minute session and others form into meaningful professional and personal peer-to-peer relationships over years.
*(In some cases like with Founder’s Institute the mentor is part of a global warrant pool of mentors for accelerated companies on a pro-rata basis).
Relationship: More Formal/but not legally authorized to bind the corporation. As early stage companies grow out of idea stage into a viable offering, they will typically begin to formalize several items including their entity formation, capital access strategy, issue founders stock, and set up the initial bylaws to prepare for full scale operations.
It is at this point that certain domain experts become valuable and needed to advance towards an established early milestone. At this stage formalizing outside Directors on the company’s board is typically pre-mature for one or both parties.
This is where the advisory role is a key asset to attract and formalize with regards to what type of help, access, time commitment, and introductions are requested, and what type of compensation is sensible.
For a fair and quick template I suggest something like the F.A.S.T. agreement as a great starting point template for companies and potential advisors. This will save time, align expectations, and avoid confusion.
Value: The value of the Board Advisor can be tremendous as you move your business to a more formal and operational entity. It can round out holes in the founding team from both experience and technical expertise as well as help ‘recruit’ key resources and potential capital providers to conversations around your opportunity.
Keep your legal governance minimal until the time comes for establishing board governance, term sheet valuation and shareholder value metrics, and management oversight procedures.
Time Horizon: This commitment is formalized yet flexible and less time consuming than a Board of Directors role. It can be fluid in its duration and exist in parallel to the Board of Directors as a stair step to a board-run company.
Compensation: Commonly given in the form of equity slivers that vest over time for specific deliverables.
Relationship: A formal officer of the corporation with binding and fiduciary responsibility to the shareholders of the company with the ability to hire/fire the CEO of the company and approve or deny major capital raises, acquisitions, and key hires.
Value: As your company moves into commercialization the value of a Board of Directors formalizes many of the necessary management processes by which you will build enterprise value and measure governance and performance for the investors. It also serves as an important way to speed up key account activity or capital raising efforts as you select Board members who have credible relationships they are willing to share.
Time Horizon: Outside Directors in private companies are typically not needed in the early stage but will begin to show up as institutional or sophisticated capital providers invest into the enterprise and wish to assign a representative who aligns with their interests.
Compensation: This position is always compensated. Depending on the stage of the business, compensation can come in several forms that typically combine equity with vesting schedules and cash or reimbursements.
For a great summary from my friend Brad Feld (so that I am not reinventing a wheel that rolls nicely) read his blog post on Board compensation.
Hopefully these distinctions will allow for better clarity between those helping and those needing help, so that frustration and or disappointment can be mitigated more frequently on the road to growth.
– Chris J. Snook, Inc.