The Power of Advisory Boards
By Christina Ellwood

At a recent SVASE East Bay Series event entitled “Don't Go It Alone: Leveraging Advisors for Entrepreneurial Success”, an esteemed panel of investors and advisors gave entrepreneurs their thoughts on attracting, compensating, and utilizing advisors.

An Advisory Board is a non-governing group of advisors who provide advice and make introductions. Good advisors can help establish credibility, open doors with warm introductions, provide insight on strategy, help you avoid pit-falls, and help you meet short-term objectives. For young, unproven companies these contributions are worth their weight in gold.

Fortunately, you don't have to have gold to get them. While there is no standard compensation scheme for advisors, many will work for gratitude. Others are often compensated with equity. Academic and customer advisors do not usually receive compensation and may be forbidden from doing so.

Typically a start-up will allocate 1.0%-2.0% of the full capitalization for all advisors. So, for a board of 5-7 advisors, estimate 0.1%-0.5% per advisor.

“It's very much like hiring - ask yourself, ‘What's the problem worth to the company?’” advised Bob Bozeman, retired angel investor, advisor and entrepreneur.

Equity should be vested over the term of service. Advisors are also “compensated” for their service in a number of indirect ways such as being exposed to new ideas and perspectives; expand their networks; and a wide range of other intangible benefits. Direct expenses should be reimbursed and meetings may include a meal.

Entrepreneurs may be surprised to find how easy it is to find advisors. According to Andrew McCraith, founder and former CEO of Silicon Clocks, “I talked with everyone I knew and more. I said ‘This is what I need’ - I was surprised how quickly I had more resources than I needed including very specific people.”

Advisors may be informal or organized into a structured Board. There are three main types of formal Advisory Boards used by technology start-ups:

* Technical Advisory Boards are comprised of industry and academic technical leaders that provide unique insight into the markets and applications of the company's technology, identify related technologies of interest, and provide guidance on product direction and positioning. Their networks should include peers as well as some investors, strategic partner candidates, and customer candidates.

* Business Advisory Boards are comprised of entrepreneurs and business professionals that provide legal, financial, human resources, and marketing advice. Their networks should include investors, potential employees, potential customers, consultants, and some strategic partner candidates.

* Customer Advisory Boards are comprised of target and existing customers that provide feedback and insights on the product, applications, and positioning of the products; provide feedback to potential investors; and provide input to prospective customers. Their networks should include peers. It is very unusual for customer advisors to receive compensation.

When setting up the board, make sure you are clear what you are trying to accomplish, what each advisor's role is in achieving that set of goals, and their term of service (e.g., 12 months). Be specific about what you need. Use your advisors' time wisely. Be mindful that their commitment to your company is probably not their top priority. Meet regularly and allow attendance via conference call. Have an agenda of items that are best addressed by the group. Save other topics for 1:1 calls with specific advisors. Do not waste the advisors time. Update advisors regularly on the state of the business e.g., if the board meets quarterly, provide a monthly update email.

Steve Zoppi, VP and CIO of TiVo and frequent technical advisor noted, “A key ingredient is to make it a 2-way conversation between the company and the advisor. Keep the advisor informed of the company's activities, challenges, and progress on a regular basis. If advisors don't know the dynamics they are caught at a disadvantage and can't advise you relevantly. Use the advisors preferred mode of communications - I like an extranet so I can log on and find all the information in one place rather than sorting through emails.”

If you need more than advice from an advisor, like an introduction or review of a document, ask them to be specific on when they can realistically complete the task. They are most likely to complete tasks shortly after the request so, follow up after a few days. Accountability is tough since they are essentially volunteers, so be diplomatic and persistent.

Select advisors who share your core values. Bob notes, “S/he's part of the team. To be effective, they must share your core values. Treat selecting an advisor like a hire. Start with requirements. Then look for good ideas.” John observed, “It's our experience that people who surround themselves with people smarter than they are - which is counter to human nature - are much more likely to be successful.”

Keep the size of the formal group manageable. “Advisory Boards are extraordinary time consuming. Get a few people who are broad based guys then add some who are good for details. Don't need a lot need the right people”, warns Bob.

Look for people who are smart and who will speak the truth, even when the truth is painful. Steve notes, “You can't be afraid of people saying you have an ugly baby or that you need to change out some of your team.” Andrew agreed, “We wasted a year trying to raise money until we brought in an experienced CEO to replace me, a first-time CEO. Within weeks we had term sheets. Some advisors had told me that was required. It was hard to hear! I didn't want to hear it. I went back and looked at those advisors who sugar coated it, and stopped working with them. I don't want people to do the nice thing. I want people to do the right thing!”

Andrew has been using advisors since the beginning, but is only now formalizing his board. “We have a loose amalgamation of friends, advisors. We're in the process of formalizing a board. We are setting a mission statement for the board just like we did for the company. The attitude and approach are what we're looking for. We have short term and long term needs and we are compensating people accordingly - some are only needed for 6 months so we're not going to put them on 2 year vesting! Others aren't contributors short term but are needed to address what we'll need to keep in mind for the next 5 years.”

A well designed and well run Advisory Board is a powerful asset for a young technology start-up. It can provide credibility with prospects and investors; help you avoid pit-falls; and open doors with warm introductions.

Quotes from the Panel

Andrew McCraith - founder and former CEO of Silicon Clocks - "I talked with everyone I knew and more. I said "This is what I need" - I was surprised how..."

Bob Bozeman - retired angel investor, advisor and entrepreneur - "S/he's part of the team. To be effective, they must share your core values. Treat selecting an advisor like..."

John Montgomery - Montgomery Law Group - "It's our experience that people who surround themselves with..."

Steve Zoppi - VP and CIO of TiVo - "A key ingredient is to make it a 2-way conversation between..."

Read Panel Bios

Securing IP Requires More than an NDA
by Dana H. Shultz

When it comes to protecting intellectual property (IP), non-disclosure agreements (NDAs) are ubiquitous. What many entrepreneurs fail to realize, however, is that for an NDA to do its job, the company must actually own the IP in the first place!

The most serious ownership problems arise when there is no written agreement between the company and the individual developing the IP. Depending on the nature of the IP (for example, whether copyright or patent protection applies) and whether the developer is an employee of the company or an independent contractor, the developer may own the IP, leaving the company with, at most, a non-exclusive license.

Employees

The company should make sure that every at-will employee - one whose employment can be terminated at any time - has entered into a Proprietary Rights Agreement (alternatively called an Invention Assignment Agreement, Patents and Invention Agreement, or something similar). Senior executives, in contrast, typically have employment agreements that address IP ownership, among other issues.

Proprietary Rights Agreements usually include the following operative provisions:

• Acknowledgement of at-will employment
• The employee's obligation to maintain company information in confidence
• Assignment of employee-developed inventions and associated IP rights to the company
• An obligation to help the company perfect those rights
• In California, notice that inventions covered by Section 2870(a) of the Labor Code (inventions developed entirely on the employee's own time without using the company's equipment, supplies, facilities or trade secrets, subject to certain exceptions) will not be assigned to the company

• Acknowledgement of the independent contractor relationship
• The contractor's obligation to maintain company information in confidence
• Acknowledgement that deliverables are works made for hire under U.S. copyright law
• To the extent that deliverables are not works made for hire, assignment of the deliverables and associated IP rights to the company
• An obligation to help the company perfect those rights
• The contractor's obligation to indemnify the company against third-party claims of IP rights infringement

Next Issue - Lethal Weapon: Intellectual Property
Patents, trade secrets, and other intellectual property can create a formidable barrier to entry for your competitors. In our next issue, hear from a panel of experts on how to formulate a winning IP strategy and avoid common IP mistakes. There are stories in the paper in everyday where IP is at the heart of the issue - from RIM/Blackberry v. NTP to SCO and Linux to Grokster. As an entrepreneur do you want to be holding the lethal weapon or have it pointing at you?

Moreland Associates helps technology companies and their investors gain and accelerate market traction. To learn more, visit our website at www.morelandassoc.com.

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