Advisors can be a valuable asset for any startup, offering expertise, guidance, and connections that can help your business grow. However, the wrong advisor can do more harm than good, as I learned from personal experience.
The Promise and the Pitfall
I once chose an advisor who came highly recommended and seemed to have all the credentials and expertise I was looking for. They promised to provide strategic guidance, make valuable introductions, and even help with fundraising. However, as time went on, it became clear that they were not fulfilling any of their promises.
The Consequences
The impact was not just a waste of time and resources; it also led to missed opportunities and caused unnecessary stress and confusion within the team. The experience taught me that choosing an advisor is a decision that should be made with as much care and due diligence as choosing an investor.
Lessons Learned
- Verify Credentials and Past Performance: Don’t just take their word for it; do your own research to verify their credentials and speak to startups they’ve advised in the past.
- Set Clear Expectations: Make sure both parties have a clear understanding of what the advisory role will entail, including time commitment and specific responsibilities.
- Legal Safeguards: One of the most critical steps in formalizing an advisor relationship is setting up legal safeguards. Always have a legal agreement that outlines obligations, expectations, and exit clauses. One crucial element that I overlooked was including a “Cliff” in the agreement.
- What is a Cliff?: A “Cliff” is a period, usually one year, during which the advisor earns the right to their equity stake in the company. If the advisor leaves or is let go before this period, they walk away with nothing. This ensures that the advisor is genuinely committed to contributing to the startup’s success.
- Why is it Important?: In my experience, not having a Cliff in the agreement led to a situation where the advisor did not fulfill their promises but still had a stake in the company. A Cliff would have protected the startup from this unfortunate outcome.
- Strong Recommendation: I strongly recommend including a Cliff in any advisory agreement to ensure that both parties are committed and aligned with the startup’s long-term goals. By incorporating legal safeguards like a Cliff, you can protect your startup from potential pitfalls and ensure that the advisor is genuinely committed to your success.
- Regular Check-ins: Schedule regular meetings to assess the advisor’s contributions and decide whether the relationship is beneficial for both parties.
- Trust Your Instincts: If something doesn’t feel right, it probably isn’t. Don’t ignore red flags.
Final Thoughts
Advisors can provide immense value, but the wrong choice can be detrimental. Learn from my experience and exercise due diligence to ensure that you’re forming a relationship that is mutually beneficial and aligned with your startup’s goals.
Anecdotal Learning: A Cautionary Tale
As a final note, I’d like to share a screenshot of the advisory agreement that lacked a “Cliff,” leading to the unfortunate experience I described. While I’ve modified some parts for privacy reasons, I believe this serves as a tangible example of what can go wrong when legal safeguards are not adequately put in place.
The Real-World Consequence: The advisor did meet some of the simpler objectives but fell significantly short in the most critical areas—securing investment rounds and acquiring customers. Despite this partial fulfillment, the advisor still walked away with a 4% stake in my company. Had there been a “Cliff” or prorated equity arrangement in place, the advisor’s stake would have been adjusted to reflect their actual contributions.
By sharing this, I hope to emphasize the importance of due diligence and legal protection when choosing an advisor. It’s not just about what they can bring to the table; it’s also about ensuring that both parties are protected and aligned for the long haul.
