Advisors can deliver insights that transform performance. But understanding which advisors will generate game-changing improvements, and how those relationships are best structured, requires fine judgment.

So, how can founders learn to identify the right advisor, give the agreement proper structure, and establish a solid working relationship? And how should those advisors be compensated? This article contains industry insights with tangible takeaways to help you answer these questions.

Before we start, let’s cover definitions.

There are lots of terms used to describe people who offer founders guidance, but they’re not all equal. There are meaningful differences between coaches, mentors and advisors.

The key difference is whether the guidance is focused on the founder as an individual, or the business as a whole.

Coaches and mentors often partner closely with founders to guide their decision-making processes and help them execute on their goals, and principally work with the individual founder(s) to improve their performance as a leader. Assuming they offer solid advice that is applied well, then the startup may likely benefit by extension, but individual growth and development are the priority.

An advisor’s input, meanwhile, is typically rooted in the needs of the business. Although these two priorities are not mutually exclusive, the areas of responsibility allocated to advisors are different in some important ways. While advisors will partner closely with founders (and usually other senior leaders), their primary focus is driving growth for the company rather than simply coaching the founder to become a better executive.

Having understood that nuance, it’s time to consider the process in a bit more detail.

It’s tempting to imagine that a great advisor will be right there just when you need them. But finding the right advisor takes time and effort, especially for first-time founders.

In fact, the struggle to source advisors is so widespread it has spawned its own software solutions: companies like Clarity and Connectd have been set up to foster connections between founders, advisors and investors.

Some founders find this process easier than others. “Serial founders, or founders who are seasoned operators in their sector, can simply leverage their networks. But first-time founders in early-stage startups don’t often have this luxury,” says seasoned startup and scaleup advisor Victoria Armstrong. Finding advisors might mean joining meetups and publicising your search in angel networks and accelerator communities.

Even if you meet advisors, it can be difficult to judge whether they will deliver on their promises and objectives based on early conversation. “A bit of introspection is essential,” Victoria says.

The introspection founders need at this crucial time applies equally to themselves as individuals and to their companies. Ask: what are my strengths and weaknesses? What are my company’s biggest opportunities and challenges? Create a list of the most important capability and performance gaps for the business, then adopt a red-amber-green methodology to separate existential problems from those that are merely troublesome, and to prioritise the most pressing issues from those that are further ahead.

These aren’t easy questions to answer, though, especially for first-time founders says Norman Rohr, an experienced go-to-market advisor and current CEO of Munich-based SaaS finway.

Asking these questions and engaging in dialogue means founders enjoy more clarity in assessing potential advisors.

This due diligence really pays off when you start to narrow your search for a great advisor. Once you have a shortlist, ask the advisor for a few references. Be sure to ask the difficult questions; you can also try reaching out to other founders or investors for their thoughts. A potential advisor may talk a good game, but only first-hand testimony will really help founders understand whether their potential new advisor can walk the walk.

Clear evidence of an exceptional track record in similar-sized businesses – and ideally in identical or directly adjacent sectors – goes a long way, says Norman. “As a rule of thumb, if your advisor hasn’t delivered the strategic or operational results you’re looking for at least twice in their own professional history, you might not have the certainty you need that they’ll have the same impact for you.”

It’s paramount to set the terms of your relationship with potential advisor(s) early to ensure that expectations are aligned before establishing a new partnership.

Here are a few common questions that come up around advisor relationships.

How formal should the relationship be?

Some advisors are able to commit more time, resource and effort than others. It’s up to the founder to identify what works well for both them and the advisor.

Advisors might be willing to advise you in a relatively informal capacity, while others might be looking for more formal positions, like non-executive director roles (more on the dynamics of these decisions below).

How often should founders meet with advisors?

The frequency and length of your meetings with advisors varies according to the advisor’s stage-specific “sweet spot”.

Advisors are not created equal, and they address different challenges based on their skills and network. For example, the effort required for a pre-Seed/Seed startup are very different to a startup at Series A and beyond. These nuances can help shape the cadence of the founder’s advisor touchpoints as the company matures and grows. Generally, at pre-Seed, founders should actively engage with advisors weekly or even bi-weekly. At Seed stage, the relationship may evolve towards monthly meetings, and by Series A either a monthly or quarterly touchpoint may suit both parties best.

Victoria, in her experience, suggests twice-monthly sessions that each last an hour or two to provide enough exposure to ‘business as usual’ without overdoing it.

How long will it be until founders see an impact?

While sound advice can certainly have a rapid impact (depending on how it’s implemented by the founder and leadership team), founders shouldn’t expect this to be the norm.

For founders who don’t have a wide network in particular, committing to a minimum bedding-in period over three to six months gives both parties time to get to know each other as people, and for some of the advice given to start trickling down to the business’s ongoing operations.

High-quality advice comes at a price. But what kind of compensation agreements should founders structure with advisors in order to get the most out of the relationship while mitigating downside risk?

Nothing is off the table. Both cash and equity should be considered, either together or separately, but advisors aren’t employees and shouldn’t be treated as such.

While it’s fairly standard to offer equity compensation to advisors, there will normally be subtle differences in the nature of the equity agreement compared to the equity stakes you give to employees. For example, it doesn’t make sense to have a four-year vesting period as advisor relationships rarely last this long. As a rule of thumb (subject to negotiations and legals), a two-year vesting schedule for advisors with a cliff lasting six to 12 months better reflects the need to deliver results at pace. However, it’s not unusual to compensate advisors directly with cash.

Founders should respond to the realities of their business when deciding how to remunerate advisors. “Founders are rightly sensitive to dilution,” Norman says.

So, what’s the market standard for advisor compensation? Inevitably, this varies according to the size and stage of your business. Equity management software platform Ledgy has compiled data on the equity stakes awarded to startup and scaleup advisors. Equity grants are proportionally higher in earlier-stage companies: in startups with a valuation of less than €5 million, the average equity stake awarded to advisors is 0.8%. As companies’ valuations increase, advisor’s equity stakes understandably drop as a proportion of total share capital: by the time a company is worth €50-100 million, advisor equity grants fall to an average of 0.25%, which still offers meaningful financial upside.

In startups, many advisor relationships start with the equivalent of a handshake and a “back-of-an-envelope” sketch of some key priorities. But if founders see transformative value from an advisor, they may wish to change the nature of the relationship by appointing the advisor to a Board role.

Board advisors have several guises, from Board observers through to non-executive or independent directors. Even the Board’s chair can be viewed as an advisor to a founder and CEO. So how should founders approach the decision to formalise the relationship by nominating an advisor as a Board member?

For Norman, it’s about the founder’s confidence in the advisor’s ability to reframe their guidance as the company grows and matures. “Lots of advisors are great for a specific stage – a defined period in time. A Board member’s responsibility is measured in years, not months.” Victoria concurs: “It’s important to remember that taking a Board seat, even as a non-executive, is also a real step-change for advisors, in terms of their commitment to the business and as a fiduciary duty to shareholders.”

The decision to appoint an advisor to the Board is not to be taken lightly, then.

Much depends on the advisor’s appetite for a longer-term commitment, and their ability to pivot away from short-term operational improvements and towards a higher-level strategic view.

Remember, Board composition greatly influences the way decisions are made. Ideally, Boards feature an odd number of members to mitigate the risk of tied decisions. If Boards have an even number of directors, your Articles of Association should include a mechanism for dealing with split decisions (such as a clause stipulating that the founder has the deciding vote in the event of a tie).

Every founder reaches points in their scaling journey where they need robust advice from experts who have been through the same challenges before.

As a founder, your judgement will be crucial when pressure to access game-changing insights from experts. While people might clamour to offer their input in the good times, founders need to have a sense that their advisors will also be there for them when things are tough.

While their input can add real value, advisors do not expect to be part of your company’s journey forever. “The longest I’ve advised any single company is a year or so,” says Victoria. “Founders should bear in mind that if an advisor does great work and lives up to their billing, they will eventually advise themselves out of a job by solving the problem you’ve brought to their door.”

Take the time up front to set expectations on the frequency of your touchpoints with advisors, establish their compensation, and define measurable outcomes. These steps avoid mixed messages that can spiral into confusion and mutual ill feeling over time. Don’t let vague advisor agreements and expectations sully the potential of great advisors to solve critical startup challenges.