Advisory Boards: Exploring and Enhancing Equity Funding

advisory board

Formal Advisory Boards, as well as individual mentors, advisors and directors, can be incredible resources for entrepreneurs. If you are thoughtful and diligent in building and managing these relationships, you can reap significant benefits.

Here we’re going to focus on Advisory Boards: why and how you can organize a formal board. And in particular for the “why” we’ll focus on two funding related benefits:

  • An Advisory Board allows equity-curious entrepreneurs to “test drive” what it feels like to have a Board of Directors
  • An Advisory Board can help equity path entrepreneurs demonstrate good things to potential investors.

Advisory Board Definition

What exactly is an Advisory Board? Ever-helpful Wikipedia says:

An advisory board is a body that provides non-binding strategic advice to the management of a corporation, organization, or foundation. The informal nature of an advisory board gives greater flexibility in structure and management compared to the board of directors. Unlike the board of directors, the advisory board does not have authority to vote on corporate matters or bear legal fiduciary responsibilities. Many new or small businesses choose to have advisory boards in order to benefit from the knowledge of others, without the expense or formality of the board of directors.

It’s useful to think of an Advisory Board as a step in increasing the formality of the assistance you receive from those outside your company:

  1. Informal advisors and mentors are often brought on very early in the life of a company in an ad hoc manner on an as-needed basis
  2. Formal advisors are consulted individually, but often on a more consistent basis – for example, monthly or quarterly calls or coffee meetings
  3. Advisory Boards meet consistently as a group to provide more formal assistance and accountability, and often will provide ad hoc help in between meetings
  4. A Board of Directors has formal legal responsibilities, meets consistently as a group, and may provide ad hoc assistance in between meetings.

Why Form an Advisory Board?

A properly built and managed Advisory Board can help you identify efficiencies, increase profitability, optimize your business model, and help expand it. It can answer your most strategic questions and help you make those tough decisions. It’s a cheat-sheet for business-building and business success.

Business owners credit their Advisory Boards with:

  • cutting costs
  • helping with product development
  • introductions to valuable clients, investors, and suppliers
  • eliminating the sense of isolation that can come with running your own business.

An Advisory Board should not be confused with a Board of Directors. Unlike Directors, Advisory Board members have no authority over your company. They are simply there to offer advice that you can take or dismiss. They do not have the legally imposed fiduciary duties of Directors.

And if that Board of Directors includes significant investors, there’s another important difference: a Board of Advisors can’t fire the CEO.

Here are 10 great reasons to set up a Board of Advisors:

  1. Expertise you can’t buy

Advisory Board members can bring skill sets that are totally out of reach for many small businesses. Take the example of an Advisory Board for a small technology company. The Advisors are:

  • A finance manager with Fortune 500 experience
  • A retired CEO
  • The CTO of a midsized technology company
  • A university professor.

Imagine what it would cost to hire this level of skill, experience, and knowledge. A carefully chosen Advisory Board can give you access to such people for a tiny fraction of that cost – or no cost. Most of the time, the only expense comes from convening meetings. However, you don’t have to wait for a meeting. When you have an Advisory Board, good advice is just a phone call or email away.

  1. Business contacts when you need them

When you choose Advisory Board members with diverse backgrounds, their lists of contacts will become one of your most valuable assets. Looking for potential customers, sympathetic bankers, well-heeled investors, or even talented new employees? Sometimes a brief introduction by an Advisor is all it takes to open doors that you thought were closed – or that you never knew existed.

Advisory Board members are sincerely interested in your success. They want to introduce you to anyone they feel might help grow your business. And since they learn important details about you and your business, they are much more comfortable providing valuable introductions than random people in your network.

  1. The benefits of a Board of Directors without the hassles

Some business owners think an Advisory Board is the same as a Board of Directors. Yet, the two are very different.

  • An Advisory Board is exactly what the name suggests: it is there simply to advise. This means you reap the benefits of your advisors, without all the formalities, accountability and expense of a Board of Directors.
  • Unlike Directors, Advisory Board members have no formal authority or power within your company.
  • An Advisory Board does not have the same legal responsibilities (fiduciary duties) as a Board of Directors. That means you won’t need to pay the high fees and provide Directors Insurance coverage to protect them from liability exposure.
  • You need not reveal your business’s most intimate details to Advisory Board members. Unlike with Directors, it’s your choice how much information to share with Advisors.
  • You need not observe legal formalities for meetings, such as voting, quorums, and minutes. With a Board of Directors, such legalities are mandatory.

Advisory Boards can be structured two ways:

  • As a list of experts and consultants willing to be associated with your business and referenced as advisors. These advisors might give you their input one-on-one.
  • As two to four individuals who operate similar to a Board of Directors, meeting periodically as a group to form a sounding board for you and your management team.

Either approach makes sense, and sometimes they work in tandem. Sometimes equity path companies will promote a list of individual experts as a more formal Advisory Board, but there’s real value in bringing a small number of them together as a group.

  1. Simple and inexpensive to set up and operate

Advisory Boards are relatively simple and inexpensive to set up.

They can be as informal as a breakfast meeting twice a year. Or they can be slightly more structured, with regular working meetings held on a periodic basis complete with agendas. The level of formality and structure is up to you.

What are the costs? Most Advisory Boards serve for free. Business owners typically call upon friends and colleagues who are willing to help out – and flattered to be asked. However, it is customary to reimburse Advisors for long distance travel or out-of-pocket expenses. At the very least, expect to foot the bill for complimentary breakfasts and lunches.

  1. Signal growth intentions

An Advisory Board is a great way to signal to the world your intent to grow your business. Few actions say as much about your commitment. Only companies that are serious about growth take the time and effort to organize an Advisory Board.

When assembling your Advisory Board, pick Advisors who can help you develop growth strategies. You need individuals whose judgment you respect and who have strategic thinking ability.

  1. A personal sounding board

Advisory Boards can serve as a sounding board for new ideas – or for solving weighty problems. One of the best things about Advisory Board members is that they are willing, informed listeners. Sometimes, simply being able to talk to someone you trust is all it takes.

Your Advisors may well have dealt with the same issues in the past. They may be able to lead you to creative solutions so simple that you’ve overlooked them. They have probably “been there, done that.” You gain the benefit of their hard learned lessons without having to go through the same pain yourself.

  1. Advisors as mentors

Let’s face it: The top is a lonely place. Business owners often have few ways to get support and guidance. Your employees expect you to have all the answers. But to whom do you turn when you need help with those answers? That’s where an Advisory Board can make all the difference.

Think of your Advisors as mentors. Mentors help coach you to become a more effective leader. They inspire you to greater leadership heights through their own positive examples. They help you get through the tough times. They support and encourage and can bring out the best in you.

  1. Address specific company needs

There are many company-enhancing reasons a founder, CEO or president desires an Advisory Board. They include:

  • Integrating outside opinion and viewpoints to counterbalance internal viewpoints
  • Providing expertise and experience lacking in the organization
  • Providing a network of new opportunities using the board members’ contacts and influences
  • Providing sound management practices in order to reach the next level of professionalism
  • Creating a succession plan
  • Helping the management team in dealing with outside directors (those not on the management team) on a formal Board of Directors
  • Planning an IPO, merger or other exit strategies.
  1. See what a board “feels like”

Entrepreneurs are an independent lot. We like autonomy. We like to control our own destiny. For some, taking on investors and setting up a Board of Directors sounds like a loss of valued entrepreneurial autonomy.

But is it really as bad as all that?

A Board of Advisors allows founders to “test drive” what a Board of Directors feels like. Just like with many aspects of entrepreneurship, you don’t really know until you actually do something. And you don’t appreciate all of the subtleties until you’ve done something for a while.

If you want to test drive a Board of Directors, make sure you create something on the more formal end of Advisory Boards (see below). Then you’ll be able to “understand through execution” some of the questions you may not even know to ask:

  • How do you choose board members whose personalities work both with you and with each other?
  • How often should a board meet, and why that frequency?
  • How can you effectively and efficiently bring new board members up to speed?
  • How much do you get accomplished during formal meetings versus in between meetings?
  • How much formal meeting preparation is appropriate? How long does it take?
  • What’s it like to share challenges with an outside board?
  • What’s it feel like to tell a board you didn’t do what you said you were going to do?
  • Are you ok with getting “tough love” critiques?
  1. Boards of Advisors signal traction

One of the central challenges of equity fundraising is convincing potential investors that your company has “traction.” Usually traction is thought of in terms of users and customers: is the hockey stick curve going up fast enough?

But at a very early stage – pre-revenue – it’s extremely difficult to convince investors that your idea is not only big, it’s inevitable. This is where a board of world class advisors can come in.

If you can convince thought leaders to not only join your board, but actually give you advice on a regular basis, it’s an important signal to investors that your startup deserves their time and attention.

And if these Advisors are referenceable – meaning they are willing to talk to potential investors during Due Diligence – they can help tip seed investors from being interested to being committed.

Also, if you create a formal Advisory Board with the best practices listed below, investors will see that they won’t need to train you on how to use a board effectively. They will believe that their time as well as their money will be valued and leveraged.

Identifying Prospective Advisors & Advisory Board Members

Determine the size of your Advisory Board. Two to four people — provided they’re the right people — can often provide a huge and tangible benefit for a small business. You do not want too many people on your board as this will invite unproductive challenges.

Look for people who are leaders in industry, and those with whom you can build a foundation of trust. Trust is essential, so you won’t hold back on sharing what’s really going on in your business.

Choose confidants. The professionals who you ultimately will recruit for your Advisory Board should be capable of handling sensitive issues and confidential information with discretion. Again, trust is an issue and something to consider when making your selection.

Consider separating business and technical advisors. If you have a major scientific or technical breakthrough under development, you may benefit from a small group of experts and industry thought leaders focused on that challenge. Those discussions should be independent of business advisory concerns.

Initial Structuring

Though Advisory Boards are more informal than Boards of Directors, they should still be governed by written agreements. Consider consulting your lawyer before forming and working with your Advisory Board. But generally, Advisory Board members should sign a nondisclosure agreement.

And it is wise to draft a charter that outlines your Advisory Board’s responsibilities and logistics, such as meeting frequency, expected time commitment and compensation, if any. Spell out your expectations. How often will the board meet? How long should each meeting last? What will you offer your members in return for their time?

Set terms. Much like a Board of Directors, Advisory Board members should have terms – such as 12 months or 24 months. Your company and its needs will change. So will your Advisors’ interests and availability. Terms formalize needed reassessment and make exits less awkward on both sides. Board members can always re-up if there’s mutual agreement.

If your company decides to establish an Advisory Board, it should do so in a way that minimizes any risk of liability for its members. Steps that can be taken include:

  • A written description of the role and responsibility of Advisory Board members, which makes it clear that they have no policy-making powers, have no voting authority, and have no management authority in the company, but their role is solely advisory, subject to the review and approval of the company’s Board of Directors and/or owner(s).
  • Make certain that the company indemnifies Advisory Board members to the full extent allowed by law, and consider separate indemnity agreements between the company and its Advisory Board members.

Advisory Board Management

The most successful boards are formed with a specific goal in mind. Managing an Advisory Board should consider the following recommendations:

  1. Have all meetings prepared well in advance, with agendas, management reports, financial reports, and key issues to be discussed.
  2. Schedule meetings well in advance – an annual calendar is best – to allow members to schedule their time around your meetings. It helps them to be available.
  3. Allow Advisory Board members access to key managers, to talk with and ask questions. As time progresses, the owner/CEO/president should invite key managers to the meetings. These meetings will then evolve into periodic strategy sessions whereby each manager gains higher-level perspectives and seasoned knowledge. Through this transference of knowledge and discussion the management team learns to problem solve more effectively.

An Advisor should:

  • Be available for quick questions or introductions by phone or email on an occasional basis from a single point of contact (the owner or CEO)
  • Participate in conference calls
  • Attend face-to-face meetings as requested.

Prepare for meetings. To get the most out of your Advisory Board meetings, prepare for them well in advance. Choose a site that is both comfortable and free of distractions. Solicit input for the agenda, and distribute important information ahead of time. Run the session as you would any professional meeting, and follow it with an action plan. If this is unfamiliar territory, ask an Advisor to help you prepare!

Stay in touch. Keep your Advisory Board members informed of your company’s activities between meetings. The fact that they’ve agreed to be on your Advisory Board means that they care about the welfare of your business. If they are consistently up-to-date on the goings-on of your enterprise, they will be of greater value to you. Weekly or bi-weekly email progress reports are simple but effective.

Distribute your business plan. It may seem obvious, but it’s a good idea to distribute copies of your business plan to each member of your Advisory Board. The more familiar they are with your business, the more valuable their contributions will be.

Ask for Honesty. An Advisory Board must be open and frank, so don’t be offended if you hear things you don’t like. Your Advisors will also suggest ways of correcting the problems they identify. If appropriate, encourage members to tell you about their mistakes so you can avoid making the same ones. You can learn a lot by finding out what other people did wrong.

Advisor participation levels vary greatly. 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.

Advisory Board Compensation

Compensation might take the form of:

  • Providing food and drink during and before or after an advisory board meeting
  • Covering expenses
  • Cash – an honorarium or a fee paid per meeting
  • Stock options.

Your board members will not be in it for the money. There is no standard compensation scheme for advisors, because it depends on how many advisors you need, how much time they will devote and what kind of company you have.

Adapted and Updated from the “Top Gun Guide to Advisory Boards” compiled in 2011 by the Maine Center for Entrepreneurial Development from a variety of web sources and originally edited by Don Gooding & Stephen Jenks.

Don Gooding

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