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Entrepreneurs
often ask me if they should form
a Board of Advisors (or “Advisory Board”).
My answer is always the same: it
depends.
The first
thing you should understand is
that there is a big difference
between a Board of Directors and
a Board of Advisors. A Board of
Directors is a legal entity with
well-defined responsibilities and
real authority. Once you form a
corporation, you automatically
have a Board of Directors. For
small startups, the Board may consist
of one person – you, the
owner --- but you can always add
other members. Each member of the
Board of Directors has voting rights,
and the Board as a whole is (ultimately)
liable for the company’s
actions. For large public corporations
Board members are usually well-compensated
(usually with stock and often with
cash and other benefits), and always
insured against lawsuits.
A Board
of Advisors is a very different
animal. First of all, the Board
of Advisors has no legal responsibilities
and has no authority. Members
may be compensated, but the compensation
is usually much less. Since the
Board of Advisors has no real
authority, members are not usually
insured against lawsuits because
there is no basis for suing them.
In many cases, there isn’t
even a formal agreement between
the company and the Board of
Advisors.
A Board of Advisors can provide
the following benefits:
- Diversity of
opinions. A good Board of Advisors
will have a diverse mix of personalities,
talents, and areas of expertise.
You should also get a blend of
opinions from different points
of view. If they all sing the
same song all the time, then
you should consider swapping
some people in and some people
out to mix things up. A Board
of Advisors might include one
or two industry experts (usually
not direct competitors, however),
one or two marketing/sales people,
and one or two financial experts,
but the exact mix depends on
you and your company.
A large rolodex.
Ideally each member will have
a significant network of high
quality professional contacts
that you can draw on when needed.
These might include potential
management team members, potential
business partners, vendors, clients,
or investors. Just be sure not
to abuse this privilege or you
will quickly wear out your welcome.
- Credibility.
Some people form a showcase Board
of Advisors where all the members
are famous. The idea is this
will attract investors. There
is no harm in doing this as long
as you have realistic expectations
about what each member can and
will do for you. Don’t
expect the CEO of a Fortune 100
company to sit down with you
for coffee twice a month. In
general, I prefer a board where
the members are respected in
their professions, but approachable.
Generally, it makes sense to form
a Board of Advisors if any or all
of the following apply:
- Your company
is growing so large that you
are starting to lose touch with
your employees (customers, vendors,
suppliers, partners, etc.). A
Board of Advisors can help you
stay grounded and also keep you
on your toes about important
issues that your management team
and/or staff may not want to
tell you.
- You plan to
raise capital from outside investors
at some point. A Board of Advisors
can help you weigh your funding
options, evaluate your growth
plans, and provide credibility
to your business (and thereby
help you attract the capital
you need).
- You are so busy
running the day to day affairs
of the business that you simply
cannot think about strategic
issues and long term plans. If
you have the money, you should
at least consider hiring an outside
strategy consultant. However,
if this is not an option, then
a strong Board of Advisors may
be just what you need.
Note that there are also situations
where a Board of Advisors is NOT
the right solution.
- If your
company is small or growing very
slowly you probably don’t
need a Board of Advisors. You
may better off simply joining
a peer networking group --- it
takes less work and it’s
easier to get out of it if it just
isn’t working.
- If
you have a low tolerance for
other people’s opinions
or you are excessively paranoid
about competitors. You should
consider other alternatives.
Earlier
in my career I worked for a well-known
international company. The company
was profitable and growing by
10%-15% per year. However, operations
were a mess, there was no long
term strategy, and most importantly,
their closest competitor was
growing nearly twice as fast.
One day we learned that the CEO
had formed a Board of Advisors.
Everyone in middle management was
very excited. However, it quickly
became clear that the whole thing
was a dog and pony show; the CEO
had no interest in using the board
to actually solve any problems.
The CEO would routinely hide important
facts about the company, and had
absolutely no interest in hearing
what the board members had to say.
The whole process was a sham, and
everybody knew it. Fortunately
for the company, the CEO had good
instincts about his customers so
the company was ok, but any potential
benefits from having an outside
group of experts reviewing his
business were completely lost by
keeping them in the dark about
real problems and only telling
them what he wanted them to hear.
If deep down in your heart you
know you just can’t be honest
with a room full of peers, then
don’t form a Board of Advisors.
You will just be wasting everyone’s
time, including your own.
How many members should be on
your board? As a rule of thumb,
I would limit it to 5-9 people.
Larger companies might have more,
but for a smaller company, this
seems about right.
How often should the Board meet?
I recommend holding formal meetings
once a quarter, or possibly even
once every month, but definitely
no more than once a month. You
might want to take individual members
out for coffee once in a while
to make things more personal.
Recognize before you start that
everyone will not be able to attend
every meeting. However, it is a
good idea to set some guidelines
up front and let people know that
you expect them to attend at least
2 out of every 3 meetings (for
example).
As a final
recommendation, make sure you
pick people that you respect,
trust, and can work with. If you
pick someone just because of their
impressive resume, you could quickly
regret your decision if you find
they dominate every conversation
and won’t listen to anything
you or other members have to say.
Also, try to pick people who are
compatible with each other. If
your board regularly splits into
two angry factions at every meeting,
you probably won’t get much
value out of your meetings.
Andrew Clarke is the CEO of Ground
Floor Partners, a business consulting
firm that helps early-stage, small
and middle-market businesses grow
through design and execution of
sound business strategies.
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