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:
Generally, it makes sense to form a Board of Advisors if any or all of the following apply:
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 point was to show people what a great CEO he was, not 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 people, but for a startup, 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 Chief Executive Officer of Ground Floor Partners. Ground Floor Partners helps early stage, small-, and middle-market businesses grow through design and execution of sound business strategies.
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