Start-Up Launchpad Blog

Should I Have an Advisory Board? - January 23, 2012

Jason M. Stone

Jason StoneIf you are a newly minted entrepreneur or have identified key resource gaps in your organization, an Advisory Board can be extremely helpful. Studies have shown that the most successful startups seek out, listen to and implement mentor advice. This can be done on an ad hoc basis, but the formality and structure of an Advisory Board can enhance the process of gathering and implementing mentor advice.

 

This is not to say, however, that every startup will benefit from an Advisory Board.

 

First, they take time. As noted below, an Advisory Board is unlikely to provide any benefits and may even cause harm if it is not populated by the right people, and nurtured appropriately. This takes time. Lots of time. It is not unreasonable to expend hundreds of hours finding and enticing the right people to join your Advisory Board and another fifty to one-hundred hours each year nurturing your Advisory Board. For entrepreneurs with little time, this can be difficult and, in some senses, a distraction from other more critical business tasks.

 

Second, Advisory Boards can be expensive. It is not unreasonable for Advisory Board members to ask for compensation for their efforts. In many cases, this comes in the form of equity and in most cases ranges from .25% to 1% per advisor. Even if they don't ask for compensation, you will incur expenses. As noted below, it is important to enter into contracts with your Advisory Board members, communicate with them, hold regular meetings and take other actions to keep them engaged. All of this costs money. These expenses can quickly outweigh the benefits of an Advisory Board in many circumstances.

 

Finally, they create risks. Members of an Advisory Board are not subject to the same fiduciary duties that the directors, managers or officers of a company are. This can create legal risks (e.g. the disclosure of confidential information). While most of these risks can be mitigated through proper management, they cannot be eliminated.

 

Assuming that a company believes that an Advisory Board provides more benefits than burdens, the next step is determining who should be on the Advisory Board.

WHO SHOULD SERVE ON MY ADVISORY BOARD

The determination of who should serve as an Advisory Board member must be closely correlated with the reason you decide to have an Advisory Board. For example, if you decided that you need an Advisory Board to provide additional industry depth, seek out industry thought leaders; if you decided that you need an Advisory Board to help you with financial and fundraising matters, seek out people that have financial and fundraising experience.

 

You should also look for people that will be actively involved with your Advisory Board. While it is always nice to be able to say that you have a recognized industry leader on your Advisory Board, such people are often over-extended and of little actual help. In most cases, you would be better off looking for engaged and responsive people than recognized individuals.

 

Finally, you should look for people that you can fire and you should think twice about bringing funding sources onto your Advisory Board. Things don't always work out as planned. If you raise money and a member of your Advisory Board is an investor, it will look bad if they do not participate in the fundraising. If a representative of your largest customer is on your Advisory Board, what do you do if they never show up or are disruptive when they do? 

 

Once you have identified the ideal candidates for your Advisory Board, you have to consider how much you should pay them.

HOW MUCH SHOULD I PAY MY ADVISORY BOARD

As noted above, it is not uncommon for advisors to request equity compensation that ranges from .25% to 1% per advisor. While you should seek to minimize your compensation costs, that should not be your primary driver in the selection of people to serve on your Advisory Board. The quality of the advisor, their fit with your needs and their engagement with your company should be paramount. Moreover, paying people tends to impose a responsibility on them. For that reason, we often encourage our clients to make cash payments to their advisors, even if small in amount, when they provide services (e.g. $250 at each quarterly meeting they attend). In the same vein, we also recommend that the equity they receive be subject to vesting requirements. People always perform better with some financial encouragement. 

 

In the end, if you need to cut costs, do so by cutting the size of your Advisory Board and not its quality. Small Advisory Boards (3 to 5 members) work best anyway.

 

Of course, once you have an Advisory Board, you have to figure out how to use them.


HOW DO I BEST UTILIZE MY ADVISORY BOARD

The exact role of your Advisory Board members will depend upon their intended function, but a few broad rules apply. First, you should develop a clear list of expectations (e.g. what should they do and when should they do it). Simply saying that they should provide strategic advice is not the best approach. Tell them that they need to attend Advisory Board meetings each quarter, meet with the company's officers "X" hours per quarter, etc. etc. Determine what you want them to achieve and get agreement on that up-front.

  • Schedule regular meetings with your Advisory Board.
  • Communicate with them regularly. 
  • Develop individual relationships with them. 
  • Have fun with them. 
  • But, more important than anything else, listen to them. That is why you hired them in the first place.

Of course, we are lawyers so we also have a few ideas about the legal aspects of an Advisory Board.

 

WHAT LEGAL CONSIDERATIONS DO I FACE WITH AN ADVISORY BOARD

As noted above, your Advisory Board members are not employees, directors, managers or officers of your company. Therefore, it is unlikely that they have the same fiduciary duties to the company that these other agents have. To deal with that, you should enter into a written agreement with your Advisory Board members. That agreement should, among other things, set forth in clear and concise language:

  • What you expect the members of your Advisory Board to do and when;
  • What they will be paid and when;
  • How they can be terminated;
  • What duties they have to the company (e.g. the duty of confidentiality and non-competition);
  • Who owns the intellectual property they help produce in the scope of their duties;
  • A system for dealing with conflicts of interest and other corporate opportunities;
  • Whether you can publicize their involvement with your company; and,
  • Whether you will provide indemnification and/or insurance coverage for them.

The agreement should also clarify that they are mere independent contractors and that they do not have the agency power to bind the company.

 

To assist with these contracts, we are in the process of developing an automated Advisory Board Agreement for our Start-up Launchpad clients. It is currently in the test phases and should go fully live in a week or two. We will post again when it is complete. In the interim, give us a call if you are interested and have any desire to provide input.