Board of Advisors or Board of Directors?

Lots of young firms always ask whether to form an advisory firm or a more formal board of directors. The first question is to whether to form a BOA or BOD for the firm.  The Board of Advisors may have different responsibilities and dynamics from a Board of Directors. Typically, if the firm is not required by law or has outside investors, a BOA may be the best option due to its flexibility and lower time commitment.  

If you form as a S-Corp or C-Corp, you need a formal BOD. However, if you form as an LLC (Limited Liability Company) you have more flexibility in board formations.

A Board of Advisors is to complement your company's senior management team with business and industry experts who have an interest in the future of your company, yet are either too busy, too expensive, or otherwise don’t seek to take on the responsibilities that a director on a BOD incurs.  The major objective of the BOA is exactly as the name implies, they advise that management may or may not follow.  Because it is only advice, the BOA members don’t face the legal and fiduciary obligations that a formal board of directors does.

The overall goal is to seek individuals who possess expertise that your firm doesn’t have and/or experienced, independent-thinking stakeholders who can provide advice that assists the organization's benefit. While there is no set formula for an advisory board, the composition typically is someone with a relevant product background; a strong technologist, and often someone with deep domain experience who could be a potential customer of the firm.  Some firms seek individuals with a strong financial background or an operations background.

Other firms will identify advisors based on their firm's current and future stages.  For instance, one local technology firm was in the research and development phase of their bioassay product development with the product launch approximately two years away.  One advisor this organization sought was a retired CEO who had been through the commercialization and product launch phase in her own company several years back.  The firm was able to proactively leverage the expertise of the advisor as they planned their product launch.

‘How to find advisors?’ is always one of the biggest questions asked by business owners/leaders.  They should start with stakeholders they already, know and trust, most importantly for referrals. Lawyers, bankers, and accountants can provide real value because of the network of clients they work with who might be valuable additions.  (Note, I typically recommend not having bankers, lawyers, and accountants on the board unless they possess a unique knowledge base in the firm’s industry, etc.)  Other sources include your most trusted customers and vendors who might have good connections in the industry.   If possible, include a well-known advisor to your board as such a member or two can lend credibility to clients, employees, and investors.

Many mentors will sit on a start-up’s advisory board for no pay. After all, they want to network with other industry players and build their credibility. Still, about 20% of small businesses offer some kind of compensation, if just enough to cover travel costs to and from meetings. (The price tag climbs as companies grow: According to Compensation Resources, almost 91% of firms with $50 million to $100 million in revenue pay their advisers; average compensation: $4,800 per year.) Equity is also an option, but the advice should be really good.

Logistically, advisory boards typically meet quarterly for about a day. Again, their purpose is to take a fresh look every few months at how the market is changing, how the technology is developing, what the company's biggest strategic and operational challenges are, and discussing the product, technology, and marketing plans can be absolutely invaluable to the company.

Between quarterly advisory meetings, the individual advisors are usually in touch fairly frequently with their counterparts in the company, coaching, answering questions, reviewing progress, making introductions, interviewing job candidates, whatever they can help with.