An active and engaged advisory board made up of the right people can help propel a growth-stage company to the next level. However, missteps in the selection and management of an advisory board can cause a company to waste its most valuable assets: time and equity. With this in mind, before embarking on the development of an advisory board, it’s important to clarify the board’s role and develop strategies to ensure expectations are met.
1) Understand the Role of Your Advisory Board.
It’s important not to confuse an advisory board with a board of directors. While a board of directors has specific responsibilities (such as hiring and firing the CEO) and fiduciary obligations governed by law, there are no rules with regard to an advisory board. It is essentially an ad hoc group of individuals you turn to for guidance and wisdom. Your advisory board can be as big or as small as you like, and its members can have as specific or as general responsibilities as are agreed upon by the parties.
2) Select True Advisors for Your Advisory Board.
Companies generally choose advisory board members for two reasons: (1) the person has experience, knowledge, and connections which can help propel the company forward; and/or (2) the person has name recognition and credibility which might “legitimize” the company.
While there is nothing wrong with reason number 2, unless that person is truly planning on acting as an advisor or advocate for your company (as opposed to simply letting you drop their name into your website or at meetings), it is unlikely this type of advisor will add the value you envision. In contrast, the best type of advisor for your board will be an individual who:
- Is excited about your business and the prospects for your company;
- Is willing to lend his or her knowledge, expertise, and connections on a consistent basis;
- Has strengths in your areas of weakness.
3) Define Specific Roles for Your Advisors.
An advisory board works best when advisors feel connected to the company and its leaders. The following are some practical steps to take to ensure your advisor remains actively engaged and involved with your company:
- a. Define your Needs. Ideally, a well-constructed advisory board is composed of people with diverse skills and experiences especially in areas where the management team has weaknesses. These areas could include finance, customer acquisition, marketing, scaling, technology, domain expertise, or growing a company.
- b. Define your Expectations. Before awarding/accepting an advisor role, the CEO should clearly articulate what he or she hopes to gain from the relationship and why the advisor has been selected for the role. Examples of things you might ask from board members are: quarterly review of marketing strategy, deep dives into growth strategy, assistance with product feedback, evangelizing the brand, connections with potential customers, a certain number of hours per month helping with introductions, etc.
- c. Keep Advisors up to Date. When advisors are too removed from the details of the company, opportunities can be lost. Make sure your advisor knows which potential customers you are targeting, when you are looking for financing, when you’ve been approached by potential strategic partners, and when your business is heading in a new direction. E-mail updates and brief phone conversations will probably be sufficient. Make sure you discuss the best means of keeping communication flowing.
- d. Run Forward-Looking Advisory Meetings a Couple of times a Year. The most effective Advisory Boards get together a couple of times a year in person. Don’t forget, you have something to offer your advisor as well. One of the things that is attractive about the advisory role is it gives the advisor an opportunity to have a direct connection to the feet on the ground and an opportunity to make additional connections. If your advisory team is strong, your advisors will appreciate the opportunity to meet one another and gather intelligence about the industry. Make sure these get-togethers allow for interaction among board members and high level, strategic thinking. Ideally, updates have been occurring regularly so the main purpose of these meetings is getting the heads together to think strategically about your company.
4) How to Compensate Your Advisory Board.
At the very early seed stage, advisory relationships tend to be more informal and board members are not necessarily compensated. However, as the company develops and advisory board members have contracts and clearly defined deliverables, it is customary to offer equity (not cash) to advisory board members. While the amount can vary depending on the individual’s contribution and stature, some fraction of 1% seems to be typical, frequently granted as options vesting over 1-4 years, assuming this is directly tied to specific deliverables and/or value creation, as opposed to responding to occasional e-mails and phone calls.
So…does it make sense to create and Advisory Board? Absolutely! The right people bring innovative ideas, create opportunities and help the company move forward faster and more efficiently. Just be sure to find the right people who have the right level of commitment, set the right goals, and communicate your expectations clearly.