Much confusion exists with regard to the board of advisors, mostly concerning its role and responsibilities. For the most part, the board of advisors is an optional body of outside advisors that exists solely at the discretion of the CEO. Unlike the board of directors, the board of advisors has no legal liabilities for its advice to the CEO or company. This lack of legal liability can sometimes foster healthy and free-flowing exchanges of useful information. A board of advisors does not replace or compete with the regular board of directors. A suitable size for the advisory board is three to five members.
A board of advisors is established to provide advice and knowledge in specific areas. For example, the board of advisors of a company mostly involved in providing financial services may wish to establish a financial board of advisors comprised of people with special skills and knowledge in, for instance, accounting, law, exchange rates, international financial matters, etc. Of course, technology companies would be advantaged by choosing technical advisory board members with strong backgrounds in pertinent areas of technology, product design, manufacturing, etc. An ideal board of advisors would have experience and knowledge in areas that the company anticipates encountering in the near future or the next stage. The ability of the executive team to tap into others who have “done that before” can be invaluable.
An advisory board member should not simply be looked at as an unpaid consultant; rather, the advisory board member should be of a caliber and personality that can make a difference to the company because of his/her special experience, knowledge, skills, abilities, etc. The amount of time devoted to the duties of board members is typically minimal if unpaid, and often, the only requirement is for the board members to facilitate contact with other people and provide specific advice within their areas of expertise. In their capacity as advisory board members, they may be expected to take calls from the CEO, CTO, or CFO in regard to particular issues they could be expected to answer directly or, with a little time, provide answers or direction. The board of advisors may take on larger issues involving more of their time, often working as a team to reduce the workload to any single member.
There are no particular rules or procedures followed by a board of advisors. Formal meetings are not typically required, although a once-a-year meeting and dinner would be wise to express appreciation, promote camaraderie, and allow the CEO (and other executives) to outline the company’s strategic plans and needs related to their advisory purpose.
As with the board of directors, the advisory board members can be compensated for their contributions and availability through the provision of stock options. As a rough guide, the board of advisors could be considered as equivalent to a quarter of a key person, but that depends a great deal upon what is being asked of them. If more is expected, then compensation should be correspondingly increased. If the board of advisors has extraordinary requirements placed on them involving significant work or time, then paid compensation (in addition to stock options) should be considered.
Members of the advisory board must not have conflicts of interest and must be prepared to sign confidentiality and noncompetition agreements. Their length of service is determined by mutual agreement; however, a specific short “standard” term that is renewable may work best for both the company and the advisory board member so as to permit the CEO to have flexibility in retaining an advisory board member, or not, and changing the specific attributes of the board over time.
People enlisted to be on the board of advisors are, or should be, people who have an interest in the business or technology and would like to contribute their special advice with the ultimate desire to be a small but important part of a successful enterprise. The pool of candidate advisors should not include family members or anyone with an emotional or financial interest in the company (apart from stock options) unless there is a justifiable reason.
The advisory board reflects the needs of the CEO and executive management team, and its ability to contribute is directly a function of how much effort is put into the relationship. Exploiting the capabilities of an advisory board should be considered only if the CEO and executive team are fully engaged and supportive of the need; otherwise, the potential benefits of the board of advisors are not realized or appreciated.
Rocky Richard Arnold provides strategic corporate and capital acquisition advice to early-stage companies founded by entrepreneurs wishing to successfully commercialize high-value-creation opportunities, ideas, and/or technologies. More information about Rocky can be found at www.rockyrichardarnold.com. His book, The Smart Entrepreneur: The book investors don’t want you to read, is available as paperback or Kindle ebook for purchase on Amazon at http://tinyurl.com/pv248qq. Financial software for use by startups can be purchased on Amazon at http://www.amazon.com/gp/product/B00K2KPSI2. He posts articles about entrepreneurship on his blog at http://thesmartentrepreneur.blogspot.com. Connect with Rocky on Twitter @Rocky_R_Arnold; Facebook at www.facebook.com/rocky.r.arnold; Google+ at www.google.com/+RockyArnold01.