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.
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