Five Reasons Why a Board of Advisors Could Help a Startup
All established private and public companies have a Board of Directors. The Board of Directors is a legal entity that is created to protect the interests of the shareholders. The Board votes on important decisions concerning the company’s future such as merger & acquisitions, divestitures, changes in senior management, etc. The Board’s directors often represent interests of large investors and use the Board to influence the company’s strategy for economic as well as political reasons.
A Board of Advisors is a little different. It is created in order to help the company’s executives make better decisions and execute the company’s strategy faster and more efficiently – in short, it supports the company and the vision of the company executives, and is not beholden to the whims of the shareholders. Because it is a not a legal entity, I recommend that a company signs an Advisor agreement which will outline Advisors’ responsibilities and compensation. Responsibilities typically include several hours of calls a month, introductions to potential partners and investors, and strategic advice. Advisors are usually compensated in stock vested over 1-2 years. Sometimes there is also a trial period to make sure that an Advisor can work efficiently with company executives and other Advisors.
Here are six important areas where a Board of Advisors can help a Startup:
- Expertise. It is a well-known fact that, in order to succeed, a startup founder must wear many hats. In reality, startup founders are generally experts in one or two fields, usually related to their industry or product, and typically lack business expertise such as strategy, finance, marketing, and sales - all of which are essential to a company’s success. The Board of Advisors can fill this gap and provide any expertise the company does not have in-house.
- Outside opinion. Growing a business is difficult. Operating in a world of uncertainty is stressful. Mistakes are costly, and it is hard to know in the midst of it all what the correct course of action is. Entrepreneurs live and breathe their ventures, but their passion and focus can backfire as it may allow tunnel-vision and emotional attachment to cloud their perspective and judgement. That is why getting an outside unbiased opinion from a trusted industry expert or a business professional is so valuable and can often save the company from its downfall, or at the very least allow it to make more informed decisions which will accelerate its growth.
- Structure. Formulating a company strategy and translating it into a strategic roadmap is crucial for long-term success. Having periodic board meetings gives entrepreneurs an opportunity to take a step back from the day-to-date activities and evaluate the company’s progress on a bigger scale.
- Credibility. Gaining customers’ trust and industry recognition are common challenges that startups face. A carefully selected Board of Advisors can help mitigate this problem especially when it is includes subject matter experts whose opinions are widely respected. Their association with the company may help across a number of initiatives from fundraising, to strategic partnerships, to marketing & PR. By being able to convince a subject matter expert to join the board, entrepreneurs prove the legitimacy of their idea.
- Network. Board Members typically have deep networks in their area of expertise. Leveraging those networks can significantly accelerate the company’s growth. When it is clear that certain Board members can generate a lot of business for a company, I recommend negotiating a separate agreement to properly incentivize them.
Finally, a Board of Advisors is a relatively inexpensive way to get access to highly qualified individuals and their networks, as opposed to what it would cost to hire them full-time. In return for their time and expertise, they receive equity in a company which, with their assistance, can become incredibly valuable. It is a win-win with limited risk for both sides.
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