As a startup you will often hear about the need for an Advisory Board, but what exactly are they and how do they boost performance?
What is an Advisory Board?
An Advisory Board is made up of (usually) experienced executives or experts who are engaged to provide informal advice, guidance and assistance to a startup in a structured way.
Note that it is not a formal Company Board structure or committee, and therefore does not have corporate legal responsibilities, voting rights or decision-making powers. However often board members will commit to a Services Agreement or similar.
The board is usually made up of 2 to 5 members who meet with a startup’s executive team monthly or as needed.
The functions of an Advisory Board
- An Advisory Board can fulfil a number of functions;
- To add expert skills and experience to a startup (remembering that a startup may not have the resources to engage senior executives on a full-time basis)
- To act as a “sounding board” on important strategic and operational decisions
- To introduce key industry, supplier and customer contacts
Who should sit on an Advisory Board?
Members of an Advisory Board should bring genuine skills, experience, diversity and contacts, and should be prepared and able to make a firm commitment in terms of their contribution. Often members will be senior or retired executives from industry, the prospective customer base or with from a technical background (IT, Finance, Legal etc). As individuals they should be recognised, well connected and credible in their field.
Advisory Board members should not be engaged in the belief that simply through association they will add credibility or kudos, or encourage investment in a startup.
When should a Startup consider establishing an Advisory Board?
- Appointing Advisory Board members very early in a startups development is unlikely to provide significant value-add for several reasons:
- The early life of a startup is often volatile and uncertain before the proposition is clear and a medium / long term direction established. In this environment it is near impossible to select Advisors with the right skills and knowledge
- Advisory Boards can be costly in terms of time, administration and money – all scarce resources for most startups
Identifying the right time is of course judgemental, however we would recommend appointing Advisory Board members only after, at least, a customer validated MVP has been launched and customer traction gained.
How are Advisory Board members paid?
There are many models used to compensate Advisory Board members, ranging from “free” (the Advisor works for the prestige and experience of working with the startup) to the equivalent of a full Board member. However, generally compensation arrangements fall between the two.
Common practice is for Advisors to be granted equity (or restricted equity) in the range 0.25% to 1.0%, vesting over 1 / 2 years. There are rarely any additional equity rights included such as non-dilution etc.
Cash compensation is rare.
Advisory Boards can be a powerful contributor to the development of a startup if established and run correctly. If your business’ requires more expertise at the helm, reach out to the seasoned team at Fullstack whom can help with outsourced CFO advisory services.