The Importance of Advisory Boards for Startup CEOs
When a startup receives financing it will need to setup a Board of Directors. The Board probably existed beforehand, but was made up only of the founders. Once funding takes place, the angels or VCs will want a seat at the table. There’s no surprise there.
But there’s another kind of board that’s equally important. In some ways it’s more important (although it doesn’t have any control over the business), and that’s the Board of Advisors.
What many first-time CEOs might not realize is that they may need to setup an Advisory Board as a condition of receiving financing. Venture capital firms like to see CEOs with strong support (beyond the Board of Directors) and that’s what the Advisory Board is there to do. It’s unlikely you’ll have an Advisory Board before you get funded, but it will very likely come up after.
Mark Macleod spells it out beautifully in his post on Advisory Boards.
Forming the Advisory Board might be a condition of financing, or perhaps a deliverable for receiving future financing/tranches from VCs, but as Mark points out, the Advisory Board isn’t there on behalf of your investors:
“Be selfish. Advisory boards are not for the company, they are for you. As leader of your company, the advisors are there to provide you with a personal, confidential, trusted sounding board.”
I hadn’t really thought of it that way before, but there’s a certain comfort in thinking about having a team of people you can lean on for advice, help, questions, support, etc.
Whether the Advisory Board is something your investors (or Board of Directors) demand or not, you should set one up anyway. Why wouldn’t you? As people have said to me before, “Being CEO is a lonely job…” so having others (far more experienced than yourself) to rely on is very valuable.
Pick Advisers Carefully
Something I’ve noticed with Advisory Boards is that they’re often stockpiled with “big names” - celebrities in their respective industries. But I suspect that’s often done for name brand and recognition. First-time startup CEOs in particular want (and to a certain degree need) validation in their space - and so they lean on celebrity advisory members as a means of getting that. I understand the reasoning. I see the attraction. But I’m not convinced this is a great approach. At the end of the day, you (as the CEO) and your company, will win or lose based on your own merits and those of your company (the team, your product/service, etc.) not the name recognition of your celebrity advisers. If the celebrity adviser can dedicate time and energy to you, then you get the best of both worlds, but otherwise, be careful.
Mark talks about a simple structure for an Advisory Board, and the first one on his list is (in my mind) the most important:
“A consligliere: This is your trusted personal adviser. Once your company is big enough to have a full time CFO this person fills much of this role. Until then get someone like a CFO on your advisory board who can provide counsel on key legal, structural, strategic and financial issues.”
I also agree with Mark’s advice to keep the advisory small at the beginning. You can always add people later on, as you discover more needs that you have.
A Few Quick Tips on Advisory Boards
A few additional thoughts:
- Compensation. You will most likely have to compensate board members. This is typically done with a small piece of equity. And if you hold advisory board meetings you will most likely have to pay for travel expenses too.
- Expectations. You need to set expectations upfront. What do you want from your advisers? Very often, you’ll want different things from each one. Make sure you’re clear about expectations and goals from the get-go. And I know this is easier said than done — you’re the first-time CEO and your advisers are veterans, experts and probably a lot wealthier than you are. Even if they’re not “celebrity advisers” you’re gunning for some big names, people you look up to and admire. It’s hard to tell someone like that, “I want X and Y out of you. So deliver!” But, you’re the boss. And you’ll need to make sure you have a strong enough working relationship with your advisers to be able to get results from them.
- Availability. It shouldn’t make a huge difference whether you try and organize all the advisers to meet at given times or interact individually with them when need be. I would prefer not to schedule regular meetings because of the difficulty in coordinating that; and ideally, your advisers should be available much more often than once every couple of months for a meeting.
Can your board of directors also be a advisory board since its in there common interest to help increase business growth?
Or is there conflicts?
funny, i didn’t know you had that conference room in your offices
great blog post, as usual, ben
@heri: You like that? We’re just finishing up the office renovations.
@Brett Evans: Your Board of Directors are already, by default, (or should be), advisers to the company. But the structure is much more formal. And the Board is responsible for a lot of company management type stuff, which advisers wouldn’t really touch.
So it’s not about conflict as much as it is about having different purposes (although there’s some obvious overlap too).
Nice post. I’ve read a lot on the internet about start-ups, but I didn’t know about mandatory advisory boards.
I guess when I think about start-ups I usually picture people in their young 20s. I can’t picture what kind of advisory board they would select.
As someone who serves on advisory boards I have seen first hand at the value of such a group. One thing about getting rockstars to serve on an advisory board usually has a problem of egos involved. Often the rockstar wants to make their own agenda part of the company’s and that can be a hindrance. I also see that all they want to have is their name on another board and have no real offering or do not bring anything to the table. I also know that in some instances VC’s want to see the rockstar name and nothing else. Good post Ben.
@Mike: If you look at YCombinator they have tons of high quality advisers … so even 20 year olds can get involved with top quality, experienced entrepreneurs/VCs/advisers to help them out.
@Jim: I think you’ve explained the complications of a good advisory board well - the pros/cons, etc. It’s certainly not a perfect thing…
Being a co-founder of a young start-up company (all in our 20’s) and having a very tight budget to work with, it’s hard to imagine finding money to put towards this sort of thing, although I completely agree with its relevance.
We have been lucky enough to have formed strong relationships with family friends and past co-workers, to have a very informal Board of Advisors on hand. Basically just people that we can call and email for advice, tips and recommendations when we want a more experienced opinion.
I think if you’ve done a good job networking and building relationships with people in the past, you should be able to have a similar system in place if you’re funding is — ridiculously — low.
Thats a beautiful room, i would like to get such one in my office, but is too little for that, how big is yours?
One day I´ll be one of the members of Board of Directors too.
Wow, that’s a very corporate looking conference room. I will be having one someday. lol
I plan on starting several small business ventures (1-3 employees), what sort of formal advisory panel would be suggested? Thanks
Ben-
Based on my experience, setting up an advisory board early on is a mistake. The VC requirement notwithstanding, in the beginning you don’t know what you don’t know. As a result, you won’t necessarily know the type of skills and knowledge of an advisor that will add value. I also think the idea of an actual “board” with group meetings is unnecessary and sometimes unproductive. I believe that advisors are important but should be chosen at a specific stage, for a specific purpose and engaged on a individual basis.
Good topic.
“Be selfish. Advisory boards are not for the company, they are for you. As leader of your company, the advisors are there to provide you with a personal, confidential, trusted sounding board.”
This is a brief of your article.
Thanks for your advices.
Great post. The value of advisory boards is often that the members feel highly obligated to help you grow your business. As such, advisory board members will often become customers or help you find customers. I have a friend who formed an advisory board and she credits it with helping her to take her revenues up by an order of magnitude from prior growth levels.
Wow, that’s a very corporate looking conference room. I will be having one someday. lol
@Zack: You don’t necessarily have to pay your Advisory Board with money - generally you compensate with equity. So even a startup with little to no financing, made up of guys in their 20s can put together a group of advisers to help out.
@Cubicle Dropout: Depends on whether you see the company scaling or if it’s a small business / lifestyle business. In that case I’m not sure you can attract advisers with equity, because it won’t be worth much as an investment on their part. Nevertheless, I think you should always have advisers / mentors to rely on.
@Jeff: I don’t envision having an advisory board that meets. I agree that it doesn’t make sense. I want advisers I can call, grab coffee with, almost any time.
In terms of being too early - I see what you mean - there’s a point there where you have to decide whether you know enough to find the people who know what you don’t know (phew). Generally, I think it’s fairly straightforward though - you want people who have been there, done it successfully, can open doors, be great ambassadors and help out.
@Ken: That’s a great point of validation for advisory boards, and also something that I’d love to see happen with my business too.
is there any one who knows any source about this subject in other languages?
Wow thats’s one great looking boardroom, its like the King Arther’s Magical round table hmmmmmmmmmmmmm
[…] the answers. No one can (I don’t care how much experience they have!) Surround yourself with great advisers that fill in the gaps in experience you have. In the case of Standout Jobs we’ve been working […]
Hey Ben,
For a formal setup - What range of basis points are people giving to advisers these days?
oh, and we linked to this article in the beta of Sproutwire (launches tomorrow) - check it out:
Beta Invite: http://sproutwire.com/?code=SP-CMT
[…] on his blog Startup CFO. (Also read F|R contributor Ben Yoskovitz’s take on the subject: The Importance of Advisory Boards for Startup CEOs.) 4) Strategy: A reminder of why failure is nothing to be afraid of, and why you should embrace […]
I am starting up an online web site http://www.jobsplay.com and having read your blog will be looking to find some people to form an advisory board for me. I have a number of possibilities who have experience in starting and running businesses but none have experience in the same industry. Do you think that just havng good business experience is enough without the specific industry experience or should I look to get someone with more relevant experience. I suppose initially any experience is better than none but would VC’s and investors look on it this way?
@Dominic: I think you want a combination of business experience + experience in the industry you’re in. That combination will help you deal with the diversity of issues you’ll face launching your startup.