You might be getting solid advice from lawyers and accountants, but lately more attention is on peer advisory boards
By Gary Miller – Managing Director, Consulting Division, SDR Ventures
Great businesses are rarely built by owners alone. Whether it’s a startup or an established business, having access to high-quality advice increases an organization’s odds of success. Businesses seeking advice can obtain it from a corporate board of directors, consultants, attorneys or accountants. Increasingly though, attention is being given to advisory boards.
The benefits of an advisory board include setting aside time to think strategically, obtaining feedback and insights from outside the company, and gathering information and expertise from peers who have knowledge and experience in areas different than your own.
The advisory board can provide assistance with marketing, product development, operations, manufacturing and identifying acquisitions or potential buyers for your company.
An advisory board is an informal group, and thinking carefully about its role and composition will maximize its contribution. It is not a corporate board of directors. It is a group of mentors. The group has no financial interest in your firm.
When forming an advisory board, first determine what skill sets you are seeking. You may want to include industry experts if you are expanding in new markets or people who will introduce you to potential investors. Choosing the right people is critical. I recommend that you do not accept any member to an advisory board who is unwilling to sign a nondisclosure agreement and a noncompete agreement.
In many cases advisory boards are “feeders” to boards of directors. They might be expert in technology, sales and marketing, operations or finance. Normally, advisory boards have four to seven members and meet quarterly. Members can serve indefinitely or for a limited term — from two to three years.
Advisory boards provide safe harbors for executives to test-drive or brainstorm ideas before taking them to the board of directors or investors.
Also, advisory boards may be needed, as a practical matter, in certain deal or ownership structures.
For example, investors in limited partnerships may require a voice in business operations but may not wish to lose the benefits of limited liability by participating directly in the management of the business. Advisory boards often are used to avoid that potential risk.
Advisory boards also can help address fiduciary duties and other liability concerns. Corporate boards of directors potentially expose themselves to a variety of legislated liabilities — responsibility for unpaid wages, unpaid taxes, environmental damage, for example — and are subject to fiduciary and other legal duties that can lead to civil or regulatory liability. It is unlikely that advisory board members could be subject to these potential exposures.
While I have heard concerns expressed about potential liabilities of advisory broad members, I am unaware of any situation in which that liability actually has come home to roost. The legislated duties and responsibilities apply only to corporate directors pursuant to applicable entity law.
Choosing among potential advisory board candidates is much more than evaluating their résumés and accomplishments. Strong advisory board candidates are objective and honest and have a genuine interest in helping you and your business succeed. They are good problem solvers and communicators, have diverse skills and are respected in their fields. Strong advisory board candidates are well-connected with networks that might be leveraged to assist you.
I do not believe in cosmetic advisory boards — individuals you post on your website because their résumés are filled with many accomplishments or they have high personal brand recognition.
I often am asked about advisory board compensation. Depending on the stage of the business, compensation can range from providing food for each meeting to covering expenses, providing stock options, making cash payments or a combination of these. Advisory board compensation is a matter of agreement. Because advisory board members have fewer time commitments and no fiduciary responsibilities, they should be paid less than the board of directors.
Note, however, an advisory board member is expected to contribute substantively — and not just paid a fee for showing up or answering e-mails or phone calls from time to time.
Gary Miller is the managing director of the Consulting Division of SDR Ventures, a Denver-based investment banking firm. Gary advises business owners on strategic business planning, M&A, and raising capital. Gary often speaks at conferences on M&A matters. Contact 720-221-9220 or firstname.lastname@example.org.
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