The Colorado Springs Business Journal
By Gary Miller – Managing Director, Consulting Division, SDR Ventures
Rarely can business owners build great companies alone. Whether it’s a startup or an established business, having access to high-quality advice increases an organization’s odds of success. Owners seeking advice can obtain it from 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 advice about marketing, product development, operations or manufacturing. It can help identify acquisitions or potential buyers for the company. Typically, business owners seek experts in technology, sales and marketing, operations and the financial services industry. Thinking carefully about an advisory board’s role and composition will maximize its contribution to the organization’s success.
An advisory board is an informal group. It is not a corporate board of directors. It is a group of mentors. The group has no financial interest in the firm. It is a group of outside advisers/experts who share their knowledge to help you be more competitive, help you think strategically and offer specific advice.
When forming an advisory board, first determine what skill sets you are seeking. Think about including people who can 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 noncompete agreements.
Normally, advisory boards have from four to seven members, meet quarterly and can serve either indefinitely or for a limited term.
Advisory boards provide safe harbors for executives to help refine ideas before taking them to the board of directors or potential investors. Also, advisory boards may be needed 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 in the management of the business directly. Advisory boards are used frequently to avoid that potential risk.
Advisory boards 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, etc.) and are subject to fiduciary and other legal duties that can lead to civil liabilities.
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 board members, I am unaware of any situation in which that liability actually has come home to roost. The legislated duties and responsibilities only apply to corporate directors pursuant to applicable entity law.
Accordingly, qualified individuals who may not be prepared to assume board of director responsibilities might well be encouraged to assist business owners as advisory board members.
Choosing advisory board members should cover more than merely evaluating their resumes and accomplishments. Strong advisory board candidates are objective and honest. They have knowledge and expertise outside your skill sets and have a genuine interest in helping you and your business succeed.
They are good problem-solvers, communicators, have diverse skills and are well-respected in their respective 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. These are individuals you post on your website because their resumés are filled with many accomplishments or they have high personal brand recognition. More often than not, they do little to genuinely give their time or expertise necessary for you to be mentored by them.
I am often asked about advisory board compensation. Depending on the stage of the business (startup to mature), I believe the compensation can range from providing food for each meeting and covering expenses to providing stock options or making cash payments — or a combination of these. Advisory board compensation is a matter of agreement. Since 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 email/phone from time to time.
Gary Miller, managing director of the consulting division for SDR Ventures Inc., can be reached at firstname.lastname@example.org.