Advisory Boards – Why You Need One and How to Start

by | January 5, 2010

Rarely does a day go by as an entrepreneur where no advice is required, obtained or given. In day-to-day operations, we struggle with the right decisions for employees, for customers, for ourselves. To help along the way, we use advisors. Some are family and required to listen to our questions, stories and rants. Others are professional service providers who are paid to listen to our questions, stories and rants. Finally, we have our advisors who often are colleagues, industry experts, or other knowledgeable resources who offer their time at no charge. Each group provides a business owner with a different and valuable perspective on the issues faced and the business owner then pulls together these perspectives to help in planning or in managing a particular problem in the business. Every business has these advisors; and every business owner uses them, to a greater or lesser extent, as go-to people to advise on key decisions. Rarely, though, are the advisors brought together as a group to offer their insights.

An Advisory Board offers the business owner the opportunity to gather insights from multiple perspectives all at one time. An Advisory Board takes the adage “Two heads are better than one” and multiples the effect, not only bringing multiple brains to the table but also bringing varied education and experience to the table. The discussion generated by the advisory group brings forth ideas that the entrepreneur could not fathom in one-on-one discussions with each advisor. In addition, one longer meeting with the group is a more efficient use of the entrepreneur’s time than one-on-one discussions with each advisor – and we all know that “Time is money.”

No one really needs to be convinced that this is a good idea. The question really is: “How do I do it?” There are three key steps to setting up an Advisory Board: Selecting the members, compensating the members, and managing the meetings.

In selecting the members, business owners must consider what their goals are – both company goals and goals of the Advisory Board. The expertise of the Advisory Board members should align with the business’ needs. It is important for the group to include the professional advisors the business owners rely on to plan and execute their business strategy and tactics (i.e. CPA, business coach, lawyer and financial planner). The business owner may have to pay these professionals to attend but having a professional team knowledgeable about the business’ plans will save money in the long run. In addition to the hired professionals, the Advisory Board should include one or more industry experts, individuals who have deep insight as to how the business operates. Sometimes, personal advisors, such as a spouse, are important to include as well.

Compensation of Advisory Board members varies based on the size of the company and the interests of the board members. Many young companies have advisors that are personally vested in the success of the business and are willing to serve free of charge. More sophisticated advisors who are involved based on their interest in the business’ financial success may require financial compensation in the form of cash, equity or options to participate in future funding or exit transactions. Anytime a company is seeking to offer equity or options to an advisor, though, the company may be required to treat the advisor as a passive investor and comply with federal and state securities laws.

Advisory Board meetings must be carefully planned and managed to ensure the goals of the meeting are met and the topics are relevant to the business’ needs. A facilitator, usually the business owner or another member of the business, should manage time and ensure the board remains on track. Often, a business wants to focus a meeting on a particular need, such as increasing sales, and a guest may be brought in to shed light on the topic for the business. At least one meeting per year should focus on strategic planning. In addition, the business owner should ensure what is said amongst the group remains confidential and proprietary to the business through a signed non-disclosure agreement.

As you can see, the process of forming an Advisory Board is not difficult. Business owners must be thoughtful in how the board is formed and managed.