Equinox Blog & Legal Updates

Advisory Boards – wrap up

January 28, 2010

Our Advisory Board panel on the 20th offered great perspectives from our panelists, moderator, and audience members. Below are a few take-aways I found interesting:

1. Size of board. Our moderator, Corey Hansen, author of Best Practices of the High Performance Entrepreneur, asked the question: “What is the right size for an Advisory Board?” The responses from the panel ranged from 3 to 10. Ultimately, we agreed that the size, in some ways, is driven by the purpose of the Advisory Board. If the purpose is to make connections for the company, maybe it’s a little bigger to help develop a network of folks who can connect the company with the right vendors, customers, investors, and other business alliances. If the purpose is to offer counsel to a company, smaller is usually better to drive ideas to solutions.

2. Who should you ask? The company should look for advisors that have “been there, done that.” The best advisors have either directly participated in the growth of similar businesses or advised numerous businesses. They should bring expertise as well as connections to the company.

3. Respecting advisor’s time. A key concern for entrepreneurs is how much time and advice to expect from an advisor. It is critical to set expectations up front in a written agreement. Generally, a quarterly Advisory Board meeting that may last up to 4 hours plus counsel in preparation for the meeting and between meetings on an as-needed basis. Something to remember, though, is that the advisor said “yes” to helping you. Do not be timid in asking for their help when you need it. That being said, be sure you’re prepared with relevant questions for the advisor when you meet, making the advisor feel valued and valuable. In a similar vein, ensure that your Advisory Board meetings are well planned and organized wiht a clear agenda. This demonstrates to your Advisory Board that you mean business and respect their generosity in being their to support your growing business.

4. Should professionals be included? An excellent question with a mixed response from the group. If your paid professionals are not on your Advisory Board, they should be in the loop as to what’s going on. As one audience member stated, “If we come to a decision in the meeting and I later take it to my attorney/accoutnant/etc. and they then bring up all kinds of other issues we hadn’t thought of, we’ve wasted a bunch of time.” Agreed. You should review the agenda for the meeting with the professionals and get their perspective or ask the professionals to participate only for specifica portions of the meeting where their expertise is needed. The common concern in including professionals is that they typically require payment for their time – this is often the case but in some situations, they are willing to waive or discount those fees for you. Your success is good for them, too! It doesn’t hurt to ask.

5. Positioning of opportunity. Many smaller businesses have a difficult time asking potential advisors to participate in a formal Advisory Board because they view their company as too small or not important enough for the advisor to commit time to. Rather than positioning the company as a small business, position the opportunity based on your vision. The fact that you’re assembling an Advisory Board demonstrates that you’re interested in growth. Tell them why you love the business and why it will be successful — they’ll say “yes” if they buy in!

6. Compensation to board. A major question raised was how to compensate board members when the company has little cash. Frequently, the advisory board members are not there to be paid. They are there because they buy into your vision and want to see you succeed or want to partipicate financially in your future success. The cash now is not usually important. You can buy lunch for the board and thank them which is often enough for some. Others may want an agreement that they can particpate in a future round of financing or upon a sale of the business. When dealing with selling or promising an equity interest in the company, you must be careful to comply with the securities laws — this is why equity compensation is often not practical unless the company is raising money anyway. Remember, too, that not all advisors must be compensated equally!

7. Term of board. How long should an advisor commit to membership on your board? One year is probably the right timeframe. You want the ability to remove an advisor who is not providing value or does not mesh with the other board members. You also may need to change the makeup of the board as the business grows and changes.

8. Protecting IP. A written agreement with the advisors is critical to setting expectations and protecting the company’s interests. The agreement should include a non-disclosure/confidentiality agreement and a non-compete and non-solicitation provision as well if applicable. There are instances where experts from similar or competing companies may be valuable to an Advisory Board. In those cases, the company must think through the risks of having a competing expert involved and how best to protect the company’s intellectual property.

I want to thank the panelists and the audience for raising so many interesting points — I think we all added a few new bits of knowledge on Advisory Boards for our future use!

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