What is the difference between a Board of Advisors and a Board of Directors?

Board of Advisors

You’re probably familiar with the role of a board of directors. The board of directors is established in accordance with state law, and the board members are expected to provide formal advice to the business and have specific oversight and responsibility for the management of various business activities. They may or may not be compensated.

The concept of a board of advisors, however, might be new to you. This blog post will show you how the various roles might interrelate.

What is a Board of Advisors? When and why do you need one?

  • A board of advisors is a group of individuals selected by the business owner to help the owner better manage the business.
  • It usually consists of a small group of business professionals who provide advice on how to make the business more valuable. It may or may not meet regularly, but the advisors often provide one-on-one assistance to the company CEO or owner.
  • A board of advisors is used mostly in startup businesses and businesses that are growing very rapidly on their way towards an exit or an IPO. At these times in the business cycle, the business owner may need help to hire the best employees, raise capital, ramp up sales and marketing, and so on.

How is a Board of Advisors different than a Board of Directors?

  • The board of directors is installed by a formal vote of the shareholders in accordance with the bylaws of the corporation or a special shareholder agreement. The members of the board owe fiduciary duties of care, loyalty, and prudence to the corporation and its shareholders. The management and officers of the corporation report to the board of directors, which oversees them and the company’s operations.
  • A board of advisors usually is formed by informal action. The advisors don’t have the fiduciary duties or potential liabilities inherent in a board of directors. A CEO can handpick who serves, and no shareholder or board of directors’ approval is required. The advisors are governed by contract with the business.
  • A typical board of advisors’ agreement outlines the duties and responsibilities of the advisor and includes confidentiality and non-disclosure provisions designed to protect the trade secrets and intellectual property of the company. The agreement specifies the duties and responsibilities of the advisor and may include a minimum number of hours per month or per quarter that the advisor is expected to provide to the business.
  • Members of a board of directors may receive cash fees as well as equity compensation for their service. Advisors typically are compensated solely by the award of an equity interest in the company, but also may receive cash compensation, particularly if they are rendering specific services to the company. The level of equity will depend on the size of the entity, its capital structure and the individual's background and experience that they're contributing. The equity interest usually requires vesting over time, and may include satisfying performance metrics.

Who should be selected for a Board of Advisors?

  • An advisor may help fill any value gaps in the business. Is expertise needed in finance, accounting, or HR? Is access to capital required? Does the business need technical, scientific, or legal expertise?
  • The ideal advisor also has experience in the specific industry, whether it’s government contracting, real estate, technology, retail, etc.
  • An advisor may be different from a consultant or a mentor. A consultant can be an advisor, but typically the consultant performs single projects of limited duration for cash compensation. A mentor usually acts very informally on an unpaid basis.

How does the business owner find the right advisors for the advisory board?

  • In building a board of advisors, a business owner should start with the people they know, and then use their networks to bring in the right people. We usually advise clients to talk to their attorneys, CPAs, investors, and other professional contacts and advisors.
  • Venture capitalists and private equity firms who've inquired about providing financing may be good sources of advisory board candidates.
  • If the company is considering a sale or other exit strategy, investment bankers and others who’ve successfully exited the industry are great sources of advice.
  • Be sure to screen the candidates and get references from others that have dealt with them in the past. And don't just go for somebody who's got a big name, because they may not have the time, energy or inclination to devote to your company. Availability and avoiding conflicts of interest are key.

For help in creating a board of advisors, please contact us at 571-203-9355 or contact us on the web at zelllaw.com.

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