There’s a long list of priorities that comes with getting a business off the ground. Choosing to form a board of directors vs. an advisory board, however, is especially critical as it will impact your start-up for years to come. Here’s the gist:
- A board of directors is an appointed group of individuals that have a fiduciary responsibility to the shareholders.
- Advisory boards are individuals selected by the founder that provide advice in an effort to lead the company to success.
In the most basic terms, a board of directors can command the direction of a business by a majority vote while an advisory board makes suggestions and you can choose to take the advice or leave it. So, which one is best for your business?
Let’s talk about your finances.
By serving as the primary leaders of your business, a board of directors has the ability to make alterations in the team’s management, are tasked with monitoring the CEO’s performance, and make strategic decisions based on their mutual goals for the company. And all of this doesn’t come cheap. In fact, the average board member retainer is $25,000 annually. For a start-up, this can be a little steep.
But don’t despair! An advisory board can be a great alternative and likely the better choice anyway. An advisory board is like a T.J. Maxx– you get designer advice at a fraction of the cost. Opposed to a board of directors, advisory boards are oftentimes asked to serve as mentors free-of-charge, with the potential of earning a small yearly stipend or equity interest in the business.
The legalities
The good news: State law grants some flexibility for start-ups when it comes to developing a board as it’s clearly not a one-size-fits-all. You have to appoint at least one director that is an actual human and not a business entity or trust, but you can also add as many members as you want.
The bad news: Those serving on the board of directors are legally bound to the business and have a liability because of that. You may want to invest in board of director’s liability insurance as a safeguard against possible legal trouble down the road. We know, this means more money out-of-pocket. Additionally, it’s harder to remove a board member once they’ve been appointed so it’s important to take the extra time and effort during the vetting process.
In this case, an advisory board is like a breath of fresh air for a start-up. It gives you a lot of the benefits that a board of directors provides but an advisory board has no actual authority over business decisions. While it’s still valuable to take time carefully selecting members of an advisory board, you’re allowed to ask that they serve for a year and then re-evaluate their position when the time comes. It’s common for start-ups to see a lot of evolvement and growth over time, so it makes sense that members of the advisory board may change as the needs of the business shift.
Are you okay with shifting power?
As the founder of a start-up, you have most, if not all, of the decision-making power regarding your business. From marketing strategies to new hires, all of these decisions favorably fall in your court. By implementing a board of directors, however, this power will shift over time to primarily have all of your decisions being board-controlled. For venture-backed start-ups specifically, the majority of control will transition from you, the founder, to investor-controlled as the business moves upward in growth.
While seeing increased success is a good thing, some founders are uncomfortable knowing the primary decision-making will be called by someone else. Want to hire someone? Not so fast. Need to reallocate the marketing budget? Better be prepared to defend your reasoning. The reality of it all is a board of directors is likely financially motivated, which will guide the business’s overall strategy.
With that said, an advisory board has no vested interest in the company so their advice is naturally free from financial bias. Rather than forcing your hand through a majority vote, they lend you their expertise through thoughtful, curated advice and the decision ultimately lands in your lap.
A built-in advisory board
The truth is, you’re not the first entrepreneur to struggle with this board of directors vs. advisory board decision. And it’s good that you’re taking the time to think things through, as this choice will likely have a major impact on your business. But you don’t need to go it alone. Whenever you’re faced with a question that seems too big to answer as an entrepreneur, we invite you to consider relying on mentumm accelerator for guidance.
mentumm accelerator is a platform built for entrepreneurs and by entrepreneurs to help guide them through their business journey. Basically, mentumm accelerator is a 24/7 available support system and extension of your advisory board that offers a community of fellow founders and experienced executives that can assist with issues, questions, challenges, and even present opportunities. Think Facebook and LinkedIn groups, monthly group calls, weekly workshops, a diverse content library, and your own board of advisors that are dedicated to helping your business be successful. You don’t need to feel like you’re alone on an island as an entrepreneur. And hell, you can even have a lot of fun while doing it.
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Author: Joe Buzzello & Tom Healy
Joe Buzzello & Tom Healy are the Co-Founders of mentumm and have a shared mission to help entrepreneurs grow faster and have a greater impact on the world.