How to Create an Advisory Board for Your Business

by Don Smith

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If you look at any major public company in the world, you'll notice one common thread. They ALL have a board of directors or an advisory board. Most have one board of directors and multiple advisory boards.

The majority of companies start with a single person or a few individuals, the founders. These are the people who came up with the idea and started running with it. Some businesses will never grow past a single-person operation, while others move on and start hiring employees and growing.

Rarely do companies grow very large without outside help. Eventually, most owners realize the wisdom and return on investment potential in seeking outside guidance, and hire an advisory board or a board of directors.

Board of Directors or Advisory Board?

It may be helpful when considering hiring board members to understand the difference between an advisory board and a board of directors.

What is an Advisory Board?

An advisory board is a body that provides non-binding strategic advice to the management of a corporation, organization, or foundation. The informal nature of an advisory board gives greater flexibility in structure and management compared to the board of directors.

Advisory Board
Advisory Boards are Less Formal & More Flexible

Unlike the board of directors, the advisory board does NOT have authority to vote on corporate matters or bear legal fiduciary responsibilities. Many new or small businesses choose to have advisory boards in order to benefit from the knowledge of others, without the expense or formality of the board of directors.

What is a Board of Directors?

A board of directors (B of D) is a group of individuals elected to represent shareholders. A board’s mandate is to establish policies for corporate management and oversight, making decisions on major company issues. Every public company must have a board of directors. Some private and nonprofit organizations also have a board of directors, especially if they have accepted outside funding.

Which One Should You Choose?

If you have several major shareholders, you may not have a choice, you may be forced to create a Board of Directors because they will want to protect and grow their investment. Keep in mind though that a board of directors has the ability to make binding decisions on behalf of all of the shareholders, often including the ability to replace the CEO.

If you are the sole owner and CEO, it probably makes more sense to hire an advisory board. Advisory boards do not have any legal rights to make final decisions or fiduciary requirements, it is solely for advisement purposes. As the CEO, final decisions still rest in your hands.

Making the Choice - Advisory Board or Board of Directors
Use an Advisory Board Unless You Have Other Major Shareholders

How to Select Advisory Board Members

1. Identify the Goal

Identify the goal of the board before selecting members. What do you want help with from your board? Most of the time, advisory boards are there to help you grow your business, but if you are in a heavily regulated industry, you may also want to have an attorney on hand to help you with policy decisions.

Write it down and be prepared to share your goal with potential board members. This can also help with clarifying who you should add to the list of potential members.

2. Identify the Meeting Frequency

How often will you meet? Weekly, monthly, or quarterly? I recommend meeting weekly in the beginning as the board gets established and then back off to monthly or quarterly meetings. The majority of new ideas are likely to come during that first handful of meetings, which leads us to the next point.

3. Identify the Term

You should routinely cycle out members on your advisory council to keep getting new ideas and keep the accountability and energy high. How long will a term be? Two to four years is typical from what I've seen.

It's best to keep a mix of experienced and inexperienced members, so you may want to do something like set a maximum three year term limit, hire two members the first year, two the second, and two more the third. Then as the terms begin expiring, bring in two new people each year.

4. Compensation

High powered board members often command a hefty fee. For example, Twenty-First Century Fox reportedly paid a total of $25.57 million to its board of directors, with the average director making $2.58 million. A board is an investment, and the better talent you can recruit, the better your return is likely to be, which is why companies like that pay so much.

For most small business owners, that figure is jaw-dropping and not practical. The good news is that you won't have to pay that much to get someone who can help you grow when you aren't yet a multi-billion dollar company.

You don't need to hire the CEO of Disney or a celebrity like Tony Robbins to be on your board for it to be useful. You may want to skip hiring your brother who works for coffee and donuts unless he's also a highly successful business owner, though.

Skip the fortune 500 CEO for an advisory board
You Don't Need a Fortune 500 CEO on Your Advisory Board

Offer too much, and you're taking away from your business. Offer too little, and you run the risk of not getting top talent.

Ultimately, there is no one size fits all compensation plan for a board member. You will have to determine what it is worth to you, and plan accordingly. Ask yourself this question. How much would you get back if your bottom line grew by 20, 30, or 50% next year as a result of hiring an advisory board?

Keep in mind that it is often better to get just one or two heavy hitters than it is to hire five or six mediocre ones.

Sometimes stock options of up to 1% are offered as an added incentive, or in lieu of cash compensation. If you're just getting started with minimal revenue, though, it is likely to be challenging to find good board members who will take only stock options or work for free.

According to Inc.com, a rough rule of thumb is to pay advisory board members about as much as you do your corporate directors, perhaps a bit less. Susan Stautberg, head of the Partner.com advisory board service in New York, sees payments ranging from “about $25,000 per year at big banks to $1,000 per meeting and stock options at young firms.” The average seems to be $1,000 to $4,000 per meeting, plus expenses, for an average of four sessions a year.

5. Recruiting New Members

Searching for advisory board members

Now that you have the basics in place, it's time to go looking for members. You and any major investors should be part of the board for starters.

You don't always have to look far to find good board members. Maybe you know some retired highlevel managers or business owners who would be willing to help.

It is helpful to have board members from a cross-section of industries with different skill-sets. You probably don't want your biggest competitor in town on your board, but if you can find someone in your industry in another area of the country that might work.

For example, I've sat on advisory boards to help advise owners on marketing, leadership, management, and technical issues due to the decades of management experience I've racked up in the IT world. I sat on a Board of Directors at a bank one time even though I knew little about the industry. They wanted me there because of my experience as a small business owner, which is who their biggest customers are. You're looking for guys like me, and people who look like your customers.

Maybe you follow some people online who are killing it in business that you want to invite to your team. I've been hired to participate in multiple online advisory boards, and those work well to keep down the cost by eliminating expenses such as travel, meals, and lodging. Your attorney and accountant might be useful to add to the group on occasion to address specific issues that come up.

Interview a Few People

Talk to a few people, and feel them out. Conduct informal interviews. Keep in mind that you don't want yes people on your board or those who have never ran a business, you want people who will challenge your ideas and keep you moving forward.

Cover Your Assets

Regardless of what board you select, be sure to have members at least sign a non-disclosure agreement and write out the details of their compensation and term. You'll be sharing a lot of confidential information, so this is basic protection you should always have in place.

Good luck on your search, hope this helps!

About the Author 

Don Smith

Happily married with five kids, Smith owns a technology company, is the founder of this site, has served on the board of directors for multiple companies, and loves playing soccer, hiking, and mentoring.

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