Thoughts on advisors and directors
Recruiting and managing a strong advisory board and board of directors is one of the more challenging tasks facing an early stage entrepreneur. The benefits can be great. But most first time startup leaders don’t understand this – why it’s important, the value that it can bring, the risks or downside. This blog post is to help in establishing both advisors and directors as your allies. People who can help you grow your business.
Advisors. If you are a first-time entrepreneur, having a strong set of advisors who believe in you is very important. You need to pick advisors who are not all yes-men. You don’t want someone who just nods their head and approves of what you are doing. In my world, I am known as being a supportive but harsh advisor who doesn’t let an entrepreneur get away with their story at face value. I would poke holes in your story, question your assumptions. And you need those types of people. A startup founded by two of my former students recently gave me a great compliment, when the CEO called me up and told me, “Babs, you are the only one who tells us that we are full of shit and doesn’t just say, ‘You guys are doing great!’ I NEED that truth!”
Advisors should provide value by giving the entrepreneur advice based on their experience. The entrepreneur, however, has to decide if s/he wants to follow that advice. And bear in mind that if you have strong advisors you may get strong opinions – and they may be contradictory! But advisors should provide introductions to help the newventurist advance the business. They should also be able to help solve problems and use creative thinking.
Advisors might be considered in particular areas that benefit the startup: technical, business, industry, customer, sales/marketing. A first-time CEO might also want a more personal advisor, like an entrepreneur who has been there, done that. This can also be called a mentor. Such a person can provide honest and confidential feedback and advice to an inexperienced, but willing to listen, CEO.
Advisors might receive a very small amount of equity to compensate them for their service. In my NewVenturist blog I have a post about this called Thoughts on Boards. I suggest something on the order of .25% vested over three to four years. This ensures that you have their attention and that they have some skin in the game.
Directors. An important part of running a startup is learning what a board of directors (called a board of managers if you are an LLC) does. Many startups resist forming a formal board until they have investment. What the board may indeed change upon investment – because investors want to be on the board – that is no reason to put off forming an appropriate early-stage board. If you do this right, you will learn about the role and function of a board, plus how to manage and lead one. This gets the better of many an inexperienced entrepreneur, often too late in the game because they didn’t understand the power of boards. A high percentage of founding CEOs get replaced against their will by their boards.
I call it the Pinocchio effect. If you want to be considered a real company, then you need to look, walk and talk like a real boy – a real company. Strong board members can give you credibility, reach, and great advice when you most need it. Early stage boards can be tremendously helpful in business development, finding customers, funding and all aspects of starting a growing a new venture.
Directors should also be compensated through a small amount of equity. Because of the fiduciary responsibilities associated with being a board director, the amount should be higher than for advisors. In my Thoughts on Boards NewVenturist post, I suggest .5% vested over three to four years.
A couple of important points in forming boards:
- The number of founders on a board should be less than the number of founders. The number of founders on the board will shrink as money is raised. Don’t make this an issue; start with one or two founders. My rule of thumb is that there should only be one inexperienced board member on a board. Maybe two but no more. You don’t want five people on a board and none of them have been on a board before. That’s a recipe for disaster and I have seen that exact scenario kill a startup.
- Who should be on the board? Of the founders, my answer is the CEO and maybe technical lead/inventor. Then you need at least one outsider.
- How many should be on the board? At the early stage I suggest three or five (you should have an odd number of course for voting reasons). If there are two founders, then maybe one outsider. Like advisors, you want outside board members who are supportive but experienced and who bring value to the company.
- Should my lawyer/accountant be on the board? NO! In my experience, your lawyer should be at all board meetings as an observer but not on the board. Your lawyer and other folks like accountants are service providers; you want to be able to fire them if necessary. Also, you should not be charged for these meetings. This is part of their job. If they don’t offer this, negotiate it.