SUMMARY
Startups Need A Board Of Advisors Than Directors For Advice And Mentorship
I had a group of ex-students out to the ranch who were puzzling over a dilemma between a Board and a Board of Advisors. They’d been working hard on their startup, were close at finding product/market fit and had been approached by Oren, a potential angel investor. Oren had been investing since he left Google four years ago and was insisting on not only Board seats, but he wanted to be Chairman of the Board. The team wasn’t sure what to do.
I listened for a while as they went back and forth about whether he should be chairman. Then I asked, “Why should he even be on your board at all?” I got looks of confusion and then they said, “We thought all investors get a board seat. At least that’s what Oren told us.”
Uh oh. Red flags just appeared in front of my eyes. I realised it was time for the Board of Directors versus advisors talk.
Roles Of Financial Investors
I pointed out that there are four roles a financial investor can take in your company: a Board member, a Board observer (a non-voting attendee of board meetings,) an Advisory Board member, or no active role. I explained that, as a non-public company, there was no legal requirement for any investor to have a board seat. Period.
That said, professional venture capital firms that lead a Series investment round usually make their investment contingent on a board seat. And it sounded like if successful, their startup was going to need additional funding past an angel round to scale.
In the last few years, it’s become more common for angel investors to ask for a board seat, but I suggested they really want to think hard about whether that’s something they need to do now.
“But how do we get the advice we need? We’re getting to the point that we have lots of questions about strategic choices and relationships. Isn’t that what a board is for? That’s what we learned in business school.”
What’s A Board Seat For?
I realised that while my students had been through the theory it was time for some practice. So I told them, “At the end of the day your board is not your friend. You may like them and they might like you, but they have a fiduciary duty to the shareholders, not the founders. (And they have a fiduciary responsibility to their own limited partners.) That means the board is your boss, and they have an obligation to optimise results for the company. You may be the ex-employees one day if they think you’re holding the company back.”
I let that sink it for a bit and then asked, “How long have you worked with Oren?”
I kind of expected the answer, but still was a bit disappointed. “Well we met him twice, once over coffee and then over lunch.”
“You want to think hard about appointing someone to be your boss just because they’re going to write you what in the scheme of things will be a small check.”
Now they looked really confused. “But we need people with great advice who we can help us with our next moves.”
How The Board Of Advisors Are Different
“Do you know what an advisory board is?” I asked. From the look on their faces, I realised they didn’t so I continued, “A Board of advisors are just like they sound. They provide advice, introductions, investment, and visual theater – (proof that you can attract A+ talent.) An advisor that provides a combination of at least two of these is useful.”
A board of advisors is not a formal legal entity like a board of directors. That means that they can’t fire you or have any control of your company. While some founders like to meet their advisors in quarterly advisory board meetings, most companies don’t really have their advisory board meet as group. You can connect with them with them on an “as needed” basis. While you traditionally compensate advisors by giving them stock, I suggest you ask them to match any grant with an equal investment in the company – so they have “skin in the game.”
Equally important is that a board of advisors is a great farm team for potential outside board members. It allows you to work with them over an extended period of time and see the quality of their advice and how it’s delivered. If they are world-class contributors, when you raise a Series A round and you need to bring in an outside board member, picking someone you’ve worked with on your advisory board is ideal.”
Finally I suggested that Oren’s request to be chairman of a five-person startup seemed to be coming from someone looking to upgrade their resume, not to optimise their startup.
No Outsiders Until Raising Series A
As we wrapped up, I offered that there was no “right answer” between Board versus Board of Advisors (see Brad Feld’s post) but they should think about their board strategy as a balance between the amount of control given to outsiders versus the great advice outsiders can bring. I suggested that if they could pull it off they might want to consider keeping it to the two founders for now, surrounded by great advisors which may include their seed investors. Then when they got a Series A, they’ll probably add one or two professional VCs on the Board with one great advisor as an outside member. As they left they were going through the experienced execs they knew who they were going to take out for coffee.
[This post by Steve Blank first appeared on the official website and has been reproduced with permission.]
