Board of Directors vs Board of Advisors - Which to grant to Investors and Mentors?
Board of Directors vs Board of Advisors - Which to grant to Investors and Mentors?
There's a big difference between giving an investor or advisor a seat on your company's Board of Directors vs appointing them to a Board of Advisors.
Startup investors or advisors often request a "board seat" when they get involved with a new venture. Sometimes this is for sound fiduciary reasons. For example, the person wants to be involved in company strategy and decisions to protect her investment (which is often made on behalf of others they represent).
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However, it's also quite common for a founder to be asked to grant a "board seat" simply for casual interest or even ego reasons. The investor or advisor wants to gain insight, inside knowledge, or even just be able to show friends that she's important enough to merit that role.
How Founders Should Award Board Seats
When faced with such requests, it's important for the founders of the company to clarify first what is being requested.
In my experience casual conversations about "a seat on the board" often overlook the distinction between a company's "Board of Directors" and a less formal "Board of Advisors".
Both offer outside advisors/investors opportunities to help the company at a senior level, often with compensation, but they have very different legal implications for the company's governance and for the CEO's interaction with those advisors.
Board of Directors
A corporate Board of Directors is a formal and important legal structure. The members of such a board effectively act as the "boss" of the company's CEO and team, overseeing everything the company does. Corporate board seats are important and powerful because they are limited in number. Their votes on significant company matters can determine a company's growth strategies, hiring/firing policies (including the CEO's tenure), and financial decisions.
Board of Advisors (or Advisory Board)
A Board of Advisors is less formal. It is not generally a recognized voting part of a company's management structure. Instead, it is a collection of individuals who have agreed to advise the company based on their own expertise in different areas that can help the startup grow (e.g., sales, engineering, financing, introductions, etc.).
Advisors like this often play the role of mentor to the company's founders and leadership team. Their expertise and connections can be invaluable in helping a small team have a larger impact or move faster thanks to the advisors' pre-existing relationships with customers, introductions to capital sources, or strategy ideas.
Most importantly, Advisory Board members do not usually have any voting rights or official participation in the governance of the company.
Board of Directors vs Board of Advisors - The Great Compromise
In most cases it's wise for a startup to limit the number of Board of Directors members it has. These powerful BOD "seats" have voting power over the entire company's operations and strategy. The CEO actually reports to them, too, so they should be closely guarded. In the early stages of a company's growth, directorships are usually limited to a founder or two and the largest cash investors in the company.
But a Board of Advisors offers a lot more flexibility. Because there are not such legal ramifications (or potential liability) from participating in an Advisory Board, startup founders can share more of this type of "board seat".
It's not uncommon for a startup to have Advisory Board members across multiple disciplines (finance, sales, legal, engineering, product development, design, etc.). Startups sometimes even have multiple Advisors from the same industry or expertise if that area is critical to the company's growth.
Too many advisors quickly gets unwieldy but 3-6 Advisory Board members is quite common and can be very helpful to accelerating a startup's growth.
See also our post "How much equity to grant to Startup Advisors". Read it for guidance on how much stock is right for awarding to your company's advisors and mentors.
- use post as H2bae book chapter too