Start-ups can use all the sound advice they can get, especially if they can get it for free. One source of “free” advice is an advisory board made up of people who can add value to your business.
In fact, advisory boards do not exist just to give advice. Advisory boards can make introductions to potential investors, identify employee candidates, help locate and negotiate strategic partnerships, introduce the business to important market segments, and provide insight into product or service development.
But before getting into the details of whether your business needs or wants a board of advisors, it is important to understand what a board of advisors is not. A board of advisors is not an organization's board of directors or managers. A board of directors or managers exists by virtue of a statute or governing corporate agreements and has legally imposed duties and potential liabilities. The individuals who serve as board members or LLC managers also receive special state-specific statutory indemnification rights to offset those legally imposed responsibilities.
The individuals who make up the board of advisors are also typically not employees. The employment relationship has its own very well developed legal paradigm that, at its core, requires the entity to control and direct how the employee serves the enterprise. A board of advisors needs to operate independently to be effective. Employees, by the nature of their relationship, do not (and cannot) operate independently from the entity that employs them.
A board of advisors has no special legal role nor does it have any statutory legal liabilities. Instead it often operates as a sometimes loose affiliate of mentors whose expertise is sought by a company. So why does your business need one?
Functionally and legally, a board of advisors is not a necessity. But assembling your business mentors into a single, organized, well defined operation can be beneficial to your mission. Because the advisors are not employees, they are not beholden to the organization as a group of "yes" men and women. They can (and do) say no and have no reason to filter their opinions. And because they have no legal obligations – such as the duty to exercise sound business judgment when called for before making important corporate decisions – they are free from the construct of potential liability or achieving a return to investors which ultimately may inform some decisionmaking. They truly are independent.
A board of advisors may also lend credibility to the enterprise, particularly if the members are well respected in their industries. In addition to lending their names and reputations to the business, advisory members can provide real value to your business by offering unbiased and informed opinions regarding how best to make your business succeed. If you decide to go the organized route, the worst thing you can do is take the time to form an advisory board, and not have the rigor of scheduled meetings, tasks and follow through. Merely listing an industry expert as being affiliated with your business but being unable to point to the continual specific value and contributions depletes the value of the advisory board. So if you organize it, use it.
What is the best way to compensate advisors? Businesses must pay employees or run afoul of federal and state wage laws. And boards of directors may (and almost always do) receive stipends, board fees or equity as an incident to their service (and as an inducement to take on legal exposure). Compensating advisory board members through equity would seem to be the best approach; paying cash is not recommended as it could potentially blur the employment line. And it is perfectly legal not to compensate an advisory board member at all.
Finally, one of the benefits of having an advisory board is to take full advantage of industry developments, technological changes, and differing points of view. Providing set periods of time for service can help promote the right balance of diversity of thought and personality. Ideally a term of one year, and a written document outlining the terms of service (and compensation) is a best practice. It also facilitates the easy removal of an individual who from the perspective of the business is no longer adding value in the advisory role.