Wednesday, February 3, 2010

Critical Considerations for a Startup Advisory Board

By Bob Arciniaga

In developing the content for this article, it was very apparent this advice is not only critical for startups but for most companies. The suggestions are even more vital in a startup environment with constrained resources.

A properly built advisory board can be a huge strategic advantage to any company. On the other hand, an advisory board put together haphazardly can be the biggest mistake for a company in the early stages of business.

What makes a GREAT advisory board experience for both the company and the advisors is a high level of engagement. Advisory boards that do not have a high engagement factor can begin what we call a “death spiral” for a board’s culture. It starts with the advisors not understanding specifically how they are helping the company and leads to board members feeling like they are not adding value.

The company soon realizes advisors that are ineffective and not providing strategic value become more of a hindrance than a help. Meetings begin to get missed, conversations do not happen and preparation for meetings dwindles. Eventually, companies stop talking to advisors.

How do you avoid the advisory board death spiral? You start by building an effective, strategic board. Here are the top five tips to building an advisory board with a high level of engagement:
  1. Take your time. The more time you put into developing your board and selecting the “right” candidates, the more you and your company will gain. The biggest mistake we see companies make is not realizing how much time is necessary to properly build and manage an advisory board before they get started. Budget your time to spend a minimum of at least 100 hours of up-front time building your board and 25 hours per quarter in managing your advisory board to even get the minimum amount of engagement.

  2. Select the right board member. No matter how much time you put into your advisory board, if you have the wrong board members you will not get the optimal level of engagement or help from your advisors. Most startups choose board members for one of the following reasons: (a) big name or business celebrity (b) the company wants to have them as a client (c) they think the person will raise money from them or (d) they have a personal relationship.

    All of these are the completely wrong reasons to invite someone to serve on your board. Why? Could you fire any of these people if they don’t work out? Probably not. Adopt the following rules: don’t put your advisors names on your website, don’t “pitch” them anything (services or investment), and only seek advisors with no personal relationship.

  3. Provide real compensation. One of the biggest myths that startups have is that you do not have to pay advisors, or you can pay them in future-value stock. What is the value of free? Stock is not adequate compensation. Most quality advisors know that chances of a liquidity event are rare.

    We suggest compensating board members in a combination of stock and stipend or bonus based on performance. The stipend should be between $150 and $300 per hour with an equity kicker based on achieving goals.

  4. Define the board structure. Your board is a part of your company and should be a highly formalized process with a solid agreement in place. We strongly recommend you do not copy and paste something you found on the Internet. Every advisor should review agreements with their general counsel.

    Eliminating all liability and providing full indemnification are going to be critical to all corporate counsel before signing off on an executive’s ability to serve on your advisory board. Agreements protect your interests and the advisory board members interests.

    We also recommend a full board charter for every board. Meetings should take place every quarter, with no exceptions. Boards should have at least five members and no more than eight. Meetings should primarily be in person.

  5. Prepare for board meetings. Not everyone is suited to run a board meeting, no matter what the title. Strategic facilitation can be difficult. The biggest mistake we see CEO’s of companies make (no matter what the size) is not being prepared for a conversation with their board members or not properly preparing for a quarterly meeting.
Your board meeting should NOT be a data dump of financials. It should be a high level discussion of ONE issue or ONE opportunity and your options for dealing with that issue or opportunity. You are seeking their ADVICE!

These are the five critical considerations for building an effective advisory board. There are many more, but this gives you a start! Treat your board responsibility with the formality it deserves and always focus on the engagement factor.

Realize there is more that goes into keeping the engagement factor high. The best advice, if you are not ready to wholly commit to a professional, well-managed board – STOP. Only build an advisory board when you are ready to fully engage.

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Today's guest blog is by Bob Arciniaga, Founder of Advisory Board Architects (ABA). Bob is a serial entrepreneur with many years as an Executive Recruiter who now runs ABA to build and manage quality corporate advisory boards. See his regular blog or contact him directly via email.


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6 comments:

  1. I couldn't agree more. We are just recruiting an advisory board for Armvida and believe it will add guidance and insight to specific decisions. Many perspectives always trump a singular attempt.

    Bob Gifford, CEO, Armvida, LLC

    ReplyDelete
  2. Its all about you in this relationships.Be in touch with formal advisors frequently by phone, e-mail and drop in visits and demand that they be responsive.

    ReplyDelete
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  5. Most startups choose board members for one of the following reasons: (a) big name or business celebrity (b) the company wants to have them as a client (c) they think the person will raise money from them or (d) they have a personal relationship.

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  6. We also recommend a full board charter for every board. Meetings should take place every quarter, with no exceptions. Boards should have at least five members and no more than eight. Meetings should primarily be in person.

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