Advisory boards

In most startups, the board of directors will be small and made up almost entirely of the founders and investor representatives. If a startup needs guidance from seasoned outside advisors, but is not ready for independent directors, an advisory board can be a good middle ground.

What does an advisory board do?

An advisory board provides advice and guidance, but does not have any decision-making power or management duties. Advisory boards can help founders develop closer ties with potential future board members, customers, industry contacts and other valuable advisors, without giving up control over the business. An advisory board not only offers management and the board of directors a different perspective but, depending on the advisors’ stature and reputation, can also add credibility.

The mandate of an advisory board can be tailored to the specific circumstances and needs of the business. For example, a startup may establish a general advisory board that provides a source of financial, technical and marketing expertise. Or, there can be a series of advisory boards with a narrower focus, such as marketing or research and development.

What liabilities and obligations are relevant for advisory boards?

The absence of decision-making power and management duties makes advisory boards attractive to those who want to play a role in the business but don’t want to take on personal liabilities as a director or officer. This makes advisory boards a good option for new and early-stage businesses that don’t have directors’ and officers’ liability insurance. Take care however that the advisory board does not overstep its bounds and take an active role in management. Statutory or non-statutory liabilities can be imposed on members of the advisory board who are seen to be exercising decision making powers and actively managing the corporation’s business.

In the absence of fiduciary duties imposed by corporate law on directors and officers, members of an advisory board should be expected to sign a confidentiality agreement with the corporation in order to more fully protect the corporation. If the advisor is also contributing to the corporation’s IP, then this agreement should also include an assignment of inventions.

How can a company effectively work with an advisory board?

It is important to consider the time required to recruit and maintain a constructive working relationship with advisory board members. Directors and management must be committed to listening to the advisory board and must also provide members with the information necessary to be able to give meaningful advice. While having an influential group of individuals on the corporation’s advisory board can add prestige and value, failure to consistently consult and inform the advisory board can harm the credibility of the management team in the eyes of its advisory board members and those they influence.

How are advisors compensated?

Different forms of compensation work for different advisors. While the most obvious form of compensation is cash, for most startups cash is in short supply. Cash is also not the motivating factor for many advisory board members. Instead, advisors are often motivated by interest in the business, networking opportunities, or evaluating the company for future investment. Where advisors do expect compensation, consider issuing stock or stock options rather than paying cash.

Questions? Email us at startups@dentons.com.