Tuesday, June 5, 2012

Advisory Boards: An Underutilized Entrepreneurial Weapon

Not to generalize (okay maybe just a little bit), but the entrepreneurs I know can be a pretty headstrong and opinionated bunch. Maybe this is part of the reason I don’t know many who have engaged an advisory board to help them develop and grow their businesses. While I’m not an entrepreneur myself (still waiting for that million dollar idea), advisory boards can add a lot of potential value for a new company.

An advisory board is similar in some ways to a corporate board of directors, but without the legal risks; there is also often less formality around them, too. The role of a corporate board of directors is to act as a fiduciary for the corporation’s shareholders and to oversee the executive officers of the corporation. An advisory board typically does not hold any official corporate power (or liability) and literally functions only in an advisory capacity. To be clear, an advisory board does not replace a board of directors, it’s just another tool in an entrepreneur’s arsenal of expertise.

Entrepreneurs, like everyone else, can use an occasional reminder of their own strengths and weaknesses. None of us are experts in everything. I have often observed that some of the most successful people are those who are not afraid to admit this and to ask for help in areas in which they may not excel.

You should consider an advisory board as an opportunity to augment the skills, networks, and relationships that you already have and seek advisory board members who have specific skills (e.g., finance, marketing, operations, or human resources) that are otherwise lacking in your business. Also, consider the professional connections that advisory board members may be able to bring to your businesses.

Creating a formal advisory board, rather than a loose set of advisors, can have other benefits. Being part of an advisory board tends to help an individual feel more invested in the success of the business. This could lead to additional sources of financing, contacts for potential customers or suppliers, or simply the benefit of lessons learned by another business owner.

It may be easier to attract quality people to serve on your advisory board than on a board of directors, because they do not have the same fiduciary obligations (and liability exposure) as members of a board of directors. Using an advisory board, you can tap into complementary skills and experience of members, without subjecting the individuals to the same level of risk or the same expected time commitment. Also, never underestimate the appeal to a person’s ego when they are asked to serve as an “expert.”

You’ll need to decide whether and what to compensate members of your advisory board. Many entrepreneurs do not provide more than a lively conversation with some adult beverages and food. Others do provide some sort of compensation, although usually stock options (rather than cash) to align interests in creating value. If a potential advisory board member is more concerned about the compensatory arrangement than how he or she can add value, you may be talking with the wrong person.

There is no one-size-fits-all recipe for an ideal advisory board. Still, an advisory board that has clear expectations as to its role and operating procedures is likely to provide more value to the business owner. When forming an advisory board, an entrepreneur should consider other issues such as: (1) whether the advisory board should have regularly scheduled meetings, or just be convened as particular questions arise; (2) what would be a reasonable time commitment to expect from advisory board members; and (3) whether there are current specific challenges in the business that the advisory board is expected to help solve. Communicating these expectations to your prospective advisory board members will help them take their role seriously and help you get the most value out of their generous support.

A Post by Alyssa Hirschfeld, Guest Blogger

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