What is a Board of Advisors?
A Board of Advisors is a group composed of local business professionals that provides advice on how a business owner can better manage his company. Because of the informal nature of this type of board, it can be structured in a way that the owner deems it necessary and helpful to his company. Advisors typically receive stock-based compensation, such as Options, and benefit from an increased valuation of the business.
Usually, the Board of Advisors is composed of a legal expert, a financial expert, a Human Resource manager, a marketing advisor, and an accountant to help with the direct manning of the business and provide insights on the various business trends going on in the financial world.
CFI’s Financial Analysis Fundamentals Course will teach you how to interpret the key financial ratios. Earn a certificate when you complete the course.
Board of Advisors vs. Board of Directors
Though both the Board of Advisors and the Board of Directors deal with how a company or business is run, there are a lot of differences between the two, as listed below:
- While the Board of Advisors is informally formed, the Board of Directors, on the other hand, is composed of individuals who have been instated by means of an election, which makes them liable to the organization. They are bound by law as they represent the company and its stockholders, making sure that they create policies and resolve issues related to the business operations.
- While the Board of Advisors is more on providing advice to the owner of the company on various business trends, the job of the Board of Directors is more difficult, and its responsibilities are greater than those of the former. The Board of Directors is more careful with the advice they give because it can have financial ramifications and one wrong move could be detrimental to the company.
- While the Board of Advisors is selected personally by the owner of the company and doesn’t have any voting rights, the Board of Directors is formed by an election and the members may take a vote on issues and in decision-making.
- While the advice of the Board of Advisors may or may not be followed by the owner or CEO, the Board of Directors is more powerful wherein the results of its elections on certain matters will always prevail. It is powerful enough to create changes in the organization and steer the company towards a particular direction, especially that it is the highest governing body of an organization.
- While a Board of Advisors is composed of individuals who are selected for their specific fields of expertise, the Board of Directors may need the input of certain specialists or industry experts in order to help them better understand the situation at hand. It means that they may need the advice of these experts for them to formulate or come up with their own decisions on the matters at hand. The Board of Advisors may also adopt a more hands-on approach and may even join in the implementation of the changes they have agreed upon.
- While a Board of Advisors receives very minimal compensation, the Board of Directors gets a really high pay. The former may only get a free meal during meetings, depending on the size of the business, and rarely receive any special allowances for travel and other purposes. The Board of Directors, on the other hand, receives allowances such as travel allowance and a fee for attending board meetings.
Importance of a Board of Advisors to a Startup or any Business
The bigger a business entity gets, the more attention it needs, and the more issues arise that need to be handled precisely and accurately to ensure its continued growth. As a result, the need for a Board of Advisors becomes stronger for various reasons.
#1 Business development
The pressure to grow a company increases as it gets bigger and getting more minds working on it is definitely an advantage. Creating a Board of Advisors does not only give sound advice on matters regarding the business, but it also helps achieve feedback from end-users of the company’s products and services and introduces the company to possible end-users and clients.
For example, a company that manufactures disposable utensils can hire a board member who used to be a Vice President of a multinational fast-food chain. It is helpful because he may even be able to introduce the company to his former job’s CEO and perhaps help close a deal.
#2 A good backup system
Creating a Board of Advisors that includes names that are popular in their respective industries where they hold a specific role can be beneficial. It attracts the attention of the investor and creates a feeling of confidence and security that such a known individual will actually put its trust in the said company.
How to Put a Board of Advisors Together
Creating a Board of Advisors is a task simpler said than done. However, there are tips to remember that will help business owners put together the kind of board that will bring the company to fruition.
#1 Identify who needs to be part of the board
Members of the Board of Advisors shouldn’t just be those the owners are familiar with. They have to be screened against a certain set of standards such as having relevant experience in the industry where the business operates. It would also be better if he or she has had the experience of doing more than just running a business.
#2 Create a board of no more than five advisors
The ideal number should be between three and five, with five being the most ideal. Putting more than five can turn simple brainstorming sessions into complicated ones, reducing the overall productivity of the board.
#3 Do not include people who will only be making a living out of being a member of the Board of Advisors
Ideally, the members of the board should be working a separate full-time job, but they should also be interested in growing the business. They should also not be immediate family members or relatives whose emotional connection to the business may interfere.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: