Why choose an advisory board instead of a board of directors?
Directors direct a business and have legal obligations and duties under the Corporations Act and case law. The legal duties include to act in the best interests of the company and to understand the financial condition of the company to ensure that the company is not trading while insolvent. Directors have power and influence over a company. If a person who has not been appointed as a director, has power and influence over a company, they may be seen as a shadow director and therefore have directors’ duties and risk.
When the company is at an early stage, it is primarily directed by the founder(s). The founders are the shareholders, key employees, and often fund the business in the early stage. A key directors’ duty is to ensure that the company does not trade while insolvent. If the founder(s) are financing the company and making spending decisions, then solvency is primarily in their hands.
At this stage, it may be too early to have independent directors. By contrast, advisory boards advise the company and provide an independent view. Advisors are not directors and do not have directors’ duties. The founders and senior team obtain advice then make their own decisions about the business.
How do I select and setup an advisory board?
Advisory board members are experienced people that are willing to assist your business. Who you choose depends on your goals, industry, business needs, skills needs, and ability to access people.
Possible experts include:
- people in the same industry as your business, but with large-corporate rather than startup experience;
- people with skills that your business will need to succeed; and
- people who have successfully grown their own business and/or raised capital.
You seek to build a mutually beneficial relationship. You can approach potential members to see if they are willing to discuss your business. Do they ask insightful questions? Are they are interested in the startup journey? Will they commit to help grow your business? Do you respect them and can they add value. Potential advisors will consider your goals, expertise, commitment, ability to execute on your vision, and whether you listen to and learn from advice.
How do I set up my advisory board? What documents and steps do I need?
It is important to be clear about what the role does and does not involve. Advisors are not directors, and do not have directors’ duties, fiduciary responsibilities or directors’ legal risk.
An advisory board may meet each quarter, or more regularly such as each month or two.
It Is usual to have a couple of key documents to explain the role and help protect your company and the advisors.
Letter of Invitation: This sets out the advisory board goals, who else will be on the board, how often you would like the board to meet, the role and the expectations of the advisors.
Advisory Board Agreement: This protects your company and the advisors and addresses key areas including:
- That members are advisors, not directors. The business, CEO and management team will make their own decisions based on advice given.
- Confidentiality – information about the company, and advisory board discussions, are confidential. This information cannot be used or disclosed except for approved company purposes.
- Intellectual Property – any intellectual property that the advisors create regarding the business, is assigned to and owned by the business.
- Non-compete clauses regarding not competing with the business and a non-poaching clause to help protect your team.
These legal documents should be prepared or reviewed by a business lawyer.
When the advisory board meets, it is common to have an agenda, board papers and minutes:
- The agenda sets out what will be discussed. This depends on the needs of the business at the time. This usually focuses on strategic direction, goals and progress.
- Board papers are documents relevant to the agenda. For example, summary financial information, and a draft pitch deck for review before the company pitches to investors.
- The discussions and conclusions at the advisory board meeting should be summarized in minutes, circulated after the meeting, for a record of conclusions and next steps.
How do I pay my advisory board?
Many potential advisors are willing to meet for a short time on a complimentary basis. This helps both parties test whether you want an advisory relationship.
Many advisory board relationships continue for several years and involve remuneration. A common cost-effective and tax-effective method is to issue equity (shares or options) to your advisory board, under an ATO-startup employee share scheme. The company and recipient can access tax exemptions if the company, recipient and plan meet eligibility criteria including revenue below $50 million, a contractor role, and holding not more than 10% of the company shares.
The options (or shares) should vest over time, so they are ‘earned’ over time. A period of 3 to 4 years is common, to incentivize your advisors.
The quantum depends on the quality of the advisor, less than 1%, to 1%, is a US guide for an early stage venture. This may be more for a high-quality well-known advisor.
If you appoint advisors, select people who will add value and commit to your business. Your advisory board agreement should be clear on the advisors’ duties, and that advisory board members do not have power and influence over the company and cannot give directions or instructions to the directors of the company. This clarifies the role and helps protect your advisory board members from being seen as directors and having director’s liability.
An advisory board can be a considerable asset for you and your business, as you move from launch to growth. An advisory board role can be a great way for corporate executives to give back and share their expertise with a new and growing business. A company can test the contributions of advisory board members, to consider appointing them if the company progresses to appointing independent directors.