Board of Directors and/or Board of Advisors

By: Janis Machala, Paladin Partners, janism@paladinpartners.com

Since this newsletter goes to angels and entrepreneurs I thought it would be interesting to discuss start-up boards. Who should be on a board of directors? Is an advisory board a good thing?  How to use advisors effectively? I’m sharing a great piece by Steve Blank (who also has a link in his piece from Brad Feld).

People often tell me they are advising several companies but when I ask what they’re doing as part of this role it’s usually coffee once and a while with the founders.  That’s expensive equity and cost of coffee for founders. I also know from recruiting board members for the board of directors and advisory board members that every one of those individuals needs to be led and not left to figure out how to be useful. Also, don’t recruit so many advisors that you can’t possible use them to maximum effect. More advisory board names in your executive summary or on your website is not growing your value as a company or adding to your legitimacy as an inexperienced team.

I often recommend an advisory board to founders: 1) it’s great practice for learning how to lead senior executives; 2) it’s a great try out for potential board of director candidates; 3) leading an advisory board is great at preparing the CEO to chair a board of directors; 4) reaching the right industry players who can open doors to the C-Suite for B2B companies is a valuable use of a modest amount of equity; and 5) your advisory board is there for the CEO/Founders while the board of directors is there for the company (big distinction).

I’m in Brad Feld’s camp about building your board early. As soon as you take in any outside investment it’s good business practice to have outsider(s) on your board. It prepares the founder(s) in leading a board before the “big gun VCs” join the board at your venture financing stage. The outsider(s) have hopefully been a CEO and lived in your shoes. Just because someone writes a check to invest as an angel or a seed VC does not automatically provide a right to a board seat. Boards where founders are 2-3 of the board seats, a waste of critical founder talent on the wrong things. The CEO should be on the board but there’s little value to other founders being on the BofD since their equity ownership will provide sway on critical issues such as financing terms, addition of shares, hiring/firing CEO, etc. It is typical that the other founders who want to be on the board think it’s a big deal but that’s their egos talking.

I am often surprised at how little thought goes into board of directors and advisory board composition. The people you keep company with in these roles can add enormous value to your company or be a “pain in the you know what” if they are not a cultural or capabilities fit. Treat each of these roles and recruits with the same care you use to pick your cofounder or your executive team members.