Board of Directors and Board of Advisors: What’s the Difference?
Frank Founder: “I just met Sam, a really well respected, seasoned industry expert. She would be a perfect addition to join our new company, Rocket Corp. Can I add her to my board of directors?”
In truth, Frank could add Sam to his board of directors, but it’s probably not what he really needs (and likely not what she wants either). Typically, founders like Frank are looking for respected industry experts to join their Board of Advisors, not the Board of Directors.
Back to the Drawing Board
Let’s go back to Board 101. Default corporate law works as follows: the stockholders elect the board, the board appoints the officers (like CEO, President, CFO, etc.) and the officers run the company. Day to day operations are handled by the officers, key decisions are made by the Board (like selling stock, taking a substantial loan or entering a key partnership) and a few critical decisions require the approval of stockholders: selling the company, naming directors.
Board of Directors vs. Board of Advisors
Under Delaware law (and most other corporate law) the Board is the gatekeeper of the Company when it comes to corporate governance. Board members are required to act on behalf of the Company’s stockholders and not out of self-interest, adhering to specific duties called “fiduciary duties.” For this reason, serving as a board member is one of a very few instances (outside of fraud and criminal activity) where an individual can be held personally liable for their actions taken on behalf of a startup.
A Board of Advisors, on the other hand, is not a fundamental corporate legal concept, but rather a startup company invention to label as a “Board” a group of light-touch consultants who have formally agreed to support a company through guidance and input. Usually, advisors are well respected in the industry, have a specific area of expertise or are well-known figures. Having them on the “team” can lend credibility and/or visibility to a young company. A board of advisors has no real decision-making power over the operations of the company, and other than by convincing management is not able to direct the company.
How Does a Board of Advisors Operate?
Different companies use advisors differently: some do nothing more than post advisors’ pictures on the company website while others hold formal recurring monthly or quarterly board-style meetings where management presents company progress, financials, etc. In this case, the process looks just like a real board, but there is no binding voting power among the advisors. Other companies will call upon their advisors ad-hoc when they need a specific type of advice.
How are Startup Board Members Compensated?
Board of Directors Compensation – for members of the board of directors who are in that role because of stock ownership, whether as a founder or as a director appointed by an investor, there is typically no compensation other than expense reimbursement to attend meetings. Once a company takes outside investment, it is not unusual to include one or more “independent directors” who are not affiliated with the Company or any investor. As may be expected, these directors often expect compensation of some sort. More established companies will often compensate independent directors with a per-meeting or annual fee, while earlier stage companies often grant equity (most typically .5-1% for an expected 2-year term).
Board of Advisors Compensation – with some exceptions, early-stage companies bringing in advisors will typically offer equity as the only incentive to be on the board of advisors. The standard range for an advisor is .25-.5% of the company, however, in some circumstances, such as very early companies, particularly high profile advisors or highly involved advisors, a larger equity grant may be reasonable.
Every corporation needs a board of directors (even if it’s just the founder) and the number of directors (never an even number) and composition of the board are very important to running the business. A board of advisors, on the other hand, is optional and technically powerless, but can be a great tool to bring highly qualified voices into the company and add legitimacy and visibility to a company.