Guidance to Governance
The Evolution and Types of Startup Boards
Happy Thursday, 👋
Entrepreneurs frequently ask us two key questions: when to establish an advisory board and how it differs from a board of directors. Each plays a unique yet complementary role in a company's development. As businesses grow, it's common to have both, though one may be more crucial during the early stages.
The Purpose of Boards
Advisory boards and boards of directors serve distinct purposes within a company. An advisory board typically consists of industry experts who provide advice and guidance to the management team without having legal governance or decision-making authority. Members often bring specialized skills, such as project management or financial expertise, and are usually compensated with equity for their contributions.
In contrast, a board of directors acts as the company's governing body, overseeing management and holding legal and fiduciary responsibilities. This board approves significant decisions and ensures compliance with laws and regulations. Members are often appointed by investors once the company raises significant external capital and receive compensation in both cash and equity due to their structured meeting schedules and greater responsibilities.
Early-Stage Impacts
Both boards significantly impact early-stage companies. Advisory boards are instrumental from a company's inception, providing targeted advice and support to establish a solid foundation for the team. Their influence is most pronounced in the early days, guiding the company's initial direction.
As a company attracts larger, third-party investors, corporate governance becomes crucial. Institutional investors may seek board representation or assist in forming a board to provide more structured organizational support.
Potential Mistakes
A common oversight for startups is the absence of any board. Creating an advisory board early on grants access to expert advice and can prevent critical mistakes, while also lending credibility to the new venture. It also becomes an ideal way to keep a founder or team moving forward and sticking to a schedule. Regularly scheduled meetings with several advisors become an important catalyst to maintain team motivation and progress.
However, startups must be cautious. An advisory board filled with high-profile individuals or celebrities who lack genuine engagement or understanding of the company can detract from its credibility. Our due diligence often reveals such mismatches, as we do call advisors to ask about a company. Sometimes we find advisors who are unaware they are listed in a company presentation, so be careful to choose those who actively contribute to the company rather than serve merely as figureheads.
Additional Thoughts
A common reason it’s difficult for founders to establish an advisory board is fear. Failing by ourselves is easy, but failing in front of others is difficult. Failing in front of a group of peers or industry experts often causes founders to delay building an advisory board. The right advisors help teams embrace failure as a learning opportunity, but it still requires allowing others to witness these challenges.
Boards are invaluable to startups. Advisory boards fill strategic gaps and assist in defining early strategies, while a board of directors provides governance and legal guardrails as the company expands. Selecting the right members for either board is crucial to building a successful company.
Wishing everyone a great weekend,
-The Caymont Ventures Team.