A problem I have been seeing very often of late (more now when I meet many start-ups as mentor/ advisor, than when I ran my own) is – when should I appoint a Board? How many people? What should I offer them? Will they be interested? I thought time (after a big gap) to write another “start-up” series post, which answers the following questions:
a) What is the difference between Board of Governors/ Directors and Advisory Board; more importantly – when do I apooint one vs. the other
b) In general, at what stage of my start-up do I appoint one
c) Why/ what are the benefits of appointing one
d) What is a good number of people to have in the board
e) What do I have to offer them as compensation.
f) In return, what do I expect from them? How often do I contact them? Can I formalise this receivable?
g) How do the answers for the above change if my start-up is product vs. services vs. Non profit? Or if it is Indian vs. not? or if it is a Lifestyle business that I want to build to scale, vs. one I want to get valuation for, and exit sooner rather than later.
I have to confess, since I am by no means an expert, I ran a small survey amongst current and past entrepreneurs who have run various start-up organisations all over the world. It was a diverse group, though not necessarily statistically significant. I will include findings from that survey as we go along – disclaimer – use those findings as anecdotal only :)
Board of Directors vs. Advisors:
This is a great article defining the different types of boards and their roles. And this is another good read on the difference between Advisory board and Board of Directors, and how to utilize them!
Basically, when you start out, an advisory board makes more sense – and obviously, you could run your org for-ever without needing a formal Board of Directors/ Governors, until you seek and get investment.
Even with the advisory board, I see start-ups in the western world, who have now seen the whole culture closely, feel the need to acquire, and actually leverage advisory boards much sooner than those in India (where it’s typically a bunch of smart techies, who have a super idea, (or sometimes just think they have), and want to create the next google). Also, as a corollary, or atleast a parallel, start ups who have been conceived to make lots of money very fast, go “by the book” more often than those that are being set up as lifestyle businesses.
As my own little survey showed, in the beginning, many start-ups, specially if they are either small, or the Non profit type, choose friends and family in the Board of Directors – generally just to suit legalities in certain countries e.g., in India, a Pvt. Ltd. company needs 2 Directors.
But, ideally, Board members need to be recruited for more than just statutory requirements. As this article talking about the mistakes that companies make when recruiting BOD says, Board members can be great resources who provide support, knowledge, and access to unique professional networks.
And indeed, as my little survey showed, the right competence or skills, and the ability to get contacts – either to potential clients, or to potential recruits, is the other big reason for Boards of Directors to be appointed. The next reason is obviously just the name-value, or reputation of the person (My husband recently got offered a seat in a Board of Directors, where one of the other guys was Vijay Amritraj (and ofcourse, I told him – “say yes, say yes” so I can maybe hob nob with him at some dinner stuff :) ))
Not surprisingly then, when one looked at the average and top-2-box analyses for reasons, the ability to get contacts, and give advice, top the charts.
No. of Members
My survey respondents seem to like the number 3, maybe because most of them are really small and new set ups. Per the article above, Fred Wilson from Union Square Ventures thinks a board of five members is ideal. He recommends no more than 7 board members (two founders, one to three VCs, and one to two other industry professionals).
I would agree that get the founders (no more than 3 – 3 being the magic number as per my earlier post on optimal no. of co-founders), get one or two “real” advisors with complementary skills that you REALLY need, and get one well connected industry person/ celebrity – who should be your business development/ recruitment channel person. The rest is superfluous — which, effectively means, that your choice of VC/ investor should also depend on then who will they put on your board, and which of the above roles can you get the investor appointed Board member to play.
Compensation for Board of Directors
Obviously if friends and family, one wouldn’t offer anything to the board. But, the commonest remuneration seems to be Equity – I have heard amounts ranging from a low of 0.25% to an average of 2% and a high of 5% to be parted with for Boards. This good common sense article talks about the difference between an advisory board and the board of directors, and also has some good sound advice on compensation.
My survey showed that just the position was what most start-ups offered their advisors/ Board members. This is probably also because at the stage they are in, in most cases their BOD members are friends and family.
Issues with Board of Directors
While, my survey seemed to indicate that the founders weren’t really facing any problems with their BOD members, I assume that’s because they weren’t being utilized effectively! In most cases, the problems arise due to not being able to get time and attention from your directors/ advisors. You may expect to be put in touch with channel partners, or a new recruit, and the Director doesn’t, or is unable to do so!
In my experience, the best way of making sure you do get the value you expect out of the Directors is to use them as individual people, rather than a full fledged board – i.e., seek a fixed slot one on one meeting with the folks (say half an hour every two months)- set that expectation upfront, send agenda in advance, and just be focussed on getting your questions answered!
This old article provides some good advice on care and feeding of Advisors.
Just for disclosure, the profile of my survey respondents is as below:
Incidentally, for my friends running Non profits, the answers to the same questions are not substantially different – as a look at this article shows
I think I should end with providing a link to an old but fantastic article – which will put a lot of answers in perspective, and contains a lot of wisdom, including in the comments after!
Hope this was useful. Right in tell me your experiences!