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Setting up an Advisory Board – An Entrepreneur’s Question:
“I would like to set up an advisory board and get a few people to serve as advisors. In exchange for introductions and advice, I’d like to give small equity stakes to five people. How easy is that?”
Response:
In order to establish the advisory board and the related equity stakes that you would like to give to the advisors, I recommend that your company’s Board of Directors first approve the formation of the advisory board and a form of advisory board member agreement to be entered into with each proposed advisor.
The advisory board member agreement defines the relationship between your company and the advisor, including confidentiality and invention assignment obligations, as well as the specific services to be provided by the advisor and the compensation that the advisor will receive.
Typically, an advisor would receive a stock option award (often less than 0.5% of the total stock ownership), so you will need to set up a stock option plan if your company has not done so already. There are certain corporate approval, tax and securities law compliance issues relating to the formation and operation of a stock option plan, such as the need for a fair market valuation of your company’s stock in order to support the exercise price for the stock options to be granted. It is important to put the right documents and procedures in place, but overall the process is not overly complicated, especially if your company already has a stock option plan up and running. As you might suspect, cash compensation is less common for advisors at startup companies that are raising money.
Before you take the time and incur the expense of setting up an advisory board (and possibly a stock option plan), you should really determine how you will use the advisory board for the benefit of your company. Some companies set up advisory boards only for the perceived value of being associated with well known or qualified advisors (and possibly having their profiles on the website). I do not believe that this association value justifies setting up an advisory board, especially given the related time, expense and potential equity dilution. Decide how you plan to use the advisors and make sure that you are committed to investing the time and resources to make the relationship mutually beneficial to both the company and the advisors.
Your Turn:
Please let us know below in the comment box how your company has used (or plans to use) an advisory board successfully and the resulting benefits that you have experienced or will experience.
