Folklore

Maximising the value of advisory boards and boards of directors

Building and leveraging a strong board for informed decision-making and growth.

‍What is the difference between a board and an advisory board?

Initially, startups may (or may not) have advisors (or advisory board) offering strategic counsel on elements like business models and talent strategies. As a startup grows, it transitions into a board of directors responsible for broader governance, investor interests, and compliance.

Effective boards for early-stage businesses go beyond a mere focus on "capital and customers." An ideal board ensures comprehensive governance and reporting, safeguarding the best interests of both the company and its investors. You can reference this board pack resource which includes critical items to include in a board pack and a basic framework.

‍Types of boards

Advisory Board:
- Non-binding decisions, advice only, composed of appointed experts providing forward-thinking guidance
- No formal power focuses on advice and expertise
- All care, no responsibility.
Board of Directors:
- Composed of appointed members representing the company
- Serves as an advisor
- All care and responsibility.

‍Advisory boards

By and large advisors are helpful if they’re the right people but are otherwise relatively low-value for the purposes of improving a company. Establishing an advisory board for your startup enhances credibility, provides access to diverse expertise, attracts investors, and offers strategic guidance.

Key considerations of advisors:

Formation: often 3–5 members, usually investors or operators, and sometimes they will have shares in the company
Meetings: at least once a year or on an ad-hoc basis, with members potentially reimbursed for expenses with no additional compensation
Responsibilities: clearly defined and with assigned responsibilities based on respective skills and experience, such as: engineering, design, strategy, hiring, marketing, governance, investment and investor relations, addressing conflicts of interest
Votes, rules, and procedures: it helps to establish a process for decisions, however, advisors typically don’t have agency over the company and its conduct, so ‘voting’ and decisions governing approvals, disapprovals, vetoes, and other actions do not sit with an Advisory Board
Duty of care: the advisory board, while not responsible for losses, holds fiduciary responsibility to the business. Compensation or indemnification is subject to a partnership agreement.

‍Board of Directors

What is a Board of Directors? From a legal perspective, the role of a board is to provide direction and oversight of strategy, budgets and leadership. They are company directors and have a legal responsibility.

At a practical level, companies need a Board of Directors to provide strategic advice, decision-making, fiscal oversight beyond budgeting, leadership support, hiring support, and functional advice.

Usually, a Board of Directors is implemented as the business accelerates growth, once formally incorporated or securing external financing. Ensuring strategic guidance and decision-making for growth, exit, or IPO success are considerations that come later.

Composition of your board

Align the board's duties with your company's stage, considering roles and responsibilities
Director diversity: you should ideally have directors with a vested interest in the decision - usually through a shareholding or a representation of a shareholding
When selecting people for your board, ensure that there is diversity of backgrounds and opinions that will get the best outcomes for the company
Include management board members for day-to-day insights
Board size and voting: choose a size aligned with company growth and investor participation - if you have an even number, make it 4 or more so that you can reach a majority (i.e. >50%) for decisions; if you have an odd number you will naturally have a majority
Optimal board size: more than 2, and up to 5 - if you have a lot of stakeholders that can add value, you could increase the size to 7 but no more, and be wary of complications that come from organising this for the benefit of the company
Effective board structure: define clear bylaws, roles, and responsibilities - consider term limits for ethical decision-making
Prioritise diverse perspectives to avoid echo chambers and stimulate robust discussions
Avoid common mistakes:
- Actively manage conflicts of interest
- Communicate frequently and clearly
- Don’t hide bad outcomes and inconvenient facts
- Avoid isolating directors, you or they may be breaching the law by doing so
- Have fun, don’t just make the process a grind.

‍Communicating with your Board

Board optimisation involves enhancing communication and collaboration for effective decision-making. This is not a forum for vanity metrics, sales and hype. It's a real place for using facts and information to ensure clarity over the company’s health, and a place for asking real questions that make the company better.

Key steps to improving board communication include:

Provide regular asynchronous updates
Engaging directors between meetings for proactive problem-solving
Organising social catchups to foster personal connections
Use well-structured board packs with essential information
Avoid unnecessary fluff in your packs
Gather and share background information ahead of time
Align the executive team transparently with the board’s requirements
Establish accountability, ensure uniform information access, and embrace over-communication to foster engagement and value
Ensure consistent, honest communication with board members outside meetings, promoting a supportive and productive environment
Provide regular updates, clear accountability, absolute transparency and, at times, vulnerability.

Resources

Board pack resource - a checklist for what should be included in a board pack.

‍This resource, and any guidance within it, must not be relied on as legal advice. We recommend that you seek professional advice to deliver an outcome best suited to your specific situation.