Many startup founders of young companies fall into the same trap: they insulate themselves and just talk to family, friends, colleagues, and co-founders (if any) as a sounding board to bounce off business ideas and make decisions. While it’s easy to see why this approach is tempting, bringing on outside advisors early on who are not major investors or family members are integral part of a startup’s success.
A common way is to bring on outside advisors through an advisory board. A board of advisors is not a formal legal entity like a board of directors, which means that they can’t fire you or have control of your startup. Still, they can partake in regular board meetings as well as providing advice or mentoring on ad hoc basis. These are individuals who have certain knowledge that can be valuable to a startup. For one startup, that advisor may be a finance professor, a marketing expert, a software engineer, or an operations guru. For startups, advisors are generally compensated for their advice through stock or stock options in the company, although there can be other considerations for their time.
Notwithstanding the many benefits that come with onboarding a board of advisors, you should only bring them on if you are going to listen to their feedback. If you’re just looking to retain positive feedback while dismissing advice that potentially challenges your ideas, you’ll be wasting everyone’s time, including your own.
- Advisors will ask critical questions and challenge ideas: Consider the following scenario. You have a great business development idea and your co-founders and the team is pumped by the possibility. Who is tempering the enthusiasm? Who is there asking critical questions or challenging the business pipeline? If the answer to this is “no one besides the leadership team,” these ideas can become circular, unfeasible, and unchecked. Outside advisors who care about your idea can help sharpen your thought process and help fill the gaps in your business strategy. These are people who are willing to ask critical questions and offer complementary skills to the founders. This results in diversity of opinions.
- Advisors can help you build connections and relationships outside the entrepreneur world: Founders are often surrounded by other founders. Advisors have years of experience under their belt and in addition to providing an outside perspective, they can connect you to people outside your industry. For example, student-led startups can leverage their relationship with outside investors and meet experienced entrepreneurs, venture capitalists, and industry experts. Establishing common relationships through outside advisors will broaden your network.
- Startups need outside investors for future capital raising: Post angel investor and seed rounds, third party investors will look to see whether a startup has a few outside advisors, often in the form of an advisory board. If a startup has outside investors who have specific industry experience and seems invested in the company, it can serve as a market validation to potential investors. Further, outside investors can help you prepare for robust business milestones and successfully pitch to get more capital. They can also help you weigh in your funding options, evaluate growth plans, and carry your company forward.
- Advisory Board vs. Board of Directors: The board of directors is the central governing body for your startup. For small startups, founders serve as directors and don’t consider bringing in outside board members until the company took on significant investment. As previously discussed, the board of directors is legally bound to the business and therefore has a more serious engagement, because they carry potential liability associated with being part of that board. The board of directors has legally defined responsibility and is governed by the corporation’s bylaws; since directors are elected for established terms they are more difficult to remove. In contrast, a board of advisors can be more informal and flexible. It’s essentially a team of people appointed to guide and counsel founders and their startup. The board of advisors has no fiduciary duty to the company and because they carry less liability than directors, less compensation is required to retain an advisor.