Advisory Groups - Startup tips

Advisory Groups: for governance virgins

Some notes for those who are already convinced outside advisors will add value... but haven’t quite got started yet!

Advisory Group or Formal Board or Not for Start-ups

From a start up point of view get going with an Advisory Group (AG) first, rather than a formal board. When is to soon ...never!

Why?  Experienced directors will not want to sign up to become a formal director, without having a good look under the hood. As a formal director they will be financially liable for the company. There is a ruling that says if the advisory group / board acts like a formal board it is deemed to be one. So you need to be careful how it operates. But from an operational sense it is a great first step.

My suggestion is start with an Advisory Group and then migrate to a formal board later on. 

Without research you will end up with the directors and investors you deserve!

Check out your advisory board members, work out whether they have a good values fit with you and get what it is like to work with. Personally I would avoid people who have bought a franchise - you need seasoned people who have had hands on experience with growing companies.

I am a believer that you should get two outside advisors so you can debate stuff rather than fall into the common trap of a “parent - child” relationship of simply doing as the advisor says.

How often to meet:

I would say monthly for 2 hours - but have a kick off briefing meeting of half a day.
Make sure you provide your AG with relevant information at least 3 days before a meeting, so you can maximise your time together

Pay them or Not?

The median based non exec directors are typically paid $32,000 and chairs $54,000. But for most start ups this is unaffordable and in appropriate certainly pre revenue.

Don’t fall into this trap:  Shareholders Association chairman Bruce Sheppard said (herald Feb 2010) good directors were underpaid but as few as one in 10 directors fell into this group. Most others were “head nodders” or “habitually stupid” and were not worth paying at all.   Full article http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10625855  

With payment you get commitment, even if is nominal. I would start with a nominal budgeted fee $600 - $1000 per month. If it works increase it each year.
Note: there are people who may be bought for some fine food and great bottle of wine. If you are really sort find a fellow entrepreneur and do a swap for services.

Warning: Do not give away equity for payment to advisors - you are stuck with shareholders for ever (or close to). If you must use equity make sure you only issue stock on completion of activities eg 0.X% per period.

If it’s not working get rid of them!

Set up clear expectations over what you expect from your AG and have regular reviews. If it’s not working fix it or get new members.