Boards vs. advisors in start-ups

In affiliation with Bennett Institute for Public Policy at the University of Cambridge.

Note: this post is mainly intended for seed-stage start-ups, but is also relevant for small businesses and foundations.¹

Most start-up CEOs know they need advice, but they sometimes get in a muddle about who they should be taking advice from, and in what situations. Often this manifests in a blurring of the lines between the board, the advisors, and the management team. 

Red flags include:

• Board meeting agendas that include items like “Review sales performance” and “Discuss product roadmap”, suggesting they have become a substitute for management team meetings
• The CEO asks the board to make management decisions (e.g. “Should I hire this person?”)
• Advisors outnumber employees on the company website 
• There are advisors the CEO hasn’t spoken to for more than three months
• Strategy offsites involve board members or advisors

Boards are not management teams

In all companies, the vast majority of decisions should be taken by the CEO with the help of her management team.

The primary role of the board is governance and oversight. It should hold the CEO to account for sticking to the company’s mission, and delivering on the commitments she has made to shareholders. It should make sure the company is complying with its legal and regulatory obligations, probe its key risks, and scrutinize its financial reporting. The board is frequently in critique mode, which is why you might hear a board member describe themselves as a “critical friend” to the company.  

In Europe, board members are almost always non-executive, meaning it’s not their job to take management decisions.² The company’s strategy is for the CEO and her management team to develop, and for the board to challenge, refine, and ultimately approve. As a general rule, the board should not get involved in commercial negotiations with clients or suppliers, or make decisions about product development, branding, marketing, and so on.

The main exception relates to the chair’s role. If the CEO is inexperienced, it can make sense to have the chair lead contractual negotiations with new investors. Similarly, bringing the chair along to high-stakes meetings can add “heft” (e.g. with a major client who is threatening to sue). 

Advisors are not boards 

Advisors can be useful for start-ups when they have:

• Deep expertise in an area where the management team is relatively weak 
• Wisdom accumulated from building a start-up themselves
• A great network and the willingness to make introductions that could lead to investment, sales, or key hires
• The ability and appetite to mentor the CEO or another member of the management team 
• A reputation that enhances the start-up’s credibility with potential investors and clients

They should listen, say what they think, throw out lots of ideas, and bring positive energy (even when disagreeing or being brutally honest). 

When boards take decisions, they do so with a formal vote, and the CEO is bound by what they decide. By contrast, the CEO isn’t under any obligation to do what her advisors say. Their advice is informal and she should take or leave it as she sees fit.

This is the reason why recurring advisory board meetings are risky. Good advisors are opinionated, and some have big egos. The CEO will often end up trying to manage disagreements between the advisors, or achieve a consensus, rather than getting the input she needs. 

To make matters worse, it’s possible that both she and the advisors will subconsciously get the sense that she is bound to follow the advice she has been given, potentially leading to tension and conflict in the future.

With that said, convening advisors can be effective when structured as a workshop, with a clear agenda to engage with a particular problem or opportunity.

Who to appoint

Start-up boards should generally be small: perhaps 3 to 5 people, including the founder or founders, an investor representative, and an independent chair. Independent board members should be compensated with equity options and/or an honorarium.

It is conventional to compensate advisors with equity options, often between 0.25 per cent and 1 per cent, depending on the time commitment they are making and how valuable their particular blend of skills and experience is to the start-up. 

Awarding options is a big decision with long-term consequences. The CEO should therefore not appoint too many advisors (3 is about right), and she should feel confident that the advisor will continue to be helpful over a  2-3 year horizon.

If she is uncertain, it is better not to make an advisory appointment. Coffee conversations with more experienced start-up CEOs and/or the company’s angel investors can sometimes substitute for advisors’ input. Alternatively, if the CEO meets an advisor who she is sure can help in the short term, and if the start-up’s cashflow will allow it, cash compensation makes sense as an alternative to options. 

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Appendix: Accountabilities matrix

¹ The boundaries between management team, board and advisers shift as start-ups mature. At pre-seed stage, there may be a lot of overlap between the board and the management team, both in terms of personnel and decision-making. As the start-up moves from seed-stage to Series A, roles begin to harden, and by later stages there is usually a sharp distinction between governance and management.

² Norms are different in North America and it’s much more common to have an executive chair

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