3 Reasons You Need to Formalize an Advisory Board for Your Startup

Every young entrepreneur loves the phrase, “I’ll need to run this by my board.”

It makes you sound official. It sounds like you’re already running a successful company.

But let’s clarify the difference between a “board” and an “advisory board.”

An advisory board is not an official part of the company. It’s a group of people you frequently turn to for advice — usually playing the roles of mentors — and attend formal meetings with some sort of regularity. And while advisory board members can be compensated monetarily or with a small piece of your company, most of the time they are more casually involved and not compensated at all.

Both advisory boards and a board of directors receive the same kinds of compensation, however a board of directors is part of a corporate governance. They have seats at the table, voting rights, and offer much more than just suggestions — their voices truly matter.

The truth is, not every startup actually needs a board of directors — and in plenty of cases, you’re far better off putting together an advisory board of mentors to weigh in when necessary, instead of putting formal advisors on payroll or giving up a small piece of your company.

When I was building my first business, I didn’t have either. I didn’t have a formal board until I sold half of Wilmar Industries in 1995 to a private equity firm. They purchased 55 percent of the company, and put together a formal board — as is common when a private equity firm gets involved.

Ten months later, we took the company public.

In hindsight, having an advisory board prior to that sell would have been beneficial. But then again, I was well past the “startup phase.”

So, whenever I hear a young entrepreneur talking about building his or her own advisory board, this is what I urge them to consider:

1. A good advisor will tell you the truth

A lot of entrepreneurs mistake older, successful figures for advisors. But that’s not always the case.

Your lawyer, your parents, or your family friends are not going to tell you what you really need to hear. They might be the perfect person to turn to when you need encouragement, but the whole point of having advisors is to surround yourself with people who are going to give it to you straight. They’ll be the ones to say, “Listen, you aren’t a great salesperson. Your financial skills suck. You need people in these roles.”

If you have the right board of advisors, they’re incentivized to make you better.

The second piece of this, and what I consider to be a prerequisite, is that a true advisor cannot have his or her hand in your pocket. Otherwise, they’re going to nudge you to make decisions that will benefit them — not you or your vision for the company.

This is why I urge patience and due diligence to anyone considering building an advisory board.

Give it time, and make sure you are choosing people who have your best interest in mind.

2. Friends and relatives should not be advisors — unless they sincerely check all the boxes

I want to reiterate how important it is for you to choose people based on merit, not former relationships.

Friends and relatives tend to make for poor advisors because, well, they care about you. And because they care about you, they will probably be less hesitant to do the two things you really need: tell you the hard truths, and support some of your riskier ambitions.

The only time friends or relatives should be considered as advisors for your company is if they really do bring substantial skill sets to the table.

You’re far better off looking to family, relatives, and friends to act as mentors from afar.

3. Advisors can begin as mentors, and then turn into a monetary relationship down the road.

When I was starting my most recent company, LendingOne, I put together an advisory board — three successful guys I knew I could turn to when I needed advice. And the value of having this advisory board is the fact that each one has experience in areas I didn’t have.

In most cases, boards begin as mentorships. I know plenty of older guys that are retired, and just want to be busy or part of something new.

But someone involved in your company without monetary compensation operates under the title of mentor, much more than an advisor. A true advisor has to have skin in the game and a reason to be part of it. Which means you’re going to attract them with the following:

• A small piece of your business.
• A fixed cost associated with each meeting or hour.

What matters most is that each person you bring in or consult brings something different to the table. It’s like a dinner party. You wouldn’t want five people all bringing the same dish.

So, if you’re a young entrepreneur, I suggest starting with a mentorship, but offer a future board seat. That way, the potential advisor knows that their mentorship is going somewhere.

This article originally appeared in Inc Magazine.

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