Getting The Right Advisors - I
By: Andrew J. Sherman, Esq.
Dickstein Shapiro LLP
As your company grows, both as a business and individually as a entrepreneur, who does the founder of the company turn to for advice and guidance? Who is available to provide the general policy and direction to the company’s founders around which a specific growth plan is built and executed? For most early stage companies, the answer is five fold: (a) coaches and mentors; (b) peer groups; (c) boards of directors and advisors; (d) professional advisors and (e) governmental and community resources
Coaches and Mentors
A rapidly increasing number of owners of small and early-stage businesses are turning to coaches and mentors as a source of guidance, insights, business advice and to serve as a strategic sounding board.
Mentors are individuals that typically are giving back to the business community by selecting one or more protégé’s to share their wisdom and advice. They tend to be older, successful in their careers and often had a mentor which helped them in a significant way at some point along the way. They enjoy sharing their knowledge and experience with their protégés and the depth of their advice is usually at the macro, “big picture” level. Mentors can be paid or unpaid, but the bulk of mentor-protégé relationships are unpaid or where the mentor has been given some equity stake or board seat in the protégé’s company. Mentor-protégé relationships can be formal, with a set of defined rules, expectations and scheduled meetings or informal with meetings and interactions on an ad hoc or as needed basis.
As in athletics, business coaches can be a source of wisdom, guidance, training and discipline for their clients. Business coaches are essentially paid mentors, but often a bit more focused on a specific area of improvement or guidance as opposed to general mentoring. For example, coaches could be laser-focused on improving an entrepreneur or executive’s leadership skills, team-building skills, marketing expertise, etc. or they could be a general sounding board and guide to push the entrepreneur towards the achievement of overall optimal performance.
Several organizations have been formed to allow entrepreneurs and executives from earlier stage companies to learn from each other. These groups typically facilitate forum groups where entrepreneurs and company leaders can learn from each other and share frustration and experiences in a confidential manner. Some of these are at the grassroots level and organized by local chambers of commerce, university entrepreneurial centers and technology incubators. Others are more prominent and national in nature. One of the networks that I would highly recommend is Entrepreneurs Organization (EO) (www.eonetwork.org)
The Entrepreneurs' Organization (EO) is a global community of business owners, all of whom run companies that exceed $1M (US) in revenue. EO is the premier, peer-to-peer global community, network and resource for entrepreneurs. Since 1987, this international nonprofit educational organization has helped its members build upon their successes through an array of learning and networking opportunities. With 5,300 members in more than 160 cities, spanning 40 countries, EO's rapidly expanding membership includes entrepreneurs from every size and type of business. Membership in EO is by invitation only, and is subject to approval by both EO International and the sponsoring local chapter. Prospective EO members must be under 40 years of age and be a founder, co-founder, owner or controlling shareholder of a business with gross annual revenues exceeding (US) $1 million.
Boards of Directors and Boards of Advisors
These two boards are often confused by entrepreneurs but actually play a very different role and have very different responsibilities from one another. The Board of Directors is required under virtually all applicable state corporate laws and owes very specific fiduciary duties to the shareholders of the corporation as described below. The basic governance structure is that the shareholders elect the directors who in turn appoint the officers. It is the role of the directors to set broad goals and policy objectives for the company which will benefit and protect the interests of the shareholders and it is incumbent on the officers to develop and implement plans to meet these goals and objectives. A strong director has board-based business experience, strong industry knowledge, a useful rolodex, adequate time to devote to truly understanding the company’s key challenges and weaknesses, the objectivity to challenge decisions made by the management team, a good listener and sounding board for the team and one who is generally well trained in the university of hard knocks. A good director does not get easily discouraged if the company gets off course nor does he or she view the world through rose-colored glasses. The board member should take their responsibilities very seriously and not be too casual when it comes to critical tasks, like board meeting preparation and attendance, taking confidentiality lightly or pursuing what appears to be a personal agenda. Each board member and the board as a whole must be constantly guided by “What is in the best interest of our shareholders?”
On the other hand, an Advisory Board is not required by state corporate laws, does not owe the same levels of fiduciary duties to the shareholders (and hence cannot generally be held as responsible for their acts or recommendations) and can be much more informal with regard to the number of meetings and agendas for meetings. The Advisory Board can be assembled for general purposes or a series of Advisory Boards could be set up for very specific purposes, such as technical review, marketing strategy, recruitment and compensation, or research and development. An Advisory Board can also be an excellent way to get a second opinion on certain matters without interrupting existing relationships.
The Board of Directors seats are usually initially set aside for co-founders and investors and many prospective Advisory Board members may be reluctant to accept the responsibility that comes with a board of director seat, especially at the outset of the relationship. Of course, the “showcase value” of putting a bunch of names that barely know you and who will never show up for any meetings dilutes the value of the credibility that you sought to establish when appointing the Board of Advisors. Prospective investors will put varying weights on the strength and composition of the Board of Advisors in making their final investment decisions and will often want direct access to the Advisory Board members as part of their due diligence process and to ascertain the depth of their commitment.
One critical difference between a Board of Directors and an Advisory Board is the management’s ability to accept or ignore the recommendations of any Advisory Board, a worry they do not have when a mandate comes down from the Board of Directors. Also, because members of the Advisory Board do not owe the same duties to the company and its shareholders, they can be used on mediating disputes by and among the officers or and between the officers and the directors. They can also be used in identifying potential board of director candidates or be a recruiting ground for eventual seats on the board.
* * * * * * *
ABOUT THE AUTHOR
ANDREW J. SHERMAN is a Partner in the Washington, D.C. office of Dickstein Shapiro LLP, with over 350 attorneys nationwide. Mr. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies. Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he teaches courses on business growth, capital formation and entrepreneurship. Mr. Sherman is the author of eighteen (18) books on the legal and strategic aspects of business growth and capital formation including his latest book Road Rules: Be The Truck. Not The Squirrel. (www.bethetruck.com). Mr. Sherman can be reached at 202-420-5000 or e-mail ShermanA@dicksteinshapiro.com.