EQUINOX Business Law Group - Seattle Bellevue

Advisory Boards - wrap up

January 27, 2010

Our Advisory Board panel on the 20th offered great perspectives from our panelists, moderator, and audience members. Below are a few take-aways I found interesting:

1. Size of board. Our moderator, Corey Hansen, author of Best Practices of the High Performance Entrepreneur, asked the question: "What is the right size for an Advisory Board?" The responses from the panel ranged from 3 to 10. Ultimately, we agreed that the size, in some ways, is driven by the purpose of the Advisory Board. If the purpose is to make connections for the company, maybe it's a little bigger to help develop a network of folks who can connect the company with the right vendors, customers, investors, and other business alliances. If the purpose is to offer counsel to a company, smaller is usually better to drive ideas to solutions.

2. Who should you ask? The company should look for advisors that have "been there, done that." The best advisors have either directly participated in the growth of similar businesses or advised numerous businesses. They should bring expertise as well as connections to the company.

3. Respecting advisor's time. A key concern for entrepreneurs is how much time and advice to expect from an advisor. It is critical to set expectations up front in a written agreement. Generally, a quarterly Advisory Board meeting that may last up to 4 hours plus counsel in preparation for the meeting and between meetings on an as-needed basis. Something to remember, though, is that the advisor said "yes" to helping you. Do not be timid in asking for their help when you need it. That being said, be sure you're prepared with relevant questions for the advisor when you meet, making the advisor feel valued and valuable. In a similar vein, ensure that your Advisory Board meetings are well planned and organized wiht a clear agenda. This demonstrates to your Advisory Board that you mean business and respect their generosity in being their to support your growing business.

4. Should professionals be included? An excellent question with a mixed response from the group. If your paid professionals are not on your Advisory Board, they should be in the loop as to what's going on. As one audience member stated, "If we come to a decision in the meeting and I later take it to my attorney/accoutnant/etc. and they then bring up all kinds of other issues we hadn't thought of, we've wasted a bunch of time." Agreed. You should review the agenda for the meeting with the professionals and get their perspective or ask the professionals to participate only for specifica portions of the meeting where their expertise is needed. The common concern in including professionals is that they typically require payment for their time - this is often the case but in some situations, they are willing to waive or discount those fees for you. Your success is good for them, too! It doesn't hurt to ask.

5. Positioning of opportunity. Many smaller businesses have a difficult time asking potential advisors to participate in a formal Advisory Board because they view their company as too small or not important enough for the advisor to commit time to. Rather than positioning the company as a small business, position the opportunity based on your vision. The fact that you're assembling an Advisory Board demonstrates that you're interested in growth. Tell them why you love the business and why it will be successful -- they'll say "yes" if they buy in!

6. Compensation to board. A major question raised was how to compensate board members when the company has little cash. Frequently, the advisory board members are not there to be paid. They are there because they buy into your vision and want to see you succeed or want to partipicate financially in your future success. The cash now is not usually important. You can buy lunch for the board and thank them which is often enough for some. Others may want an agreement that they can particpate in a future round of financing or upon a sale of the business. When dealing with selling or promising an equity interest in the company, you must be careful to comply with the securities laws -- this is why equity compensation is often not practical unless the company is raising money anyway. Remember, too, that not all advisors must be compensated equally!

7. Term of board. How long should an advisor commit to membership on your board? One year is probably the right timeframe. You want the ability to remove an advisor who is not providing value or does not mesh with the other board members. You also may need to change the makeup of the board as the business grows and changes.

8. Protecting IP. A written agreement with the advisors is critical to setting expectations and protecting the company's interests. The agreement should include a non-disclosure/confidentiality agreement and a non-compete and non-solicitation provision as well if applicable. There are instances where experts from similar or competing companies may be valuable to an Advisory Board. In those cases, the company must think through the risks of having a competing expert involved and how best to protect the company's intellectual property.

I want to thank the panelists and the audience for raising so many interesting points -- I think we all added a few new bits of knowledge on Advisory Boards for our future use!

Know What You Don't Know

January 20, 2010

Our guest blog post this week comes from David Heyting, Senior Tax Manager at Hersman Serles Almond PLLC. David has worked in both the public and private sector counseling business owners on tax compliance, tax planning, job costing, and business expansion and succession planning.

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When starting out, business owners realize that they need to be very knowledgeable – experts even – in their own industries or professions. However what they may not be aware of is that, they also need to be lawyers, accountants, human resource managers, bankers, counselors, IT engineers, and on and on. The list of things that business owners need to know and understand in order to succeed is endless. The problem is that we are all only given 24 hours in the day! Not to mention that the business owner still has to actually run the business. This is where leveraging is important. By forming an advisory board, a business owner can fill the gaps by using the talents and resources of a carefully chosen group of professionals. They do not need to be an experts in all areas, but can rely upon others to help them deal with issues that fall outside of their knowledge base. It goes along with the old saying that two heads are better than one. The business owners now have several knowledgeable people working to address issues facing their company.

“It’s not about what you know, it’s about whom you know” is a common business phrase that we all have heard. The reality of the matter is that it is true! A business advisory board helps to provide a business with a huge resource pool. Often times the solution to a problem is more about knowing the right person or company to fix the problem than understanding all of the ins and outs of the problem. Business owners who use advisory boards will quickly find that often times their advisors have already dealt with the same issue and have a solution to the problem. Having a larger resource pool through an advisory board is an enormous asset to a business. That is a reason why large companies seek high powered individuals to be on their boards – not only do they want to use that persons vast knowledge, but they also want to benefit from the connections and resources that person brings to the table.

Along with a resource pool, advisory boards help to provide collaboration. Typically most decisions that impact a business affect multiple facets of a business. Business deacons are made all the time that have unexpected, inadvertent consequences. Sometimes it can take years for these issues to arise and when they do they can be large issues. The advisory board helps to eliminate these types of problems by bringing multiple viewpoints to the forefront. Now in one meeting a business owner can look at all sides of decisions. Nobody ever wants to look back and say, “I wish I would have run that by my CPA and not just my attorney” or visa-versa. Nothing is done in a vacuum and it is critical to make sure that decisions are made with full knowledge of its impact.

Business owners need to know what they know and know what they don’t know. It is important to not only understand their strengths, but to also recognize they cannot possibly be experts in everything. Therefore use of an advisory board is essential to meet the needs of a successful business and its owner.

Advisory Boards - It's Lonely at the Top

January 11, 2010

Our guest blog post comes from Nate Silverman, Principal at Silverman Consulting LLC and a certified Hot100 Advisor. The Hot100 Program is designed to help privately owned companies with one or two active owners, annual revenues of $500,000 to $50 million, and at least five employees to increase sales, profitability, and/or valuation (owner’s equity). Nate will be a participant in our January 20 panel discussion on Advisory Boards: Why You Need One and How To Start.

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Many entrepreneurs start their own company because they want to be The Boss. They want to be the One in Charge. But, many soon realize that it is indeed lonely on top. They start to miss having someone to talk to. They start to feel like everyone at the company (their employees who they carefully recruited and selected) expects them to know all the answers. As the President, they are expected to help everyone else. After a while, many business owners long to talk to someone who wants to help them.

This is one of the primary roles of an advisory board - to help the owner or president learn, improve themselves and deal with ongoing business issues. A good advisory board should include a mix of people who have been there/done that and understand the challenges you will face growing your business and specialists who know more about certain topics or fields than you do. This includes legal, accounting, technology, human resources, etc.

Advisory boards can be formal, with set meeting dates throughout the year, or informal - individual mentors who agree to take your call or meet with you whenever you need to ask them specific questions. One of the benefits of having group meetings is to allow for the advisors to interact and debate. You may get more out of the discussion and conflicting viewpoints, but only if you are able to facilitate the meeting and keep on topic. In one advisory board I helped set up, we brought together the leading experts in the field for the first time ever. We had lively discussions that benefited everyone - primarily because we had questions that had never been asked before. It forced the advisors to talk with each other (which helped build stronger relationships between them) and elevated everyone’s understanding and appreciation for the goals of the company.

To maintain a successful advisory board, you need to make sure every meeting or discussion is mutually beneficial. Advisors may initially agree to be involved simply to help you or be a part of something new and exciting. But, that can wear off after a while. If they are helpful to you, you need to make sure they receive something back in return. This could be money or stock (i.e. payment), sneak peeks or special opportunities to use your product or service (i.e. privileges), new relationships (as in my example above), or even new opportunities for themselves (if your company will help create new markets or business for their companies). On the other hand, don’t be afraid to change advisors as your needs evolve over time.

An effective advisory board is a unique blend of experts who will help you be the best owner or president you can be to continue to grow your company. Develop and manage the group wisely.

Advisory Boards - Why You Need One and How to Start

January 04, 2010

Rarely does a day go by as an entrepreneur where no advice is required, obtained or given. In day-to-day operations, we struggle with the right decisions for employees, for customers, for ourselves. To help along the way, we use advisors. Some are family and required to listen to our questions, stories and rants. Others are professional service providers who are paid to listen to our questions, stories and rants. Finally, we have our advisors who often are colleagues, industry experts, or other knowledgeable resources who offer their time at no charge. Each group provides a business owner with a different and valuable perspective on the issues faced and the business owner then pulls together these perspectives to help in planning or in managing a particular problem in the business. Every business has these advisors; and every business owner uses them, to a greater or lesser extent, as go-to people to advise on key decisions. Rarely, though, are the advisors brought together as a group to offer their insights.

An Advisory Board offers the business owner the opportunity to gather insights from multiple perspectives all at one time. An Advisory Board takes the adage “Two heads are better than one” and multiples the effect, not only bringing multiple brains to the table but also bringing varied education and experience to the table. The discussion generated by the advisory group brings forth ideas that the entrepreneur could not fathom in one-on-one discussions with each advisor. In addition, one longer meeting with the group is a more efficient use of the entrepreneur’s time than one-on-one discussions with each advisor – and we all know that “Time is money.”

No one really needs to be convinced that this is a good idea. The question really is: “How do I do it?” There are three key steps to setting up an Advisory Board: Selecting the members, compensating the members, and managing the meetings.

In selecting the members, business owners must consider what their goals are – both company goals and goals of the Advisory Board. The expertise of the Advisory Board members should align with the business’ needs. It is important for the group to include the professional advisors the business owners rely on to plan and execute their business strategy and tactics (i.e. CPA, business coach, lawyer and financial planner). The business owner may have to pay these professionals to attend but having a professional team knowledgeable about the business’ plans will save money in the long run. In addition to the hired professionals, the Advisory Board should include one or more industry experts, individuals who have deep insight as to how the business operates. Sometimes, personal advisors, such as a spouse, are important to include as well.

Compensation of Advisory Board members varies based on the size of the company and the interests of the board members. Many young companies have advisors that are personally vested in the success of the business and are willing to serve free of charge. More sophisticated advisors who are involved based on their interest in the business’ financial success may require financial compensation in the form of cash, equity or options to participate in future funding or exit transactions. Anytime a company is seeking to offer equity or options to an advisor, though, the company may be required to treat the advisor as a passive investor and comply with federal and state securities laws.

Advisory Board meetings must be carefully planned and managed to ensure the goals of the meeting are met and the topics are relevant to the business’ needs. A facilitator, usually the business owner or another member of the business, should manage time and ensure the board remains on track. Often, a business wants to focus a meeting on a particular need, such as increasing sales, and a guest may be brought in to shed light on the topic for the business. At least one meeting per year should focus on strategic planning. In addition, the business owner should ensure what is said amongst the group remains confidential and proprietary to the business through a signed non-disclosure agreement.

As you can see, the process of forming an Advisory Board is not difficult. Business owners must be thoughtful in how the board is formed and managed.