Utilizing an advisory board is a great way to help your company get off the ground and leverage the experience of other industry professionals to help address your company’s opportunities and challenges. But what if your company has now grown – when do you take the next step and transition from an advisory board to a board of directors?
When and if that time comes, first consider the individuals that have spent their time advising you and your business. They have provided their guidance and wisdom without any compensatory benefit, so be sure to thank those advisors for their time and insights. After all, part of the reason you now need a board of directors may very well be due to their counsel!
The process to find new board members can be very similar to how you recruited people to your advisory board. First, I recommend listing the ideal skills, personalities and backgrounds for your board of directors. Be specific, it will help with your search. Consider people with diverse viewpoints, these viewpoints will make for engaging board conversations and will make your company better. Be sure to ask others for their recommendations, as they likely have connections you don’t.
To utilize the board members’ maximum skills and abilities, ensure their passion for the company’s purpose and then ignite that passion with strong engagement, collaboration and opportunities to provide insight.
With an official board, you’ll need official bylaws. Formal bylaws with details of board roles and responsibilities will be necessary for the organization. The bylaws will help outline how the board will operate and can also be helpful in preventing or resolving conflict and disagreements. I recommend enlisting the assistance of an attorney to help draft these.
Assuming your bylaws don’t address board size, you’ll need to consider the ideal number of board members. What’s an “ideal” number? I see many companies with first-time boards utilize four board members plus the owner for a total of five voting members. An odd number helps prevent the issue of being locked in a tie for voting. Yes, I said voting. These board members will now be voting and deciding on direction and strategy of your company, which may be an entirely new culture shift for a business owner, who has been used to being the sole decision maker. Before starting a board of directors, make sure you are ready for this shift. Different from an advisory board, once an action is passed or decision made by the board of directors, the company is expected to execute and follow through with it.
Lastly, unlike an advisory board, it is customary to compensate your board members. Board members may only ask for reimbursement of travel costs. Others may accept equity instruments like stock options or warrants, which provide opportunity for future ownership in the company. If shares or ownership of the company are utilized as compensation, I strongly encourage discussion with your tax advisor about any tax implications to the company. Plus, remember you will be giving up some ownership of the company. Have a short-and long-term compensation strategy and understand its impact on the company’s ownership.
With the creation of a board of directors, you will now have people solely focused on helping you and your company be successful. They can also help expand your vision in a way that helps you and the company achieve your long-term and strategic goals.
Rachel Polson is a partner at accounting and advisory firm Baker Tilly. She is a member of the MHTA Foundation Board of Directors and has served as a judge for MHTA’s Tekne Awards for several years.