Riddle: What do you call a board of directors that has no power?

Riddle: What sounds official and legal but probably isn’t; sounds expensive and probably isn’t; sounds like a good idea and might be, or not; depending on who you are and how you implement it?

You guessed right: The board of advisors.

Here’s a real case for you: Here at Palo Alto Software we had a board of advisors for a couple of years in the late 1990s, during a period in which we roughly doubled our sales over three years.

We had three advisors. We paid each of them $1,000 for the day, plus travel expenses, for two or three half-day meetings per year. One was former CEO of a large and successful software company. One was a very smart middle-aged entrepreneur with a heavy finance background, and successes and failures in his past. Another was the former dean of the business school.

The meetings were mostly fun, interesting, and useful. We’d talk about strategy sometimes, finance sometimes … one meeting was dedicated to whether or not we needed to find a vice president in charge of marketing, a position we hadn’t had during our ramp-up period.

We eventually let the board of advisors lapse. As we grew as a company, we acquired more functional expertise inside the company (for example, the people who now run it as CEO, COO, VPs of Product Development and Customer Experience, and Managing Director of the UK Subsidiary) and the function was essentially taken in house.

And here’s another case: Not long ago I was asked to be a member of the board of advisors for a website I like, developed by a person I like. Duties were never established. But in this case the website had a financial institution as a parent (investor), and the financial institution wanted me to sign a formal document giving them rights to use my name forever, and pointing out in excruciating detail, that in exchange for that I’d get nothing whatsoever, ever. So no, thanks. I didn’t sign, I’m not on the website. But I still stay in email contact with that developer, because I like him, and I like the site.

And a third case: I’ve also been asked to be an advisor by yet another person I like, whose website I like, and in this case there is no formality to it. He asks me questions occasionally by email, sometimes even by phone, and I give him straight answers. That’s cool. One of these days I’m going to hit him up for some low-level options or something like that.  But he doesn’t ask much, it’s a moot point. And my name isn’t on his site.

The trick here is that what we did doesn’t mean anything, necessarily, for you. Or for anybody else. The board of advisors is what you decide to make of it. You don’t need it. If you want it, you may or may not have to pay for it. Here’s some more on this:

  • It’s not a board of directors. The board of directors is a formal legal board established in the charter of a corporation. The owners name the board members. The board hires the management team, approves loans, compensation, and so on. There may be exceptions, but you can assume every corporation has a board of directors. And you can also assume that members of the board of directors have some ownership as well. And liability insurance. Directors can be liable for the sins of the companies they supposedly direct.
  • There are no generally accepted guidelines for how or how much, if anything, a company pays the members of a board of advisors. Ours were paid, and many are, but many more are not. In high-end startups looking for investment, advisors are often compensated with stock options. In that case, if the company hits it big, the options are worth something; and if not, oh well, not much loss either. Sometimes advisors have actual shares of ownership.
  • There are no generally accepted guidelines for what advisors do. In our case, they traveled to Eugene (OR) to meet with us, they listened, discussed, and suggested. Sometimes entrepreneurs get active advisor contributions like regular advice, meetings, phone calls, or emails. Sometimes advisors do nothing more than dress up the website and the collaterals.
  • I see advisors used most often in high-end business plans linked to seeking high-end venture capital investment. Advisors with experience add to the sense of an experienced management team. They are common in business plans submitted to venture competitions. As I read those plans, I look for formal ties that build relationships, like ownership, or at least options, and regular meetings. If there isn’t something to solidify the relationship, then I don’t really believe it.

So I hope you can see that the questions in my title for this post are trick questions. A board of advisors is whatever you make of it. And there’s no reason to have one unless there is a reason to have one. That’s up to you.

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Tim BerryTim Berry
Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.