TV shows and movies like to show corporate boardrooms as chock full of dramatic office politics. For a lot of first time entrepreneurs, that Hollywood idea of a board might be the first thing that comes to mind. But in real life, things couldn’t be more different. As an entrepreneur, you’ve likely heard of two kinds of boards: an advisory board and a board of directors. The two are vastly different and play separate roles in your company. In our newest Entrepreneurship 101 blog, we’re breaking down the differences between the two boards and discussing whether or not you need either.
An advisory board, quite literally, is a group of people who advise an entrepreneur on their business. Generally, the board is an informal group of experienced professionals who offer their time and domain expertise to a founder. Advisors can be anyone you feel would be a relevant and useful resource. Your advisors could include a legal expert, a serial entrepreneur, or maybe someone with years of experience in the industry you’re trying to disrupt. Most importantly, they should be people you can learn from.
A board of directors is a governing body elected to represent the interests of the shareholders and serves to help guide a business through major decisions, like mergers and acquisitions. Board members are elected and might include key shareholders or outside executives with years of boardroom and business experience. All public companies have a board of directors and many large private companies do as well, especially if they’re later-stage companies.
A board of directors has decision making powers and certain responsibilities based on your corporate bylaws, which are legally binding. There’s also a formal process to setting up a board of directors. Meanwhile, an advisory board is a lot simpler to set up and doesn’t have any authority — while they might give you plenty of useful suggestions, the decision power still ultimately rests with you.
Your board of directors are your fellow decision makers, and are people you’ll potentially be working with for years. Meanwhile, advisory board members may change every few months even, depending on your business needs and any pivots you might be making.
Your advisory board will also rarely meet as a full group, if at all. Instead, they’re generally available for you to reach out to as needed to use as a sounding board. On the other hand, your board of directors will meet regularly throughout the year to go over upcoming business strategy and any major changes or issues.
The most significant difference between the two boards is in board member priorities. Members of the board of directors will always keep shareholder interests in mind, above everything else. They’re there to make the best decision for the business. The advisory board is there to help you achieve your vision, and may prioritize that instead.
Technically you don’t need either board, especially if your company is in its early stages. However, both an advisory board and a board of directors offer a lot of benefits. If you’re just starting out as an entrepreneur, an advisory board can be invaluable. These are people who can guide you and provide you with meaningful relationships and knowledge.
A board of directors may become relevant if you’re pursuing funding from venture capital firms (VCs), since VCs may request a board seat. A formal board of directors can also be instrumental in navigating more complex business decisions, like deciding to go public.
Whether you’re choosing to put together an advisory board or you’re creating a formal board of directors, it’s best not to ask someone to join your board just for the sake of asking them. The professionals and experts you come in contact with can be just as much of a help as they can be a hindrance. You should value both your time and their time enough to be selective and strategic about who you let guide both you and your business.
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Paige is the Content Marketing Associate at Netcapital Advisors. She is a graduate of Wellesley College, with a double major in American Studies and East Asian Languages and Cultures. Outside of her work at ValueSetters, Paige pursues creative writing and keeps up with the latest cultural news.