Board of Directors vs Board of Advisors: Startup’s Brain vs Soul

In essence, a board of advisors is more concerned with a company’s strategic interests, while a board of directors focuses on advancing the interests of shareholders. This distinction seems subtle, but for many companies that originate outside the U.S. startup ecosystem, this can be quite a foreign concept. Lifelong entrepreneur Michael Burtov explains the difference between the two.

Recently, I was working with a Latin American startup, let’s call them “TechNest” (not their real name), to develop a board of advisors. TechNest launched a smart home device and was considering expansion into the U.S. 

The startup already had a board of directors, but a board of advisors contributes differently to the decision-making process and company’s trajectory.

A board of directors has just one job – to increase shareholder value. TechNest’s directors assessed financial risks, considered the U.S. regulatory environment, and evaluated the potential return on investment of expansion. Their primary concern was ensuring the company’s financial stability and growth with this new venture. 

Since the company had recently raised a venture round, the investor board members were particularly keen on evaluating whether this expansion would lead to a quicker sale of the company.

However, the newly formed board of advisors, with diverse expertise and no fiduciary obligations, provided a very different perspective. They focused on cultural nuances, consumer behavior, and branding challenges in the U.S. They highlighted the need for localized marketing, adapting products to American consumer preferences, hiring a local team, and building partnerships.

While the directors reviewed numbers and regulatory hurdles, the advisors honed in on operational and cultural aspects of entering a new market. The advisors’ insights were not just beneficial, they were essential,  though sometimes at odds with the directors’ views.

How does this work?

A board of directors is a governing body within a company, typically comprising elected members who jointly oversee activities. Their sole role, by law, is to have a fiduciary responsibility to act in the shareholders’ best interests. Directors are accountable for financial health, strategic direction, and governance. Most jurisdictions require boards of directors, and in practice all startups seeking investor funding have them. Directors are often compensated through equity or cash, serving defined terms in the bylaws.

A board of advisors consists of industry and other experts offering non-binding guidance and insights to management. Unlike directors, advisors don’t have formal authority to make decisions or fiduciary duties to shareholders, so they can freely offer suggestions without legal repercussions. Startups often seek advisors for expertise that are lacking internally, as well as to acquire credibility and business development networking. Advisor compensation, meeting frequency, and structure vary based on organizational needs.

While the board of directors oversees governance and shareholder interests, the board of advisors provides specialized guidance to address challenges and opportunities.

Advisory boards serve critical roles:

Spotify: In its early days, Spotify had an advisory board comprising music industry experts, tech veterans, and artists to help it navigate the complex landscape of music streaming, licensing agreements, and artist relations.

Dropbox: Dropbox used its advisory board, which included experts in security and enterprise solutions, to facilitate its pivot from being a consumer-focused service to capturing the enterprise market, addressing the needs of larger businesses for secure file sharing and storage.

Startups in Accelerators or Ecosystems: Many startups that are part of accelerator programs or startup ecosystems often have access to a pool of mentors and experts. These mentors provide specific industry insights, network introductions, and guidance on product-market fit.

Biotech and Pharma companies: Startups in these sectors often form scientific advisory boards. For instance, a biotech company working on a novel cancer drug might assemble an advisory board consisting of oncologists, researchers, and experts in cancer biology. This board provides insights into the latest research, potential applications of the drug, and feedback on clinical trials.

The takeaway for immigrant entrepreneurs

Boards of directors and advisors play distinctive, complementary, and sometimes adversarial roles. The board of directors, with its binding authority and fiduciary duty, sets the overarching direction and ensures returns for shareholders. It’s the logical, cold brain of the organization. 

On the other hand, the board of advisors, with its reservoir of specialized insights, offers guidance in the startup’s best interests. It’s the soul, essence, or spirit of a startup, representing its true character and individuality. 

While their functions differ and are often opposed, they’re both critical. Personally, if I was forced to choose between a brain or a soul, I’d choose to have a soul every single time.

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