Board of Directors vs. Board of Advisors

Board of Directors vs. Board of Advisors

 

Building a large board of directors isn’t always the best way to bring in outside expertise into your business. Building a board of advisors is a less-costly alternative, which is especially useful in start-ups and small businesses. The right advisors not only bring fresh perspectives but they also build the credibility of the business for both investors and clients. Furthermore, advisors expand the network of your business by association.

 

Having a network of informal advisors is useful, but it may be far more effective for you to formalize these relationships by inviting them on to your company’s Board of Advisors.

 

Check out the table below for a handy comparison between a Board of Directors and a Board of Advisors.

 

Board of Directors Board of Advisors
 

 

 

Liability

Directors have a “duty of care” to the company, meaning they can be held liable for their mistakes and decisions. The business may need a “Directors and Officers Insurance Policy” to induce directors to take on these risks. Advisors are less likely to be held liable for their mistakes in advising the company and therefore the company likely does not need the same level of liability insurance. Because there is less risk involved, people may be more likely to accept a formal advisory position than a director position.
 

 

Formality

The inner workings of the Board of Directors are more formalized; they are legally defined by the Articles of Incorporation and any applicable shareholder agreements. The Board of Advisors is much less formal and is readily able to adapt to the dynamic needs of the business. Advisors can be added and removed, with ease, as needed by the CEO and executive management.
 

 

 

Efficiency

A large Board of Directors can lead to communication breakdown and inefficiencies, especially as the company grows in size. The organizational complexity of a Board of Directors can often hinder productivity and render the board ineffective. A smaller Board of Advisors can work more efficiently because its size may not necessarily grow with the company. As the company evolves, new advisors can be strategically added depending on their expertise.
 

 

Expense

Directors typically expect higher salaries because of the liability they are exposed to. They are usually paid to attend meetings, which can put undue financial strain on the business. Advisors are typically willing to do a lot for your business, for a lot less! Rather than paying advisors a salary, you may want to make them stakeholders in your success by offering them equity in your company

 

If you’d like a PDF of the above information, click here.

 

Chris Dittrich is current studying law at the University of Ottawa. We had the pleasure of having Chris join our office as a student intern this summer and wish him the best in his continued studies.

By | 2015-09-02T17:03:20+00:00 September 2nd, 2015|Commercial Law, Uncategorised|

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