Why your small business should create a ridiculously early board of advisors (and how doing so made my company)
Part 1.
After running my small business out of my apartment for a year, I needed to get out of the house. I decided to get some cheap office space to set up shop, and I called a connection who did commercial brokerage. As she showed me tiny, dank office spaces I could afford she asked what business I was in. When I told her that I did test prep, she said she had just sold a condo to someone in the same industry, and asked if I would like the connection. I did!
Chris joined as a board member and over the next 6 years was instrumental to my business. In fact, our little company would not have found its niche in MCAT test prep were it not for Chris detailing the opportunity there. Our company would have been in zombie survival mode forever if I had not gotten and taken his advice).
I want to talk today to people starting small businesses, in any industry. This is NOT for CEOs of public companies or founders of venture-backed startups, who will have boards full of their investors.
I’m talking to you — yes you — even if you have just gotten started and your business is just you. If you have big aspirations (and you should), you can benefit from a board.
In part one, we’ll go over how to get your board together, and how to get them paid. In part 2, we’ll cover what you should do with your board once it’s assembled.
Why do you need a board?
Lot’s of great reasons :)
Strategic Clarity. As CEO, your strategic plan is obviously critical for the business. Your board should be a go-to resource for making sure you’re executing a plan that makes sense. Since your board members have likely seen businesses in your industry grow, they can help you set the right strategy as well as reasonable metrics.
Accountability. Again as CEO, you likely report only to yourself (or maybe to 1–2 business partners). Your board helps the founding team stay accountable. If your board did nothing else than create a time every quarter for you to look at your own goals, it would be worthwhile.
Widening Your World. Especially when your business is small, your world can be very small — your team, your customers, and whatever is on fire that day. Your board can help you think bigger by giving you a window into the wider industry, exposing trends and market forces you should know about.
When should you assemble your first board?
The answer is “probably sooner thank you think.”
If you are building a rocket ship, I think you should have a board basically as soon as you start. If you are successful, you’ll be moving so fast that having a steady set of hands to guide you through growth is critical.
But let’s say you run a highly profitable business that will provide a great income for you and your family but is not likely to end up at $1B+. In that case, it could be premature to create a board before you get to your first $250,000 in revenue. That feels like a pretty arbitrary number — the way it should feel when you need a board is that you have too many priorities and opportunities to know what to do. If you feel like you have complete control over your business, just wait until you grow :)
Who should be on your board?
Kinda obviously, the most important decision you’ll make is who should be on your board.
Notice that I said your “first” board. that’s right — it’s totally ok to bring on advisors who you need today, with the understanding all around that you’ll likely need different advisors at some point in the future.
I’m a fan of advisory boards with between 3 and 5 members. Smaller and you might not get the full value; bigger and meetings have to run unnecessarily long to get everyone’s full participation.
As you search for board members, keep this in mind — being an advisor to a startup is a sexy thing for a lot of people, particularly the folks who would be participating on their first board. The quality of people you can get functioning as My First Board Seat is very high. Imagine this — you have been in the marketing industry for 15 years and have risen to be a director at a mid-size company. one day you are introduced to a startup with an eager founder who wants you to be an advisor. Holy shit! You thought board seats were for CEOs of huge companies or VC partners. this company is small, but just like everything in life, if you do a great job, might there be bigger board seats available in a few years? 🤩
Here’s some general tips.
- you will probably end up with a list of people you know already and people you don’t. Don’t fall into the trap of only asking people in your immediate network — you probably don’t already know the 3 very best board members. Instead, ASK your entire network who can fill a specific role on your board
- Start with your own blind spots. If you are highly technical but don’t have a sales/marketing background, get that (and vice versa)
- Get at least one member from a bigger company and at least one member who ran a startup or worked at a smaller company. You’ll be amazed what you can learn from how bigger companies operate; at the same time, you want someone around the table who has fought the battles you are fighting
- Find someone who has done exactly what you want to do. Specifically, find someone who has grown a business exactly like yours to 2–4x where it is today. Sometimes that’s a startup founder who has exited; sometimes that's someone who has been at a larger company
Now, here’s what you want to avoid — the folks that are kinda hanging around the startup scene in your town looking for advisory roles.
How should you pay your board
The biggest question I get from SMBs is how to compensate their board members. Let me settle this upfront — you have to compensate your advisors. They are taking time and energy for you; in particular, you want advisors who feel incented to think about you and how to help you in between quarterly meetings.
Here’s a couple things I’ve seen work.
Cash compensation
Especially for My First Board Role folks, consider relatively trivial cash compensation. One of my favorite board structures is a small training company here in Chicago. They are firmly planted in the My First Board Role camp. They pay $1,200/year. That’s it. No equity — and yet, they have an all-star board and have no trouble getting new members. Why? Well, they are paying enough that it’s not straight-up insulting.
But, more importantly, they are creating an incredible My First Board experience.
First, they go out of their way to get board members impressive enough that it’s fun and professionally rewarding to learn from the other members. This is why you really can’t have 1 all-star and then a couple slouches — the all-star isn’t advancing her own career.
Second, they treat the board seriously (more on that later) and clearly take the time to prepare great materials for the meeting. It’s clear that they value the help and are not misusing board members’ time.
It’s possible to get great people with very little compensation — just be mindful of what you are providing them instead.
Equity
The traditional “startup board” compensation model would be to offer stock options to board members. early board members might get between .25% and 2%.
I compensated my board members with phantom equity. We were structured as an LLC, and it didn’t make sense to either change our corporate structure or make my board members of the LLC. This is an over-looked compensation method that saves a ton of paperwork headaches and is nearly as good as equity when you exit. (The tax treatment is, for phantom equity holders, much worse).
Board equity, whether real options or phantom, should vest over the commitment period — likely 2–3 years. Remember — if your company is successful, you will have totally different problems in 3 years that might necessitate new blood on your board.
So, how do you know when to pay cash and when to pay equity?
In part, it reflects the kind of business you are looking to build. If you are building a great small business that can do a couple million dollars of revenue at its best (a HUGE achievement), err more on the side of cash compensation as your equity is only worth something when you sell.
If you are trying to build a rocket ship, equity will be more valued (and allows you to focus your cash on the business.
Having a great board can make your journey a lot more fun, and your vision a lot clearer. It’s also probably easier than you think.
Join me in Part 2 for what to actually do with your board.
