Hi Bob,

Founders often confuse their Advisory Board with their Board of Directors. While there’s sometimes a path from Advisor to Director, a Director role has significantly more responsibility. Confusing the two leads to misaligned expectations around commitment, compensation, and equity incentives.

Key takeaway

Every Delaware C-Corporation has a Board of Directors. It’s a required tier of company governance—the structure and process of how your company is run—outlined by the Delaware Corporate code. Directors have specific legal responsibilities and duties to the company including approving major decisions like fundraising. Even if they are referred to as a Board, advisors operate in a much less formal capacity. Advisors often provide advice around strategic matters like fundraising or navigating regulated industries but they do not have a specific role in company governance. Great advisors may be invited to balance founders and investors on the Board of Directors. When they are, the additional responsibilities of the role usually come with additional cash compensation and equity incentives that are not available to advisors.

The details

The Delaware corporate code sets out 3 layers of governance: officers, directors, and shareholders. In order for a startup to be recognized as a fully-formed corporate entity, establish liability protection for the founders, and set the stage for future corporate actions, it needs to create these 3 layers of governance by appointing members and issuing shares of stock. This is why our Company as a Service software, Gust Launch, ensures all three layers are properly created post incorporation.

It’s pretty common for the CEO to be appointed to the required officer positions (President and Secretary) and be the only director on the Board of Directors at the beginning. That means, the CEO of the company will often vote on or sign off on corporate actions multiple times while wearing different hats.

When a company raises a significant amount of money from external investors, those investors will often receive a seat on the Board of Directors as part of the deal terms. The investors and founders are working in collaboration to build a large shared enterprise, so the investors naturally get a say in future corporate decisions—including future fundraising.

If a Board of Directors have an even number of directors, a deadlock can happen. So, when an investor joins the board it’s common that an additional member of the founding team also join to keep the number of directors at an odd number. Alternatively, if there’s a great advisor available with significant experience relevant to the company, the startup and investors might agree to appoint an independent director.

In either case, the Board of Directors is occupied by people who have a clear need to be involved in important corporate decisions on a regular basis.

In addition to the group of people making important corporate decisions on a regular basis, a startup typically needs other folks to provide advice, mentorship, and connections. Often, these are people with an established track record in startup operations, investing, and fundraising or in an industry vertical critical to the startup. These are high-impact people that—in almost all cases—the startup can’t afford to compensate even in a contracting capacity. They are a startup’s advisors. Advisors typically help the company navigate a specific problem set often over a limited time window—think a regulatory or fundraising cycle or, roughly, 18-24 months.

Sometimes this group of advisors are referred to in aggregate as an Advisory Board or a Board of Advisors. But, even when referred to as a board, these advisors are not an official, required part of the governance structure of the company and they do not sign off on important corporate actions. These advisors may receive small equity incentives and are very rarely, if ever, compensated in cash.

In cases where the startup and its investors choose to appoint an independent director to the Board of Directors an existing advisor might make a great candidate. If an existing advisor takes the position they’ll officially be a director, a change in role that’s usually accompanied by additional compensation and equity incentives.

Many founders engage with early supporters who are eager to help but uncertain about their specific role and delaying specificity there can start to get vague or even contentious as things go well. At Mission Control, we assist founders weekly in identifying the most suitable roles for these early contributors and help reduce the vague language and misunderstandings.