An advisory board is a group of experienced people who give a business advice, contacts and credibility without being its directors. They have no vote on the board, no statutory duties to the company and no power to make decisions for it. The founder and the directors still run the business, and the advisers help them run it better.
A startup advisory board is worth the equity given to it when each seat fills a specific gap in the business that an investor or a customer can see. A list of well-known names who never pick up the phone does little beyond filling a slide in the pitch deck.
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Advisory Board vs Board of Directors
The two get confused because both are called a board, but they’re different things in law. A board of directors runs the company. Its members are formally appointed, registered at Companies House, and each one owes the company 7 general duties under the Companies Act 2006, including promoting its success and using their own independent judgement. An advisory board has no legal standing. It exists only because the company has agreed it with each adviser in writing.
| Board of directors | Advisory board | |
|---|---|---|
| Legal status | Required by company law | Exists only by agreement with the company |
| Registered at Companies House | Yes | No |
| Decisions | Makes them and can bind the company | Gives advice, with no vote and no power to bind the company |
| Legal duties | 7 statutory duties to the company | Whatever the adviser agreement says, usually confidentiality |
| Personal liability | Can be personally liable in some circumstances | Low, as long as they only advise |
| How they’re paid | Salary or fees, sometimes shares | Options or shares, sometimes a fee |
| Who appoints them | The shareholders or the board, under the articles | The founder or the directors |
The line between the two can blur. In UK law, a person whose instructions the directors are used to following can be treated as a shadow director, with many of a director’s duties, even though they were never appointed. Advice given in a professional capacity doesn’t make someone a shadow director on its own. An adviser who gives advice while the directors make the decisions stays an adviser.
A non-executive director sits between the two. They’re a member of the board of directors, with a vote and the same duties as every other director, but they aren’t involved in running the business day to day. A business that wants an experienced outsider with real authority, rather than someone to call for advice, is usually looking for a non-executive director.
When a Startup Needs an Advisory Board
An advisory board makes sense when the business has a gap the founder can’t fill by hiring yet, and that someone experienced could fill with a few hours a month. Gaps that bring in a first adviser include things like:
- sector knowledge the founding team doesn’t have, such as a fintech founder with nobody who has worked with a regulator
- contacts at the customers the business is trying to sell to, or the suppliers it depends on
- experience of a stage the founder hasn’t been through yet, such as a first raise, opening in a new country or selling a business
- technical expertise the product depends on
Advisers also come up when a business is raising. Things an investor is looking for include:
- the founder, and whether they can deliver the plan
- the team around the founder, and the gaps in it
- evidence that customers want the product and will pay for it
- the size of the market and how fast the business can grow in it
- the future plans and what the money is going to be used for
An adviser with a relevant, checkable record can help with the second point on that list. They don’t replace any of the others. An interested investor may want to speak to the advisers named in the investor pitch deck. They will then do their due diligence and check what they have been told is true, and an adviser who barely knows the company is quickly found out.
An advisory board is vanity when the names are there for the logo, when the advisers have no reason to engage, or when the experience it adds is already on the team or the board of directors. In those cases the equity would do more good kept in the option pool for the people the business needs to hire.
Who to Recruit
The starting point is the gap each seat is meant to fill. There’s no set number of seats. A business with 2 real gaps needs 2 advisers.
The people worth approaching tend to have things like:
- a record in the specific sector or stage, that can be checked
- contacts they’re prepared to introduce the business to
- the time for a regular call and the occasional introduction
- no conflict, such as advising a direct competitor
They’re often found in the founder’s own network, among the angel investors already in the business, among senior people at customers and suppliers, and among former executives who have run a business in the same sector. The Founder Institute, which publishes the widely used FAST adviser template, suggests working with a potential adviser for at least a month, and spending at least 8 hours together, before discussing equity.
Paying Advisers: Cash, Options or Shares
Early-stage advisers are usually paid in equity, because the business rarely has spare cash and because a stake gives the adviser a reason to care how the business does. There are 3 ways to pay them.
Options. The right to buy shares later at a price set today. Options vest over time and lapse if the adviser leaves early, which makes them the usual choice. In the UK, the tax-advantaged EMI scheme needs the option holder to work at least 25 hours a week, or 75% of their working time, for the company. Advisers rarely meet that, so they usually get options outside EMI, without its tax advantages.
Shares. Shares issued now make the adviser a shareholder straight away, with votes and a right to dividends. Shares given for work can create a tax bill for the adviser, which is covered in sweat equity.
Cash. A monthly fee or a day rate. It suits a business that can afford it, and an adviser who wants certainty more than upside. Some advisers take a mix of a lower fee and a smaller stake.
How Much Equity Advisers Get
There’s no legal rate for advisory board equity. The FAST template sets out suggested grants by the company’s stage and how involved the adviser is, as a percentage of the fully diluted share capital.
| Adviser involvement | Pre-seed | Seed | Series A |
|---|---|---|---|
| Standard: monthly meetings | 0.50% | 0.25% | 0.10% |
| Expert: meetings plus contacts and projects | 1.00% | 0.75% | 0.50% |
The same page notes that a technology startup setting aside a 5% pool for a group of advisers isn’t unusual. The grid is a starting point, and the founder and the adviser can agree something different.
The percentage falls as the company grows because each share is worth more. Say an adviser joins a pre-seed company valued at £2m and receives 0.50%. On paper that stake is worth £10,000. An adviser joining at Series A with a £20m valuation and receiving 0.10% has a stake worth £20,000.
Every grant goes on the cap table with every other share and option. Issuing new shares to an adviser can also trigger the existing shareholders’ pre-emption rights, so those need to be waived or disapplied first.
Vesting for Advisers
Adviser equity is normally earned over time through vesting, so an adviser who stops helping doesn’t keep a stake for help they never gave. The FAST template uses monthly vesting over 2 years with a 3-month cliff, and everything unvested vests if the company is sold.
On a 1% grant, nothing vests for the first 3 months. At the cliff, 0.125% vests in one go. After that, 0.0417% vests each month, so the adviser holds 0.5% at 12 months and the full 1% at 24 months. Either side can end the relationship in the first 3 months without any equity changing hands. How cliffs and leaver terms work in more detail is covered in vesting schedules.
The Adviser Agreement
Every adviser signs a written agreement before any equity is granted. It sets out things like:
- the role, the gap the adviser is there for and the time they’ll give
- the number and type of options or shares, the vesting, the cliff and what happens if the company is sold
- how either side can end it, and what happens to unvested equity when they do
- confidentiality for everything the adviser sees
- that anything the adviser creates for the company belongs to the company
- that the adviser tells the company if they start working with a competitor
- whether the company can use the adviser’s name and profile in its deck and on its website
- which expenses the company will pay, with approval in advance
- that the adviser can’t sign contracts or make commitments on the company’s behalf
The last point does two jobs. It stops an adviser committing the company to anything, and it keeps the relationship clearly on the advice side of the line, away from the shadow director test.
How to Run an Advisory Board
An advisory board doesn’t have to meet as a group, and plenty work entirely through one-to-one calls. Whichever way it runs, the founder runs it.
- Set what each adviser is for. Write down, for each adviser, things like the introductions they’ll make, the reviews they’ll do and how often they’ll speak to the founder.
- Fix the rhythm. A monthly call with each adviser, or a quarterly meeting of the whole group, goes in the diary for the year.
- Send an update before every call. The numbers, what has happened since the last call and the help that’s needed. The adviser arrives already knowing the position.
- Make specific requests. An introduction to a named buyer, a review of the financial model before the raise, a view on a hire.
- Keep a record. What the adviser suggested, what the business did with it and what came of it.
- Review each seat. Once a year, or as the vesting runs out, check whether the gap is still there and whether the adviser is filling it. A seat that isn’t working ends under the agreement.
Advisory Boards Outside the UK
The split between directors and advisers works the same way in the US, Australia, Canada, Singapore and the UAE. Directors carry the duties set by local company law, and an advisory board exists only by agreement. The FAST template was written for US companies and pays advisers in non-qualified stock options. The tax on an adviser’s shares or options depends on where the adviser lives.
FAQs
What is an advisory board?
An advisory board is a group of experienced people who advise a business without being its directors. They have no vote, no statutory duties and no power to bind the company, and they’re usually paid in options or shares.
How much equity do advisory board members get?
The FAST template suggests between 0.10% and 1% per adviser, depending on the company’s stage and how involved the adviser is. A pre-seed adviser making introductions and taking on projects would get 1%, and an adviser at a Series A company who joins monthly meetings would get 0.10%.
Are advisory board members paid?
Advisory board members are usually paid in equity, often options that vest over 2 years. Some get a monthly fee or a day rate instead, or a mix of a smaller fee and a smaller stake.
What is the difference between an advisory board and a board of directors?
A board of directors runs the company and its members owe it legal duties, while an advisory board only gives advice. Directors are registered at Companies House and can be personally liable in some circumstances. Advisers have no legal role unless they start directing the business, when they can be treated as shadow directors.
Does a startup need an advisory board before raising?
No, a startup doesn’t need an advisory board to raise money. An adviser with a relevant record can help fill a gap in the team that investors would otherwise ask about, but investors back the founder, the business and the plan.
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This explains how advisory boards generally work. It isn’t legal or tax advice, and a solicitor and accountant should check the agreement and the tax position before options or shares are granted.
