This document outlines how to create an advisory board and the agenda for the first meeting. This document must be adapted and revised for you specific situation.

The audience for this document is CEOs and founder

2 What is the value of an advisory board?

Advisory boards have a major impact on sales and productivity, comparing the three years after an advisory board vs the three years before an advisory board: sales growth of 67% vs 23% and productivity growth of 6% vs 3%.¹

2.1 What is an advisory board?

A group of independent people who advise the CEO (or board of directors) on specific problems and meet on a regular basis. The advisory board has no voting authority and company has no legal obligation to follow advice.

The board is independent. Ideally the advisors have no other business arrangement with the company other than being on the advisory board. If the advisors have other financial arrangements, their advice may be biased.

2.2 How is an advisory board different from a group of advisors?

Every CEO/Founder has informal advisors. The advisors know little or nothing about the company, answer very specific pointed questions and devote little time to the company. The engagement with the CEO/Founder is sporadic and ad-doc.

An advisory board has scheduled involvement with the CEO/Founder. The advisors have an understanding of the company based upon their ongoing involvement as well as the information provided to them by the CEO/Founder. The advisors have made a long-term commitment of time to the company, a few hours a month or more.

2.3 How do you measure advisory board value?

There can be two sets of “hard metrics”, especially if it is possible to compare the times before and after the advisory board creation, as well as comparison of any improvements relative to industry benchmarks.

What is the impact on sales, earnings, and productivity?
What is the impact on key business milestones, growth, and innovation?

It can be difficult to establish a direct cause-and-effect relationship between the advisory board advice and business results. A key indicator can be whether or not the advisory board impacts the decisions made by the CEO (or by the board of directors).

2.4 What are the major benefits of an advisory board, as perceived by companies with advisory boards?

85% of business leaders believe that the advisory board had a significant impact on success.²

Some of the benefits, according to business leaders (rating on a scale of 1 to 10):³

Is an essential tool 8.2
Allows you to develop a broader vision 8.0
Improves strategic business choices 8.0
Forces management to look at the company 7.5
Challenges the company’s management team 7.5
Puts in place a better management structure 7.4
Brings rigour in to the company 7.2
Reassures shareholders and investors 7.2
Avoids costly mistakes 6.7

What are some of the impacts of an advisory board, according to the business leaders (on a scale of 1 to 10):⁴

Company vision 7.7
Innovation 6.9
Risk management 6.8
Profitability 6.8
Survival 6.6
Sales growth 6.6
Hiring the best employees 6.2

2.5 Who has advisory boards?

75% of SMEs (Small Medium Enterprises)⁵ have no board. 19% have a board of directors only. 6% have an advisory board (Half of those also have a board of directors)⁶
11% of companies with more than 100 employees have an advisory board.⁷

2.6 How do you recruit advisory boards?

56% of the advisories come from the company’s network, 8% from external recruiting such as associations, only 3% from company’s financial institution or investors.⁸

2.7 How do you organize an advisory board?

You need to determine the skills and experience required on your advisory board. Look at your 2-5 year business forecast. What are the opportunities and challenges over that time-horizon? What is the talent (skills and experience) you need? What are the talent gaps when you look at the management team (and board of directors) What is the talent you need on your advisory board?
The written advisory board mandate must have the objectives, terms of reference and time commitment. Each advisor commits to reading preparatory documents, actively participating in the meetings and follow-up. The mandate also addresses advisor out-of-pocket expenses and compensation (if any). If business development is a role, then there can be performance bonuses based on business development results. The mandate may be the set of mutual expectations i.e. expectations of the CEO/Founder and of the advisors.
The mandate must be clear – are the advisors expected to act in the best interests of the owner(s) or the best interests of a broader set of stakeholders? For example, a recapitalization could provide capital to the owner but risk the long-term viability of the company.
It must be clear how the company and advisory board interact. (e.g. meetings only with the CEO or including C-Suite members? Are all questions (from management and advisors) funneled through the CEO? The advisory board may meet weekly, monthly, quarterly as well as urgent ad-hoc meetings.
Is there an advisory board chair? If so, the role of the chair is crucial, working with management, the board of directors, and the advisory board members.
The individual advisor roles must be clear, e.g. help develop business by opening doors, act as a company ambassador at social events, etc.
Individual advisors bring specialized experience, knowledge and contacts which the board of directors does not have. The advisor capabilities are not a replacement for capabilities which should be on the board of directors or management, but rather be complementary.
Each advisor must also have a degree of passion and interest in the business.
The advisory board has simpler processes than a board of directors, does not require elections, term limits, committees, public disclosure, etc.

3 Do you have the capability for an advisory board?

You have three pre-requisites for your creation of an advisory board. Much of the focus is on having the documented thinking of the CEO/Founder and documented company plans and results. If there are no documents, then its too early for an advisory board. The CEO may have advisors with whom she has an ad-hoc relationship.

3.1 The CEO has time available

The CEO has the time to prepare for meetings, have the meetings, and follow-up from the meetings. This implies that there are enough team members to allow the CEO to delegate some of her work. If the company consists of one sole founder, then it’s too early for an advisory board.

3.2 The CEO has a plan with milestones.

The CEO must have a documented set of future milestones. There is a least an assumption of the company’s future path. If the CEO has not documented what the company will be achieving in future, it’s to early for an advisory board. The role of an advisor is not to document where the company is going.

The advisor will help the CEO think through how to achieve critical milestones.

3.3 The CEO has a cash flow forecast, budget, and tracking process.

The cash flow forecast, budget, and tracking process is directly tied to the set of milestones. There must be a set of documented assumptions as to what resources are required to achieve milestones. If the CEO has no documented set of assumptions as to the cash required to achieve critical milestones, it’s too early for an advisory board

4 How do you get people to serve on your advisory board?

When talking with prospective members, focus on two things:

The impact the advisor will have on the CEO/founders and on the company. People won’t want to be an advisor if they are asked for advice on minor issues and if the CEO/Founder regularly ignores most of the advice.
The benefits to the advisor of being on an advisory board, which could include:
1. Learning new ideas and getting new perspectives.
2. Expanding their network.
3. The personal satisfaction of helping a CEO/founder and company succeed.
Compensation is not a reason people join an advisory board. If the advisor puts in significant time or when the company goes beyond the startup stage, then compensation is warranted.

Advisors come from the CEO/founders network. The network may also suggest advisors.

4.1 Document the initial set of mutual expectations

Document the initial set of mutual expectations:

What expectations the founder(s) have of the advisory board and of each advisor. E.g.
1. Hours per month?
2. Meetings during the business day? During evening? During weekend?
3. In person meetings or via Skype?
4. Reading material before each meeting?
5. Any follow-up from meetings?
6. Responding to emails and phone calls between meetings?
7. Investing in the company?
8. Doing introductions: to potential customers, partners, suppliers, employees?
9. Represent the company at social events?
10. Attend meetings with founders?
11. Attend meetings with potential customers, suppliers, partners, employees?
12. Attend internal project meetings?
13. Review and comment on material produced by the company?
What expectation each advisor has of the founders.
Expectations may be different for each individual advisor

4.2 Send a formal invitation letter to the advisor candidate

The letter needs to include:

A brief overview of the company
The advisory board’s mandate and role.
the responsibility of the advisors and the time commitment expected (how often the board will meet and for how long)
Why you think the person would be a great addition
The specific contribution the person would make.

4.3 Invite the best people

You have identified the capabilities you need on your advisory board. Invite the best people you know. If they are not part of your network, ask someone in your network for an introduction. You can also cold call them.

4.4 Advisors may change over time

The advisors you have when you are pre-seed with no satisfied customers and no revenue may be different from the advisors you have when you are a global unicorn about to do an IPO

5 Sample advisory board invitation letter

The following draft invitation letter must be sent after you’ve connected with a prospective advisor and have drafted a draft mutual set of expectations. Note that there is a fixed time frame for the appointment. The CEO/founder may at any time for any reason end the appointment of the advisor to the advisory board. The letter must be customized for each advisor.

5.1 Your company letterhead

(Prospective Board Member’s Name and Address)

(Date)

Dear (Board Member’s Name):

5.2 Start out with your ask

I’m pleased to invite you to become a member of the FastGrowth Business Advisory for 20__ – __.

5.3 Pitch What are the benefits to this advisory board member?

FastGrowth is one of the AR (Augmented Reality) industry leaders. You have the opportunity to shape the global growth of this industry and literally change how humanity views the world.

FastGrowth is entering the next stage of its business evolution. Growing from 10 to 50 employees in the next 24 months requires reinvention of every aspect of the business: talent, technology, and processes.

Your experience and insight would be the perfect person to help me think through the critical changes and deal with the issues.

I will cover nominal expenses you incur from attending advisory board meetings such as parking. I don’t expect you to fly in for the meetings.

5.4 Overview of the Company – 1-2 sentences per topic area

FastGrowth was founded in 2014. Currently,

Target customers are …….

Their problems are ….

Our solution is ……….

In 24 months,

Target customers will be ………….

Their problems will be ………….

Our solution will be ……………

5.5 Advisory board’s mandate and focus – What are the advisory board’s goals?)

The main purpose of FastGrowth’s Business Advisory Board is to provide management advice about the direction the company should follow. Specific goals for this year are how the company can get ready for Series B funding and manage the deployment of those funds.

5.6 Responsibilities of board members

The Board will have an initial face-to-face 2-hour meeting. Subsequently, there will be a monthly 1-hour conference call, with a 2-hour face-to-face meeting quarterly. Your time commitment is approximately 5 hours per month. You will also need to sign a confidentiality agreement.

5.7 (Close and thank you)

Thank you for considering being a part of FastGrowth’s Advisory Board. I will call you within 7 days. I’m available to discuss any questions you may have. You can reach me by phone at (phone number) or via email at (email address).

Sincerely,

(Your signature)

Name
Title

6 Follow Up Your Board Invitation Letter

Follow up your letter with a phone call. If your prospective advisory board member does not have time to talk with you, they will not have time to be on your board.

7 First meeting of the advisory board

7.1 Plan the First Meeting Agenda Around a Problem or Discussion Topic

Your first meeting, therefore, like all your Advisory Board meetings, needs to be planned around a question or problem. You might find it easiest to state the problem as a goal. For instance, “We want to raised Series B funds in 9 months time. How might we do this?” Or there may be a general topic “How can we cut our business costs?”

7.2 Gather the Relevant Background Materials

Once you’ve decided on the discussion topic, it’s time to gather the materials that your Advisory Board members will need to read before the meeting.
Because this is the first Advisory Board meeting, you should include a business plan and any other documents pertinent to the discussion topic, such as charts, graphs and fact sheets illustrating the background of the discussion topic.
You should send a copy of these documents to all Advisory Board members one weeks in advance, along with a copy of the agenda. You can distribute material by providing the Advisory Board with access to an online data room. Later stage companies should use a Board of Directors software packing to manage information distribution.

7.3 Create the Meeting Agenda

Below is an example of a first meeting agenda (with comments for running the meeting efficiently) that you need to revised and adopt for your first Advisory Board meeting.
Each agenda item is timed; building a time schedule into your meeting and sticking to it ensures that your meeting doesn’t get bogged down and stimulates on-topic discussion.
There is no presentation of the pre-reading material. The focus on the meeting if the CEO/Founder learning from the group discussion.
Every advisory board meeting must start with the CEO/founders 1-5 minute pitch. The details supporting the pitch are available in the data room for the advisors.

7.4 Make Arrangements for Recording the Meeting Minutes

Make some arrangements for recording the minutes of the meeting. Don’t try to do this yourself; you need to be able to participate fully by listening and contributing. If you don’t have someone who can attend and serve as a secretary, ask an Advisory Board member to record the meeting.

The minutes are brief and capture:

What was the discussion topic?
What were the issues, challenges?
What were the decisions and next steps?

Lots of the discussion will be on flip charts, whiteboard, or electronic meeting software. The minutes are not intended to capture every word said.

7.5 Provide refreshments

Provide beverage (coffee, tea, water, etc.). Food is required depending upon when the meeting is held, your advisors are busy people. E.g. Early morning meeting – breakfast; Mid morning meetings – snacks; Mid day meeting – lunch; Afternoon meeting – snacks; Evening meeting dinner.

Food can be sandwiches, pizza etc. You will have to learn any food allergies and preferences of your advisors.

7.6 What might an agenda look like?

The sample advisory board meeting agenda below includes suggested activities with notes to guide you through the meeting process. You will have to change this to meet your company’s specific situation

[Your Company Name]

Agenda

[Date]

[Location]

Beginning/Ending Time	Activity
7:00 – 7:05 am	Introductions (Assuming your Advisory Board members haven’t met, introduce yourself and all the Board members, giving a brief outline of their expertise.)
7:05 – 7:10 am	Why an Advisory Board? (A brief statement of how you see the Advisory Board operating and the contributions you hope the Advisory Board can make to your company. Include details such as how often the Board will meet.)
7:10 – 7:20 am	Questions (If there are any. If there aren’t, ask your Board Members how they see the Advisory Board operating and how they hope to contribute.)
7:20 – 7:25 am	The CEO/Founder does her 1-5 minute pitch
	Discussion Topic: [Insert Your Question/Problem Statement Here]
7:25 – 7:30 am	Presentation of the Discussion Topic (An outline of the history of the topic and how it’s presently affecting the company; refrain from giving your views/solutions at this point.)
7:30 – 8:35 am	Discussion (You want to keep the ideas flowing at this stage; don’t reject or dismiss ideas at this point. Do contribute your ideas/views, too.)
8:35 – 8:50 am	Proposals/Resolutions (Evaluating the ideas the group has heard and choosing the best “solutions”.)
8:50 – 8:55 am	Summary (Summarize the topic, the discussion, and the results for the group and tell them what you plan to do.)
8:55 – 8:58 am	The CEO/Founder states what has been the value, if any, of the meeting]
8:58 – 9:00 am	Schedule of future meetings
9:00 am	Adjournment

7.7 Begin Future Meetings With a Review of Previous Minutes

The minutes are in the pre-prereading material. The minutes will show unresolved issues as well as the CEO/Founders decisions and planned actions. The review will update everyone on the outcomes of the decisions/actions.

8 Footnotes

Advisory Boards: An untapped resource for businesses March 2014 Business Development Bank of Canada https://www.bdc.ca/en/Documents/analysis_research/bdc_study_advisory_boards.PDF

¹ Page 1

² Page 10

³ Page 9

⁴ Page 10

⁶ Page 6

⁷ Page 11

⁵ Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

April 3, 2019 Tom Koor

How can founders and investors create a shareholders agreement?

How can founders and investors create a Unanimous Shareholders Agreement?

1 Purpose of this document

2 How to read and use this document

3 What is a Founders Agreement?

4 What is a USA (Unanimous Shareholders Agreement)?

4.1 What are the benefits of a USA?

5 How does a USA fit into the overall governance structure?

6 What are the stakeholder expectations?

7 What questions does the founders agreement address?

8 How does the term sheet reflect stakeholder expectations?

8.1 Questions to consider in the term sheet include:

9 How does the USA reflect stakeholder expectations?

9.1 Generic contents

9.2 Decision Making.

9.2.1 Shareholders.

9.2.2 Board of Directors.

9.3 Sale or transfer of shares

9.3.1 Forced shareholder exit

9.3.2 Shotgun provision.

9.3.3 Right of first refusal

9.3.4 Tag-a-long or piggyback.

9.3.5 Drag-along rights.

9.3.6 Option to purchase/call rights.

9.3.7 Option to sell/put right

9.3.8 Auction.

9.4 Issuing additional stock or options

9.5 Dispute resolution.

9.6 Information Rights

9.7 Amending the shareholders agreement.

1 Purpose of this document

This document is a tool to help the founders and shareholders of a private corporation develop a common understanding of expectations and objectives. This common understanding can then enable lawyers to craft a USA (Unanimous Shareholders Agreement). This tool can be used to both review an existing USA as well as craft a new or revised USA.

The critical action is to document the expectations of the founders and shareholders before starting to spend money on lawyers to develop a USA. Once the expectations are documented, then any issue can be discussed and resolved, leading to a set of common expectations which can guide the lawyers.

This document poses a series of questions, to stimulate thinking and discussion. This is not a comprehensive list of questions. It is up to the founders and shareholders to make decisions. This document does not make recommendation nor does it provide legal advice. Legal advice must be obtained from qualified lawyers. A Strategic Advisor can help you think through your answers to the questions.

2 How to read and use this document

The co-founders and shareholders will be referred to as “stakeholders”.

The document is organized to 6 groups:

What is a USA and what are the benefits?
How does the USA fit into the overall governance structure?
What are the stakeholder expectations?
What is a founders agreement?
How does the term sheet reflect stakeholder expectations?
How does the USA reflect stakeholder expectations?

The point of view of each stakeholder should be documented for each question.

3 What is a USA (Unanimous Shareholders Agreement)?

The Canada Business Corporations Act defines a USA as “…written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation.” All shareholders must sign and be part of the USA

3.1 What are the benefits of a USA?

The USA typically contains provisions in two main areas: decision making and share transfers, which are particularly helpful in the case of deadlocks or an unexpected shift in share ownership as a result, for example, of the bankruptcy or death of a shareholder. A USA is generally recommended whenever there are two or more shareholders in a closely held corporation.

The process of establishing a USA defines expectations and creates provisions which will ideally prevent lengthy, expensive, and potentially damaging disputes in the future.

4 How does a USA fit into the overall governance structure?

Governance is simply the definition of who makes what company decisions and the process for making those decisions.

The founders agreement may be used before there is any legal entity in order to define key decision making roles.
The articles of incorporation may limit the actions and decision of stakeholders.
The by-laws, which are approved by shareholders, limit the decisions and actions of the board of directors and management.
The board of directors, according to the Canada Business Corporations Act “…shall manage, or supervise the management of, the business and affairs of a corporation.” The board of directors mandate may specify which decisions are reserved for the board
Board of directors approved policies may constrain the decisions of management and the board. The board of course can approve an exception to any constraints it has placed on itself. The Board of Directors committee mandates may specify which decisions are made by the committee.
The Delegation of Authority to the CEO may specify that the CEO may make all decisions, subject to board of directors approved policies, and except those decisions specifically reserved for the board or shareholders. The Board of Directors and stakeholders still have the authority to veto any decision made by the CEO as well as make any decision which may have been delegated to the CEO.
Loans, other financing, and other corporate agreements with third parties may have covenants which in specific situations may provide decision rights to third parties or limit the decision rights of the stakeholders.
The USA may specify which decisions are reserved for shareholders and which for the board of directors. The USA takes precedence over any by-laws, board of directors decisions, board approved policies, and management decisions. A unanimous shareholders resolution may be able to make any legal decision, regardless of bylaws, existing unanimous shareholders agreement, or other governance documents, except for the articles of incorporation. The company must file with Corporations Canada (if federally incorporated) to amend the articles of incorporation.
Decision making authority and constraints may also be defined in other documents such as: Share Purchase Agreement or Investor Rights Agreement. Seek to reduce the number of documents which define decision making authority or constraints. Simplicity enables greater common understanding and reduces the costs of creating and maintaining legal documents.

5 What are the stakeholder expectations?

You should document the stakeholder expectations, which may include the following questions. The intent is to identify where there are common expectations as well as disagreements. As the stakeholders review and discuss their expectations, they may revise their expectations.

The stakeholder expectations are the foundation for preparing the founders agreement, term sheet and USA. When issues arise with the founders agreement, term sheet or USA, revisit and revise if necessary, the documented expectations. Do not attempt to come to agreement on expectations by spending large legal fee to revised term sheets and USAs.

In my experience, the agreement on stakeholder expectations may take several months.

Why does the company exist?
Why is the stakeholder involved?
1. Make a positive impact on society?
2. Have a positive impact on stakeholders reputation?
3. Make money?
4. Some other reason?
What are the stakeholders’ specific objectives?
1. Realize x times return on investment within y years?
2. Sell the business within x years?
3. Growing the value of the company year over year?
4. What are the key milestones?
What is the scope of the business?
1. Geography?
2. Nature of the business?
3. What the business cannot do?
What contribution will each stakeholder make?
1. Capital?
2. Introductions to potential customers?
3. Introductions to potential employees?
4. Introductions to potential suppliers?
5. Expertise relevant to the business?
6. Time devoted to the business?
How will the stakeholder realize financial value from the business?
1. Sale of equity?
2. Sale of business, followed by cash to shareholders?
3. Dividends?
4. Fees, salary, or other compensation?
5. Products and services provided by the business, perhaps at cost?
6. Other ways?

6 What is a Founders Agreement?

The founders of a company may have an agreement before the company is incorporated and a shareholders agreement put into place. This agreement may or may not be a legal document signed by the founders. Even if signed, it may only be an intent rather than legally binding on future actions.

6.1 What questions does the founders agreement address?

The following are some of the questions a founders agreement may address.

What objectives and timelines does each founder have for the startup and for themselves?
Who gets what percentage of the company?
1. Will the percentage depend upon vesting over time and continued involvement in the company?
What will each founder contribute?
1. Number of hours?
2. Capital?
3. Finding customers?
4. Finding capital?
5. Creating the product or service?
How are key decisions made?
1. Who will be the CEO?
2. Unanimous? Majority? CEO only?
3. What will be the founders salaries, if any?
What if a founder wants to leave? Can the other founders buy the equity? And at what price?
What happens if a founder becomes disabled or dies?
What happens if a founder wants to sell the company or kill the company?
What happens if it takes longer than expected to launch the company?
Can a founder work on other startups while launching this company?
What are reasons for removing a founder as an employee?
What happens if a founder does not fulfill the founders agreement?
If the business does not succeed, can a founder try again?
How much of the company are the founders willing to give up for how much capital?

7 How does the term sheet reflect stakeholder expectations?

Once the stakeholders have a set of shared expectations, with no fatal disagreements, a legal document know as the Term Sheet is prepared. The purpose of the term sheet is to outline the terms by which an investor will make a financial investment in company. The term sheet is not a legally binding document, with the exception of items such as confidentiality.
There may be a negotiation process around the term sheet.
Once the term sheet is signed, then the USA can be created (often with more negotiation) as well as the legal documents associated with funding and the other items in the term sheet.

7.1 Questions to consider in the term sheet include:

What type of securities are being offered to investors? E.g. common stock? Class A preferred?
What happens to the investors investment in the event the company is liquidated?
What conversion rights, if any, will the security provide?
What are the voting rights?
What must be in the shareholders agreement?
1. What will be the information rights?
2. What key protections will the investor have?
3. What pre-emptive rights will the investor have, to prevent dilution?
4. What happens if any shareholder wished to sell?
5. How are directors elected?
  1. Will the be a shareholder representative?
6. How do you define “sale of the company”?
What will be the size of the option pool?
How many years will the share purchase agreement survive?
1. Will there by any key representation and warranty items?
What will be the founders terms?
1. What will the founders transfer to the company e.g. intellectual property?
2. Will the founders have an employment agreement?
3. What are the terms regarding founders vesting?
Will the company pay for investors legal fees?
How long is the term sheet valid for?
Will the founders be prohibited from soliciting other financing during the time the term sheet is valid?

8 How does the USA reflect stakeholder expectations?

8.1 Generic contents

Some of the generic contents include:

Is there a table of contents for the shareholders agreement?
Is there a statement that this is a unanimous shareholders agreement?
Does the shareholders agreement relieve directors of obligations and liabilities regarding decisions make by the shareholders?
Does the shareholders agreement prevail over articles of incorporation and by-laws?
Is the business defined?
Are the business objectives defined?
Are there definitions and principles of interpretation?
Confidentiality?
List of shareholders and shares owned?

8.2 Decision Making

Which decisions are reserved for shareholders and which for directors? The following illustrates some possible decision. These are neither recommendations nor advice as to who makes the decisions.

8.2.1 Shareholders

Shareholder meetings
1. How many shareholder meetings per year?
Are there shareholder representatives and can those representatives bind the shareholders?
What is quorum for shareholder meetings? Does the quorum consider any required representation from each shareholder?
Do decisions of the shareholder representatives need to be unanimous?
What decisions are reserved for shareholders?
1. Changes to the shareholders agreement?
2. Changes to capital?
3. Changes to board size?
4. Material changes to the business and business objectives?
5. Mergers or acquisitions?
6. Sale of the company or major assets?
7. Going public via IPO or direct listing?
8. Major financing?
9. Approval of any contracts which limit the decision-making authority of the shareholders?
10. Appointment of auditors?
11. Appointment, termination, and compensation of CEO?

8.2.2 Board of Directors

What happens if one of the directors dies or is incapacitated?
Do specific stakeholders have the right to appoint a certain number of directors?
Do founders have certain rights to nominate certain number of directors?
Is the process for appointing board chair defined?
How is director compensation (if any) set?
What is the minimum number of yearly board meetings?
What is the process for calling an emergency board meeting?
What is board meeting quorum? What quorum requirements exist regarding director(s) nominated by each stakeholder?
How many directors are required to approve a resolution?
What are the specific decisions reserved for the board of directors, if any?
1. Approval of strategic/business pans and related budgets? If so, what must be in these documents?
2. Approval of material modifications to strategic/business plans and budgets?
3. Appointment, termination, and compensation of all officers, other than the CEO?
4. Financing?
5. Capital expenditures?
6. Dividends or other return of capital?
7. Material accounting or tax policies?
8. What committees, if any, of the board exist?
9. What are the key responsibilities of each committee?
10. How is the composition of each committee determined?
11. Will the committees have any decision-making authority?
12. What are the minimum number of yearly committee meetings?

8.3 Sale or transfer of shares

What is the process?
What are the restrictions?

8.3.1 Forced shareholder exit

If a shareholder is an individual, what happens if: shareholder dies, is incapacitated, declares bankruptcy, divorces, etc.
If a shareholder is a company, trust, etc. what happens if: there is a change of control, bankruptcy, change in leadership of the other company, etc.

8.3.2 Shotgun provision

Is there a shotgun provision? (Usually only for a 50/50 two shareholder situation. Allows shareholder A to buy out shareholder B. After A makes the offer, then shareholder B can buy out shareholder A at the same price.)

8.3.3 Right of first refusal

Is there a right of first refusal? (This gives a shareholder the option to purchase the shares of another shareholder before they are sold to a third party.)

8.3.4 Tag-a-long or piggyback

Is there a tag-a-long right? (The minority shareholder has the option to block the sale of the majority shareholders, unless minority can sell at the same terms.)

8.3.5 Drag-along rights

Are there drag-along rights? (The major shareholder has the option to force the minority shareholders to sell at the same terms)

8.3.6 Option to purchase/call rights

Does a shareholder have the option to purchase the shares of another shareholder?
What are the terms and conditions?

8.3.7 Option to sell/put right

Does a shareholder have the right to force another shareholder to purchase the right holder’s shares?
What are the terms and conditions?

8.3.8 Auction

If there is a fundamental disagreement among the shareholders, is there an auction process. (Each shareholder would submit sealed bids for the shares in question. The highest bid wins the auction.

8.4 Issuing additional stock or options

Who makes decisions regarding the size of the stock option pool and issues of stock options?
Do existing shareholders have pre-emptive rights to purchase new shares issued?

8.5 Dispute resolution

Is there a dispute resolution process?
Is there binding arbitration?
How is the arbitrator selected?

8.6 Information Rights

What information must the corporation deliver to shareholders by what time?
Must the corporation provide to shareholders other financial and business information requested by the shareholders?

8.7 Amending the shareholders agreement

Is unanimous shareholder agreement required to amend the shareholders agreement or some percentage of the shareholders?

November 30, 2018December 12, 2018 Tom Koor

What is the value of a for-profit advisory Board?

What is the value of a for-profit advisory board?

What is an advisory board?

A group of independent people who advise the CEO (or board of directors) on specific problems and meet on a regular basis. The advisory board has no voting authority the and company has no legal obligation to follow advice.

The board is independent. Ideally the members have no other business arrangement with the company other than being on the advisory board. If the members have other financial arrangements, their advice may be biased.

How do you measure value?

What is the impact on sales, earnings, and productivity?
What is the impact on key business milestones, growth, and innovation?

It can be difficult to establish a direct cause-and-effect relationship between the advisory board actions and business results. A key indicator can be whether or not the advisory board impacts the decisions made by the CEO (or by the board of directors).

What are the major benefits of an advisory board, as perceived by companies with advisory boards?

85% believe that the advisory board had a significant impact on success.²

Some of the benefits, according to business leaders (rating on a scale of 1 to 10):³

Is an essential tool 8.2
Allows you to develop a broader vision 8.0
Improves strategic business choices 8.0
Forces management to look at the company 7.5
Challenges the company’s management team 7.5
Puts in place a better management structure 7.4
Brings rigour in to the company 7.2
Reassures shareholders and investors 7.2
Avoids costly mistakes 6.7

What are some of the impacts of an advisory board, according to the business leaders (on a scale of 1 to 10):⁴

Company vision 7.7
Innovation 6.9
Risk management 6.8
Profitability 6.8
Survival 6.6
Sales growth 6.6
Hiring the best employees 6.2

Who has advisory boards?

75% of SMEs (Small Medium Enterprises)⁵ have no board. 19% have a board of directors only. 6% have an advisory board (Half of those also have a board of directors)⁶
11% of companies with more than 100 employees have an advisory board.⁷

How do you recruit advisory boards?

56% of the advisories come from the company’s network, 8% from external recruiting such as associations, only 3% from company’s financial institution or investors.⁸

How do you organize an advisory board?

You need to determine the skills and experience required on your advisory board. Look at you 3-5 year business forecast. What are the opportunities and challenges over that time-horizon? What is the talent (skills and experience) you need? What are the talent gaps when you look at the management team (and board of directors) What is the talent you need on your advisory board.
The written advisory board mandate must have the objectives, terms of reference and time commitment. Each advisor commits to reading preparatory documents, actively participating in the meetings and follow-up. The mandate also addresses advisor out-of-pocket expenses and compensation (if any). If business development is a role, then there can be performance bonuses based on business development results.
The mandate must be clear – are the advisors expected to act in the best interests of the owner(s) or the best interests of a broader set of stakeholders? For example, a recapitalization could provide capital to the owner but risk the long-term viability of the company.
It must be clear how the company and advisory board interact. (e.g. meetings only with the CEO or including C-Suite members? Are all questions (from management and advisors) funneled through the CEO?) The advisory board may meet monthly, quarterly or as required.
The role of the chair is crucial, working with management, the board of directors, and the advisory board members.
The individual advisor roles must be clear, e.g. help develop business by opening doors, act as a company ambassador at social events, etc.
Individual advisors bring specialized experience, knowledge and contacts which the board of directors does not have. The advisor capabilities are not a replacement for capabilities which should be on the board of directors or management, but rather be complementary.
Each advisor must also have a degree of passion and interest in the business.
The advisory board has simpler processes than a board of directors, does not require elections, term limits, committees, public disclosure, etc.

Why don’t companies create advisory boards?

57% believe it is too much work.⁹

The creation of an advisory board does create more work for management, and more fact-based data collection and analysis. The question for the CEO, board of directors, and/or owners is whether or not the increase in profitability warrants this additional work.

What does an advisory board cost?

The cost is driven by the value the advisors can create as well as the cash available.

A small angel-investor-backed start-up may have a volunteer advisory board meeting on an adhoc basis or even once a year. Advisors will focus on survival issues, CEO coaching, and shifts in strategy.
A growing company with 4-6 advisors may provide $15,000/yr compensation for each advisor, with more for the chair – and the time commitment may range from 60 to 125 hours a year. The advisors will focus on the long-term direction and initiatives which have a major impact on value growth and preservation.

Is your CEO or board of directors ready to create a formal advisory board?

The advisory board asks questions and challenges the CEO (or board of directors). The advisory board does not prepare reports or analysis.

There are four criteria to determine if you are ready for an advisory board.

There is a management team who can free up some of the CEO’s time. It can take the CEO 120-150 hours to setup and recruit and advisory board, plus another 60 hours per year for ongoing operations (this assumes 4 one day meetings per year of the advisory board).
There is a strategic plan. This plan answers several questions:
- Who are the target customers?
- What problems or needs do they have?
- What is your solution?
- Why do the target customers perceive that your solution is a better value than the competition’s solutions?
- Who is your team and what are their relevant skills and experience in understanding the customer and to deliver your solution?
- How are you going to get customers?
- What is your business model for delivering your solution?
There is a 3-5 year financial plan, tied to the strategic plan. The financial plan has two components: the cashflow forecast, and the budget. There is already a process in place to track budgets to actuals.
You have a fact-based, analytical understanding of customers and their needs. This can include: identifying customer needs by reviewing notes of meetings and calls with customers, analyzing what customers buy and don’t buy, analyzing what customers look at in your newsletters and websites, focus groups, surveys, etc. Once you have customers, the net promoter score survey becomes critical, especially as you analyze why the score changes. You start your business with hopes and wishes as to what customer needs are. As soon as you start communicating with customers, you must become fact-based.

If you don’t meet the above criteria, you are not ready for an advisory board.

Next steps

To enable discussion with your investors, board and management, download the following one-page slide:

What is the value of a for-profit advisory board?

To create a formal advisory board, contact the Business Development Corporation of Canada, who have a proven process for creating advisory boards.

Footnotes

Advisory Boards: An untapped resource for businesses March 2014 Business Development Bank of Canada https://www.bdc.ca/en/Documents/analysis_research/bdc_study_advisory_boards.PDF

¹ Page 1

² Page 10

³ Page 9

⁴ Page 10

⁶ Page 6

⁷ Page 11

⁸Page 13

⁹ Page 12

⁵ Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

Further Reading

Small company boards: Questions for advisors and directors. CPA Canada https://www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/corporate-governance/publications/potential-small-company-directors-advisors-questions

Survey: What is the role of advisory boards. https://koorandassociates.org/further-reading/survey-what-is-the-role-of-advisory-boards/

July 30, 2018 Tom Koor

Survey – what is the role of advisory boards?

Survey – what is the role of advisory boards?

I did a survey of people on my LinkedIn network who are on an advisory board or a CEO with an advisory board. This survey was done because I was appointed chair of an advisory board and wanted to learn from others. If you are an advisory board member or chair, please contact me – I’d like to include your learnings.

The following contains the email I sent out as well as the responses, which are anonymous.

The email I sent out

Hello XXX

I have a few questions regarding what sort of things you do for your advisory board (I saw your role on your profile). I ask because I’ve been appointed chair of an advisory board for a financial services firm and need to resurrect the board. I need to learn some details about what other advisory boards do.

Thank you.

Tom

Possible actions:

Prepare for and attend regular face-to-face meetings?
Available for consultation between meetings?
Serve on advisory board committee?
Introduce potential clients to the firm?
Spend time with potential clients?
Introduce other executives to the firm?
Provide new business ideas and opportunities?
Promote the firm via your personal social media (twitter, website, blogs, Facebook, LinkedIn, etc.)?
Provide suggestions and advice regarding functional areas (sales, marketing, finance, HR, etc.)?
Have functional meetings outside of regular advisory board meetings?
Other????

The anonymous responses

Advisory Board #1 member

That’s right on the money It’s really an opportunity to bring strategic resources and thought leadership to an organization People on the boards usually have some expertise that you can draw on including Sale’s, marketing, finance and leadership. The chair is the quarterback to draw out that experience and knowledge.

Advisory Board #2 member

Happy to help you if I can.

As of this past month, I am Chair of the Program Advisory Council for the XXX program at the XXX School of Business. We basically work with the faculty and students to help support and improve the overall program and the various components within it.

I am also an XXX Advisor on the Board of Directors for the Canadian XXX Council I provide the “XXX” on that Board with a CIO perspective on the various issues that they deal with. In addition, I do serve on various Committees of the Board along with the other Board members. So, I am not sure that my experiences are directly compatible with your Advisory Board role question. However, along with my other two Board of Director roles, I would say the possible actions of #1, 2, 3, 6, 7 and 8 fit best with my general understanding of what needs to be done.

Advisory Board #3 member

My role is for a small co (very) and it’s really ad hoc to have a halo support group with supplementary skills. If yours is bigger then the types of things you describe could be formalized and scheduled. You want to be mindful of people’s time. Maximize their value add at the time their skills/connections are most useful, minimize procedure…. my 2 cents Congrats and good luck!

Advisory Board #4 member

It can be whatever you define. At the minimum is for pick up the phone when the ceo needs and can go to everything else in your list. At this point my commitment is limited to picking up the phone as I am busy with my own startup. Hope this helps.

Advisory Board #5 CEO who had an advisory board

Overview

The role depends upon the stage of the company and the growth/profitability issues a company faces.
In all cases, the network of the advisor is critical. At the very least, the network provides information to the advisor. In some cases, the advisor may introduce: potential customers, potential investors, potential suppliers, potential new employees.

Where do you find advisors?

They can be senior executives, towards the end of their career, who are somewhat bored and eager to work with other executives on some challenging issues.
The executives could come from: current customers, potential customers, other organizations in the company/customer ecosystem.
It is key that all advisors be “A” quality. If some are “B” or “C”, then the “A” quality will leave.

What is the role of the advisory board?

The advisors provide advice to the CEO and perhaps management.
The advisors must have skills, experience relevant to the challenges and issues the company will be facing in the next 2-3 years. g. if going public, then need CFO or another executive who led an IPO.
1. Advisors should complement the knowledge, skills, and experience of the management team. e. The combination of the advisory board and management team should have the knowledge, skills, and experience relevant to the major challenges and opportunities arising in the next 2-3 years.
The board does not make decisions. Thus, requires less information than a decision making fiduciary board. A dashboard of key metrics is useful.
The role of the CEO and management is to listen and learn, not to make long presentations.
Set the expectations for advisors upfront. Consider a fixed two-year term.
If there are 6-8 advisors, there will be a 80% participation rate.
There should be no dominant personalities on the board, recognizing that the chair should enable the discussion.
The advisors must provide unvarnished input to the CEO and management.
Each board meeting and call can be a problem-solving discussion focused on the issues raised by the CEO. It’s not necessary for the advisors to agree on a single solution – what’s important is to maximize the input and learnings to the CEO and management.

What was the advisory board role when you were the CEO?

This was a company with a fiduciary board of directors.

The advisory board had a one-day meeting down south in the winter. Fly in day before for dinner. One day meeting, then fly out. The CEO and management attended.
Three quarterly advisory board conference calls of 1-2 hours each.
All meetings/calls were scheduled 1 month prior to fiduciary board meetings, to enable CEO to learn regarding key issues – almost like a dry run. The CEO also shared strategy and strategic plan with the advisors, to get their comments.
The CEO and management also made occasional phone calls to the advisors.
The advisors received material before meetings/calls. This enabled the meetings to focus on discussions and not review of material.
The advisory board chair was paid $25,000 per year. The advisors were paid $500 to $1,000 per-diem, with out-of-pocket travel costs covered.