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This insight addresses the establishment and maintenance of an advisory board, a formal group with no legal responsibilities, but one able to be called upon to act as business, industry and scientific advisors to the CEO.  Usually, such an advisory board is formed carefully by the CEO to fill in the critical areas of need not evidenced in the board of directors or within the company itself.  University professors, industry gurus, lawyers familiar with patent law and former executives of competitor companies are typical recruits to an advisory board. Sometimes, celebrities will agree to sit on an advisory board as a gift to the CEO, providing a bit of glamour for the company at small expense.

There is no limit to the number of individuals for such a board, but there is a practical limit to the amount of cash and / or stock to be allocated to these outside advisors.  The rule of thumb for an advisory board member is to expect a full day each year on site, typically in a strategic planning meeting with numerous members of the staff, and a number of phone calls from senior members of management during the year.  Included in the “package” is the expectation that the advisor’s name will be freely used in the company’s marketing, a bio listed on the website, and occasional calls will come as references to the advisor from potential investors and others looking for deeper insight into the secret sauce of the company or state of the industry than can be provided by many on the inside.

[Email readers continue here…] For this, an advisory board member for a small to medium sized company should expect to receive options equal to ¼% of the fully diluted stock of the company, vesting over two years, and subsequent grants of the same size if renewed in subsequent two year intervals.  Alternatively, some companies pay an advisor a fee of $1,000 per meeting day and optionally much smaller stock grants, if any.  Additional commitments of time by an advisory board member should be compensated as would any consultant, at half and full day rates agreed upon in advance between the CEO and the advisor. There is no rule as to uniformity of pay, as some advisors may be willing to serve at no cost while others are industry consultants used to receiving fair payment for services rendered.

I sit on a board of a company with potentially valuable patents that it is exploiting aggressively. The board has hired an attorney firm to pursue protection of these patents in the courts, but the members of the board felt that it would be wise to add a member to the advisory board who is also a patent attorney to watch over the process and advise the board at its meetings of issues that may not have been covered by the paid attorney or by other member of the board itself.  In this case, payment for the attorney advisory board member was agreed to in the form of common stock options more generous than the average advisory board grant, as the attorney was invited to sit in on all meetings of the corporate board and agreed to do so.  There are many variants of the rule for payment, and many reasons why advisors may be willing to serve. In this instance, the attorney realizes that the potential value of the stock options in the event of major wins in patent litigation would far outweigh any fees which he might have charged.

Advisors fill blind spots in the corporate knowledge base and guide the CEO in areas that the CEO feels are personal weaknesses.  There is usually a formal agreement between the company and the advisor, carefully calling out the time expectation, the forms and amounts of payment, and the indemnifications from liability granted by the company to the advisor in return for confidentiality and non-disclosure of company trade secrets by the advisor.

A particularly strong advisor, especially if well known, may be named chairman of the advisory board, often just a honorary title, since the CEO is usually tasked with the planning of the full day meeting of advisors annually, setting the agenda to match the needs of the member of the corporate board and senior management.