What’s the difference?
tl;dr – A company’s Board of Directors has decision making authority for major business conducted by the company as well as a fiduciary duty to the company. A Board of Advisors advises the company on strategic matters but does not have decision making authority or a fiduciary duty to the company.
Often, when I ask first-time founders of early stage companies who sits on their Board of Directors, they give me a list of names of people who hold between 0.25%-1% of their company. At that point I ask – “Wait, are these people Directors or Advisors?” To which a common response is “They are advisors. What’s the difference?”
I’m glad you asked!
Board of Directors
A Board of Directors has great power and decision-making authority over major actions affecting the company. These decisions include hiring/firing the CEO, approving a financing, raising the size of a stock plan, approving a sale, etc. The Board of Directors decides the path the company will take over a formal meeting or through a written consent.
Additionally, directors are formally elected by stockholders or by other directors depending on the circumstances and the bylaws of the company. Generally, directors are founders, investors, or a subject matter expert who can provide industry/product guidance to the company.
Finally, the Board of Directors has a “fiduciary duty” to the company. What that means is that a director has two primary fiduciary duties to a company – the duty of care and the duty of loyalty. The duty of care means the director should inform themselves and think of alternatives before making decisions. The duty of loyalty means the director should look to the interests of the company and to its other owners and not just to their personal interests when making decisions.
Board of Advisors
A Board of Advisors does just what it name entails and advises a company on strategic matters but has no decision-making authority over the path the company takes. For example, if your founding team is lacking experience in creating a Go to Market strategy in your industry you can bring on an advisor who fills that gap.
Another big benefit to a Board of Advisors is that it gets strategic resources/knowledge involved with the Company, without giving those people decision-making power. A strong Board of Advisors is also a great signal to customers, vendors, and investors. It is a good way to gain credibility so long as your advisors are well-respected, and you don’t give up too much equity.
Finally, advisors can be early investors in your company.
Unlike a Board of Directors, a Board of Advisors rarely meets and operates as a single unit. This is mainly because the Board of Advisors itself is normally larger than a Board of Directors and thus it is hard to schedule a meeting time that works for all. A company normally meets with its advisors on an ad-hoc basis.
Advisors are often picked by founders of the company with no formalities beyond advisor agreement and equity documents approved by the Board of Directors.
Finally, advisors do not have a fiduciary duty to the company and its stockholders.