Building a VC Advisory Board
“The power of many will always exceed the power of one.” Colleen Ferrary Bader
All startups have a board of advisers and as they grow, they become the board of directors. This aims to advise the entrepreneur on the strategy, business model, commercial development, formation of human talent and capital raising, among others. In addition, it fulfills the function of ensuring the best interest of investors and ensuring compliance with the governance of the startup. Just as startups have these control bodies, Venture Capital funds have their own.
Every Venture Capital fund has an advisory board, the purpose of which is to advise and provide knowledge and support to the fund managers, and to ensure the corporate governance of the vehicle. The main elements to consider for the construction of an advisory board are the following:
The first step is to elect the individuals who will make up the advisory board. It is a relevant decision since it will be the advisory, surveillance and control body of the vehicle. The main characteristics to consider at the time of forming it are:
o Size: 3–5 members appointed by GP, usually investors (Limited Partners).
o They are usually the largest investors in the fund.
o None must be related or affiliated with the GP.
o Generally, they can be changed at any moment in time by the GP.
The frequency of the meetings and the participation of each of the members must be also defined. For example:
o Meetings are usually at least once a year.
o In addition, they receive reimbursement of expenses (out-of-pocket expenses) and usually do not receive any additional compensation.
Each of the members has clear and specific responsibilities that must be fully fulfilled. Among some of them are:
o Review and approve or reject investment proposals.
o Review portfolio valuations.
o Consult and provide advice to the GP “on the conduct of Partnerships affairs”.
o Resolve any issue related to a potential conflict of interest between GP and any other person or entity.
o Approval of changes to the investment guidelines of the company.
o Approval of investments outside the investment guidelines.
o In addition, the members of the advisory board are not part of the fund management and cannot make contracts or make decisions related to the investment vehicle, this responsibility rests with the fund manager.
- Votes, rules, and procedures
Like any governing body, it has established processes, as well as voting guidelines and structures. The most commons are:
o Approvals, disapprovals, vetoes, and other actions are taken by the majority of the members.
o They have the authority to adopt rules and processes related to various issues.
- Duty of care
The General Partner is responsible for managing and making the investments on behalf of the partnership (GP + LP). However, there are several events where it requires the approval of the advisory board to carry them out. Hence, the advisory board has a fiduciary responsibility to the fund’s investors; some caveats around this are:
o No member of the advisory board is responsible for the losses that the company may suffer.
o The members of the advisory board are subject to being compensated or indemnified by the partnership.
- Investment Advisers Act
On some occasions, the formation of the advisory board of the company may be governed in accordance with the US Investment Advisers Act of 1940.
In addition to the elements previously mentioned, it is important to keep in mind the following recommendations when setting up an advisory board in a VC fund:
- Members must be professionals with extensive experience, either as an entrepreneur, in investments or in technology.
- The managers of the VC fund must be objective in forming the advisory board and select those members who provide the most value, not necessarily those with the largest capital commitment.
- Every advisory board must be diversified and inclusive.
- The advisory board varies depending on the type of company. The conformation of an independent Venture Capital fund is different from a Venture Capital corporate fund. Each of them must adjust the advisory board according to their reality. For more information about these differences, please refer to the following article: IVC vs. CVC
The advisory board is a fundamental part of any Venture Capital fund, similar to the advisory board or board of directors of a startup. The big difference is that Venture Capital funds require an advisory board from the start in order to begin operations. As in any society, LP’s should look at the profiles of the advisory board members and their independence or relation to the fund manager, and they will be able to get a good idea of the seriousness and governance of the Venture Capital fund.
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Gonzalo Soriano. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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