Build Board of Directors: Simple How To Guide for StartupsStartup Law ResourcesEmployment Law, Human Resources
To build board of directors for your startup, look for the most experienced people in the company.9 min read
To build board of directors for your startup, look for the most experienced people in the company. The board should be elected by shareholders, will determine the company's direction, and will draft the company's bylaws. Also, when it comes to who is responsible for the success and the failure of the company, the board is where all eyes fall.
What Does a Board of Directors Do?
Building the board of directors for your startup is tough, as the board of directors will help shape the future of your company. Early mistakes with the board can be devastating.
The board of directors at your startup exists to guide your company. They aren‘t the scotch-and-cigar-filled rooms where the rich divide assets up among themselves, especially not in a startup.
The board is responsible for things like setting high-level goals for the company, hiring the CEO, issuing stock, and clearing dividends. Keep in mind, your management team oversees all day-to-day operations, while the board supervises only the executives and the CEO.
Companies incorporating as C Corporations or S Corporations must have a board (for example, technology startups looking for funding in Delaware typically incorporate as a C Corporation). However, a sole proprietorship, LLC, or general partnership does not need a board.
Remember, your financial investors do not have to join your board. Also, board members can fill four roles: board member, advisory board member, a board observer (a non-voting member who attends meetings), or non-active board member.
- Common Directors. Directors represent the common stock and shareholders. Common Stock Directors are often one or more of the company founders and sometimes seed investors. Before raising venture capital, your board usually only has Common Directors.
- Preferred Directors. Preferred Directors represent preferred stockholders. These Preferred Directors are typically lead investors who make company decisions based on how they affect the interest of all investors.
- Independent Directors. These are third-party directors appointed to represent only the company's interest. Independent Directors are market experts that make decisions without being bogged down by stockholder allegiances. These directors have no stock in the business.
Having a board of directors that has a clear agenda and a way forward is essential to ensuring the success of your startup. The following is a step-by-step method for building a board of directors that can guide your company into the future.
Consider Having an Advisory Board
Startups often choose to skip having a typical board until they get outside investors.
Remember, boards focus on what is best for the shareholders and are not devoted to the founders. Essentially, the board oversees the founders.
Alternatively, advisory boards offer advice, investments, and introductions to important people, but they have no control over the founders. In some startups, this advisory council meets quarterly, while others come together when they need individual investors. Also, these advisors receive compensation in the form of stock in the company.
For startups, board strategy is essential, and many don't put outsiders on the board until they receive Series A funding. Before this point, they pick reliable advisors along with any seed investors for the board. When they receive Series A funding, they might bring on one or two professional venture capitalists (VCs) with a dependable advisor as an outside member.
Have the Right Number of Members
When filing articles of incorporation, you usually must pick an initial director or directors for your startup. Several states only require a single director, often the CEO or President.
One mistake that a lot of firms make is not having a board of directors with the right number of members for their purpose. A good number for a new company is three to five directors at the beginning. This gives you room to expand, and it will also help you avoid any chance of a tie when votes come up. More members than this at the beginning can make scheduling an issue and be a drain on your funds, and any fewer members is not a board. Compensation is essential, so keep that in mind and consider giving them access to a percentage of stock instead of money. A common amount given is 1 percent of stock or expenses per quarter plus a meager retainer.
Typically, venture capitalists will try to create additional board seats, but you should limit their number to no more than seven (the two founders, one to three VCs, and two additional professionals in the industry).
Hire Independent Directors
When a company raises money through investors and gains venture capital, their investors ask for seats on the board in order to keep an eye on their investment. But startups must be cautious, as some board members can put the interest of investors or founders above the well-being of the company.
Outside directors can provide professional advice and perspective to the board that you might not get from a member who is too close to the company. Outside directors are typically experienced in making objective corporate decisions and are not encumbered by a personal or emotional connection to the company. They can also bring in skills that might not exist in your startup.
Don't Demand Management Support
Expecting your board of directors to fall in line behind management is a recipe for disaster, as the benefit of a board is the ability to make decisions based on divergent opinions. Forcing the minds that you are compensated and provided with seats at the table to simply agree with management is a waste of resources and will likely result in poor business decisions.
Avoid Misalignment Regarding the Board's Role
Boards of directors have many fiduciary and legal responsibilities. Still, boards often have additional roles correlated with the venture's stage.
At early-stage startups, members should support the management (without micromanaging it). For example, they may help guide product decisions or provide access to recruits, customers, and investors. Ideally, board members could also mentor founders. More established startups, however, may need a different type of assistance related to scaling sales, engineering, logistics, and other functions that no longer fit into a garage.
Establish Structure for the Board
Think about putting four-year term limits on board membership along with other rules. Plan how people can join the board. Will management vote? Will members select their successors?
Your board needs a playbook and defined roles and responsibilities. Written governance policies should be created through voting. At a minimum, the board should be required to meet four times annually in the presence of a quorum, or if there are any pressing issues to be addressed.
Attributes to Look for to Build Your Model Board
To ensure your board is effective at its job, it is vital that you choose the right people to be on your board. This process can be difficult, but by choosing the right people, you will increase your chance of them being successful. One of the most important ways to build a model board is by selecting people who can bring skills and experience you may be lacking that will work in harmony with your skills. When choosing people for the board, you should focus on diversity, relevancy, and alignment.
Having a board made up of individuals who have different expertise, knowledge, and backgrounds can provide the best combination to keep your company moving forward. When you have a startup company, there are certain skill sets you want to make sure to have as available assets on your board. This includes:
- A marketing expert. It is important to have a member who understands the target market for your business and the ways to reach that audience.
- A financial expert. Having someone who understands the ins and outs of finances for an early startup can help get you connected with funding sources and provide oversight for the company's financial plan.
- An advisor. A board member with an advisor skill set can help guide decisions and aid in negotiations that the company may encounter during the startup phase.
- An exits expert. An exit strategy is almost always a part of the startup plan. Whether the exit results in an IPO or a merger and acquisition, having an expert who can prepare the company for what's ahead is vital.
- An expert for each major department. For the final positions, you will want to add members who have experience in the other major departments that your company will have, such as product development, sales, etc.
While diversity is essential in a company, it only works if it is relevant to the direction the company is heading. The concept of relevancy is fairly easy. If you sell office furniture and supplies, you will want to look for board members who have been involved in the office supply and furniture industry. If your company sells health care devices, you will want someone with health care experience in sales and reimbursement.
The final attribute to look for when creating the perfect board is alignment. Your board should be comprised of members who are focused on the long-term goals of your company. Since building a company can be difficult, it is vital that the board works together instead of pulling the company in opposite directions.
Choose members who share the same vision for the company and are in sync with both the short- and long-term goals that the company is trying to achieve.
Choosing the perfect board takes some organization. Start by creating a spreadsheet that lists each of the skill sets you need to have filled by a board member. Then, use the top row to put your possible board members. Mark the skill sets that each of the board members has. Once the spreadsheet is completed, you will be able to see where your potential board's strengths lie and the areas where you may be coming up short.
It is important that, when defining these skills, you include the skills your company will need to achieve both its short-term and long-term goals. Another thing to consider when selecting board members is adding influential people who may have contacts in the fields you need to make your startup successful. Expertise is important when it comes to building and growing a company.
Find the Right People for Your Board
Even though board members are key resources who provide support, insight, and professional networks, not all members are created equal.
- Consider the future. When selecting board members, consider how they will function in the long term. Select directors who are ambitious, want to see the company grow, and have a vision for taking your company from a startup to a powerful business.
- Develop a clear job outline. Make the title and description of each board member explicit from the beginning. This includes both non-executive and executive positions. Define the goal of each role, including the role the board will play in risk management and strategy.
- Choose your workhorse. Find at least one person on the board who understands your vision of the company and who can handle directing the board. Look beyond those who are simply accountants and lawyers and actively seek out leaders.
- Infrastructure is everything. Try to create a reliable structure to build upon from your team. Keep in mind that as the CEO you report to the board, so gather a team of people you respect with the know-how to get things done.
- Be impartial. Look to the duty and leave your emotions behind. Make sure each member knows their role clearly and the roles of the board. Make sure that they understand that they are there to protect the company and not their own best interest.
- Avoid all yes-men/women. Avoid those who are prone to sucking up. Go for those who are smart and brave enough to know when to disagree with you.
- Choose a mixed-bag approach. Try to create a sense of diversity within the group. This diversity should be in reference to ideas, identity, and skill set. A group is often as strong as they are different.
- Develop a unified concept of the future. Try and make sure that these different people are capable of coming together when it counts. Make sure that they have a shared goal and are looking to reach the same destination.
- Hone the idea of the imaginary line. Make sure to be very explicit about the jobs on the board. Keep jobs like CEO and board chairman distinct and separate.
- Pay fair and consider the past. Look for those with substantial and valuable experience. Consider their skills and be sure to pay them accordingly.
How Often Should Your Board Meet?
There are many factors that determine when a board should meet, including what stage the company is in and the needs of its management. Typically in a startup company, the board will meet in person at least once per quarter. This will allow them to review each quarter's results to ensure the company is on track.
Companies that are in the early stages of development may find it beneficial to hold more frequent board meetings, which can either be done in person or over the phone. Some companies may find informal board phone meetings more beneficial so that they can stay on top of operations and make the necessary changes to avoid encountering problems.
When crisis situations or major changes occur, such as being acquired by another company or acquiring a company, the board will be expected to meet more frequently. This can be as frequent as every day or even multiple times per day. A typical board meeting will run a few hours, though many run longer depending on what is on the agenda.
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