How a Board of Directors Can Help Your Startup
Why Your Startup Needs a Board of Directors
When launching a startup, you are probably most focused on your product or business strategy. Setting up a board of directors is certainly not the first thing on your list of priorities. And yet, by law, companies are required to have a board of directors. It doesn’t need to be a fancy board with a lot of members. Actually, there can be just one. In many startups, the founders elect themselves as that person at first and add more as the company grows.
There are more reasons to designate a board of directors other than just the requirement by law. The role of a board is to provide guidance and help your company move forward. Practically, this means that boards deal with corporate issues, like setting up stock options, authorizing fundraising, budgeting, seeking loans, and issuing stock. Boards are also in charge of hiring and firing senior management and determining their salaries.
Forming a Board of Directors in a Startup
When the initial board membership consists of just the founders or CEOs, they tend to have a majority stake in the business and thus don’t have that much to do in a board capacity, since they are themselves from management. In most cases, though, investors who join in will demand a seat on the board, and that’s when the board’s significance really starts to develop.
In the first round of funding, founders can try to maintain control of the board by designating two seats to company management and one seat to the investor. After the second round of funding, the dynamic starts to balance out. If you have two main investors in each round, you’ll now have two investors on the board.
A common practice at this point is to designate an independent seat, which is reserved for someone who is not from management or an investor. Rather, that person is often someone who has knowledge of the industry and/or a valuable network. This brings your total number of board members to five. It’s preferable to have an odd number of members on your board at all times so you can avoid the dreaded tie.
How to Build a Great Board for Your Startup
In the beginning, you might be hesitant to bring investors and others onto your board because that essentially gives then a say in your precious startup. Bear in mind, though, that investors and advisors bring insights and expertise to the table. They believe in your company and want you to succeed. The advantage they have is being able to view things from a different perspective. So, don’t be too scared of them — embrace them. Many successful CEOs have boards with high-quality, experienced advisors backing them up.
If you are able to bring on two independents as opposed to two investors, the latter might be a better choice for your startup when it’s still young. Having a board that is dominated by management or investors can skew the objectivity that it is supposed to provide. Independents, on the other hand, want the company to succeed but don’t have any actual money on the line. This gives them an unbiased viewpoint.
What the Right Board of Directors Can Do for Your Startup
Your board of directors should propel your startup forward, not hinder it. To do this, members need to be on the same page. Management has a lot of power in making that happen.
First of all, the choice of investors/independents will greatly influence how your board operates. Remember, the choice is yours; you don’t need to settle. When choosing, keep these four things in mind:
Attitude — What’s the potential member’s attitude? Are they eternal optimists? Pessimists? Realists? What does your board need?
Experience — How much experience does the potential member have in your industry? Do they have a network that you can benefit from?
Time — Does the potential member have enough time to allocate to your company? There are at least four meetings a year, but in young startups, there can be double.
Personal fit — Some people just click. Others don’t. Choose someone who clicks with you and your vision.
Another way managers can maximize the potential of their board is to make sure that the lines of communication are open. Members from management usually spend more time together than with other members. Therefore, they might be privy to information that the others aren’t or assume the others know things that they don’t.
To keep the lines of communication open, try and foster personal relationships with board members. You can have one-on-one meetings with each member before the board meeting to make sure you’re aligned. Frequent, well-structured reports are also part of good communication.
If your startup is relatively young, you can make your life easier by keeping the number of board members to a minimum. This makes everything run more smoothly, from the scheduling to the communicating to the potential conflicts. At the same time, you may not want to appoint people to your board unnecessarily so the people that you do choose should count.