For any company, public or private, the board of directors can have a major impact on direction and growth. For fledgling startups, the need for a board may seem far off. But as something that can play a major role in the development and success of a company, we would urge startups to begin assembling their board carefully and earlier than they may think necessary.
What is a Startup Board?
A board of directors is a group of individuals who represent a company’s shareholders. All public companies must have a board of directors, and all startups who are backed by venture capitalists have a board.
What Do They Do?
While the management team of a startup handles daily operations, the board has what are called “fiduciary duties.” At a high-level, the board is obligated to make decisions that are in the best interest of all shareholders. On a more granular level, this means the board is tasked with voting on matters such as issuing stock, hiring and firing senior-level management, c-suite compensation, approving operating budgets and additional fundraising, etc. In addition to making these critical decisions, a good board should offer founders guidance, connections, and resources.
How Boards Evolve
To become incorporated, a company must have a board. For a brand-new startup, the board usually consists of the founder or founders. As the company grows, so will the board, and the composition will change depending on the stage the company is at.
From Series Seed to Series B, the board is generally controlled by founders. After the close of the seed round, it’s common for the lead investor from that round to be added to the board. A common board makeup at this stage could be something like two founders and one seed investor. (It’s worth mentioning here that odd board numbers are preferable to avoid a tie vote).
With each subsequent financing, a new investor from each round will be added to the board. After the second round, it’s common for startups to add an “independent” member – someone who isn’t an investor but has pertinent industry knowledge and know-how and connections within it. Once a startup reaches round C, the founders will most often become outnumbered by independent members and investors.
There may come a point at which adding additional board members no longer makes sense. The board could already be large enough, or the size of the investment doesn’t necessarily warrant a seat. At this point, a company may choose to allow investors to act as “observers” to the board. In this role, select investors are invited to come and participate in board meetings but are not allowed a formal vote on issues.
Of course, there is no set formula here, and board composition and size will vary from company to company.
What to Look for in Board Members
We know that the board can have a significant influence over the direction of a company. Therefore, it would behoove founders to choose members cautiously. Sometimes, investors will include a board seat in the terms of their investment, so if that investor is not someone who would be beneficial to the board, that investment may have to be turned down. Generally, a board member who has no knowledge of the industry is not an ideal pick.
So, what does an effective board member look like? A good place for founders to start is to consider what areas they are lacking in – whether that be know-how, connections, or resources – and find board members that fill those needs. Equally as important are personal attributes like fit and how they work with the team.
When evaluating a potential board member, here are a few useful criteria to reflect on:
- Chemistry: Do they mesh well with the other board members?
- Collaboration: Is this person someone who works well with others? Will they be able to disagree constructively?
- Fit: What need do they meet in the business? Is it their experience? Their network?
In short, board members should be committed to contributing to the success of the company.
Generally, board members who are also investors in the company are not paid, while independent board members are. Usually, independent board members are compensated in equity in the company. Some companies offer cash compensation as well.
Boards can make or break a company, and the most effective boards are not thrown together in a pinch but are rather carefully curated over time. For founders, this means being proactive in finding gaps and cultivating relationships with potential board members before they’re necessary.