While startup founders may receive the majority of news headlines and recognition surrounding their companies, there is often another group involved in making business decisions: a board of directors.
A board of directors is a group of individuals that act as representatives of a company’s shareholders. Every public company must have a board of directors, and some private companies (like startups) or nonprofits will as well. How the board is structured, including the number of members, how they’re named to the board, and how often they meet, is outlined in a company’s bylaws.
What does a board of directors do?
A board of directors isn’t intended to get involved with a startup’s day-to-day operations – essentially, the board is responsible for representing shareholders and making decisions for the good of the company. In other words, it is the board’s fiscal responsibility to keep the company running efficiently so that shareholders and other stakeholders don’t lose money.
The board often helps make some of the most important company decisions, including whether to raise funds, enter into talks concerning acquisitions or IPOs, and the hiring or firing of senior management. The board also upholds the company’s mission and works to ensure decisions are following the core values and goal of the company over the long term.
For startups, the board members can be a useful source of advice on business development, sales and marketing, product timelines, or anything else upon which a founder may need counsel. Some members, if they are particularly well known in the startup’s field, may also lend credibility to the emerging company as it grows.
How are board members chosen?
A board must be put in place when a startup is founded. Initially, a board may consist of only one member, and it can include the founder. Other members are added as the company grows – for startups, it is common to include the lead investor from each seed round. After the second round of financing, a startup may also choose to select an “independent” board member, someone not affiliated with the company or other investors but who does have industry knowledge and connections.
While a company can technically have as many board members as it wishes, many in the startup ecosphere believe five to seven members is ideal. It’s also encouraged to have an uneven number of members, as it helps to prevent ties during voting matters.
Why do founders need to work with board members?
Most experts agree that communication is the most important part of the founder-board member relationship. Just as the investors should be kept up to date on what’s happening with a startup, so too should board members. Board members can only effectively advise founders if they know the company’s challenges, successes, and potential changes. The more they’re kept in the loop, they more they may feel dialed in to the overall wellbeing of the startup and seek out solutions or identify potential issues, as well.
Likewise, founders should be open to receive that input. The board will not always support management – and, in fact, can often insert a fresh idea or provide necessary outside perspective. This mutual trust is key to encouraging company growth.
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