For entrepreneurs, the thought of creating a board of directors can evoke mixed feelings. Some may find the idea exciting, imagining a room full of experienced leaders fostering their startup’s growth. For others, it’s intimidating, conjuring scenes of intimidating power struggles in grand boardrooms. Yet, the reality of startup boards is far from these extremes.
In this article, Orinola Gbadebo-Smith, a seasoned investor, entrepreneur, and startup founder, shares insights into — and strategies for — building and managing effective startup boards. Dispelling myths, this guide offers practical recommendations to help founders succeed in navigating the complex world of boards.
What Is a Board of Directors?
A board of directors represents the interests of a company’s shareholders, providing governance, strategy, and oversight. Boards exist across industries and business types, from for-profit corporations to non-profits and government agencies. Their primary purpose is to ensure the company operates effectively and in alignment with stakeholder interests.
Corporate Governance Principles
Boards are governed by four core legal principles:
- Duty of Care: Directors must exercise prudent decision-making using sound data and diligence in their actions.
- Duty of Loyalty: Directors must act solely in the company’s and shareholders’ best interests, avoiding conflicts of interest or self-dealing.
- Duty of Confidentiality: Directors must protect the company’s nonpublic and sensitive information.
- Duty of Disclosure: Directors must ensure stakeholders receive all material information needed for decision-making.
Control Levers of Boards
Boards have three primary means of influencing the company:
- Policies and Rules: Boards create governance structures that guide operational decision-making and protect the company.
- Leadership Selection: Hiring, evaluating, supporting, and sometimes firing C-level executives, particularly CEOs, is among a board’s most valuable tools.
- Capital Allocation: Boards approve budgets, financings, incentive plans, stock issuance, and large expenditures to ensure resources are effectively deployed.
In addition to these responsibilities, boards provide softer support, such as cultivating trust, offering guidance to CEOs during tough periods, and maintaining transparency to align all stakeholders.
Why Boards Matter to Founders
Boards are invaluable, both as strategic partners and as safeguards. Still, they present a unique challenge for founder-CEOs. Once a board is established, even founders who also serve as the CEO report to it. This governance structure becomes more pronounced when external investors join and protect their minority stakes through legal agreements.
To Bootstrap or Build a Board?
Before creating or expanding a board, founders must consider their motivations. Those who prioritize control may opt to bootstrap or establish advisory boards instead of formal governance boards. However, if a founder leans towards growth or external funding, sharing control and building a balanced board is essential.
Key Documents and Structure
When incorporating a company, the initial board often comprises the founder(s). However, as the company grows, particularly after raising external capital, its board evolves to include investors, independent directors, and advisors.
Governing Documents
The following govern board structure and powers:
- Articles of Incorporation: Defines the entity, share structure, and shareholder rights.
- Bylaws: Establishes internal operating rules, including director elections and board protocols.
- Shareholder Purchase Agreement (SPA): Governs the terms of capital raises and share ownership.
- Shareholder Rights Agreement (SHA): Details board composition, decision-making powers, and governance rights, often favoring investors.
Understanding these documents is critical, as they often dictate the board’s authority, including board seat elections and major strategic decisions.
How to Build an Effective Startup Board
Ideal Board Composition
A high-functioning board can be a startup’s secret weapon. Fred Wilson of Union Square Ventures recommends boards include the following:
- The CEO (founder or not).
- One financial investor, such as a venture capitalist.
- Two to three fellow CEOs with experience scaling companies.
Similarly, startup expert Brad Feld advocates including one independent director and legal counsel when possible.
Practical Steps for Building Your Board
- Start Small and Focused: For early-stage companies, a five-person board works best.
- Fill Skill Gaps: Identify the areas of expertise your startup needs (e.g., product development, customer acquisition, fundraising) and target board members who can address them.
- Leverage Your Network: Expand your search through professional and personal networks to find the right individuals. Don’t be afraid to reach beyond immediate contacts.
- Prioritize Diverse Perspectives: Build a board with a mix of complementary skills, experiences, and personalities to foster constructive discussions and balanced decision-making.
- Assess Values and Compatibility: Board members should align with your company’s mission, values, and culture while being trustworthy and supportive.
Key Skill Sets for Early-Stage Boards
- Product Development: Board members with technical expertise can guide product iterations and speed up achieving product-market fit.
- Market Development: An experienced marketer can help refine go-to-market strategies.
- Business Model Scalability: Directors with revenue model experience can help shape profit strategies and early client relationships.
- Talent Development: A strong board can identify and attract top talent, aiding in leadership hires and culture building.
- Fundraising Expertise: Directors with networks and experience raising capital can help craft funding strategies and make valuable introductions.
Compensating Board Members
For early-stage startups, board compensation is usually in the form of equity rather than cash. Typical grants range from 0.5% to 2% equity, depending on the board member’s role and the company’s stage. Institutional investor representatives (e.g., venture capitalists) typically do not receive compensation.
Additional considerations:
- Reimbursement: Cover reasonable out-of-pocket expenses (e.g., travel).
- Indemnification: Protect directors from liabilities incurred during their tenure.
- D&O Insurance: Consider directors and officers liability insurance (starting at $1M coverage) to ensure additional protection.
Tips for Proactive Board Management
- Resist Control Bias: Avoid stuffing your board with agreeable individuals. Balanced boards generate better outcomes and solutions by addressing diverse perspectives and challenges.
- Ensure Board Independence: Match any venture capital board appointments with independent directors to maintain alignment and avoid lopsided agendas.
- Avoid Even Numbers: Prevent deadlock scenarios by choosing odd-numbered boards.
- Select a Strong Chairperson: The board chair provides leadership, facilitates discussions, and mediates disputes. Pick someone capable of building trust and cohesion.
- Be Wary of “Big Names”: High-profile board members can unintentionally cause power imbalances. Choose individuals for their practical contributions, not celebrity.
- Diligence Your Prospects: Vet your board candidates as rigorously as you would executive hires. Perform reference checks, especially when considering prominent names.
Conclusion: Building the Right Board for Success
The entrepreneurial journey is fraught with challenges, uncertainty, and risk. Founders may lack the perfect roadmap to reach product-market fit or create new markets. In these uncharted waters, a startup board—composed of seasoned professionals with capital, networks, and insights—can be a guiding lighthouse.
A carefully curated board doesn’t just provide oversight but also becomes a partner that accelerates your company’s progress. By constructing a balanced, skilled, and aligned board, founders can set the foundation for long-term growth and success. Remember: the right five-person board could be the difference-maker in navigating the complexities of entrepreneurship. Happy building!