What do startup entrepreneurs need to know about building a board of directors?
A board of directors is an incredibly important part of any business. Even more so for startups with big aspirations.
Unfortunately, there is a lot less knowledge and awareness, or information out there on this pivotal part of the business than for fundraising, marketing, recruiting, or even selling your company.
Your board can make or break you. So, what is a board of directors all about? How do you build a good one? What are the best practices for working with them?
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Here is the content that we will cover in this post. Let’s get started.
- 1. What Is A Board Of Directors?
- 2. The Importance Of Your Board Of Directors
- 3. What Does A Board Of Directors Do?
- 4. Roles & Titles
- 5. Types Of Boards
- 6. Passive Boards
- 7. An Engaged Board
- 8. Intervening Boards
- 9. Operating Boards
- 10. Building A Board
- 11. How Many People Should Be On A Board Of Directors?
- 12. Who Should Be On Your Board?
- 13. Best Practices For Working With Your Board
- 14. Use Them, Listen To Them
- 15. Be Transparent
- 16. What Out For Conflicts
- 17. Be Mindful Of Their Time & Reputations
- 18. Annual Board Evaluations
- 19. Summary
What Is A Board Of Directors?
Put simply, a board of directors is a group of individuals elected and put in place to help guide a company.
They are effectively a supervisory committee that is tasked with overseeing and protecting the best interests of the company as a whole.
They are ultimately responsible for the management of the company and are to represent all shareholders.
These are meant to be non-operating executives. In contrast to your executive officers who take the roles of CEO, CFO, CTO, CMO, etc.
Depending on your type of organization and the jurisdiction you form in, a formal board of directors may or may not be legally required. Regardless of which, it can be very valuable and advantageous to have one.
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The Importance Of Your Board Of Directors
The importance of the board of directors should not be underestimated.
A board of directors can make a company. They can also destroy one. They can certainly derail your personal vision.
In fact, the board can have the power to appoint a CEO, and remove one. Including you as a founder of the company. It is not that uncommon. So, it is clearly vital to choose your board well and to manage them well.
Your board will also be one of the most noticeable elements of your brand and company as a whole. Who is on your board will directly impact your fundraising, what talent is attracted to and willing to work for you, as well as your credibility with big customers.
Boards can provide accountability for startup founders. This is a great thing if you want to build the best possible company, in the best way, and draw the best investors.
They can provide invaluable wisdom, expertise, and contacts that are hard to buy at any price.
There are many elements and factors in play. All of them are initially in your control. This is why there is so much value in learning about and being intentional about your board at the earliest possible stages. Perhaps even before you register your company, finish your business plan, or put up a test landing page and grab a domain name.
Understanding the board is also important as you may one day step back and become a director or chairman of your board as you move on to other activities and ventures. So, take the time to learn the process of building a board of directors.
What Does A Board Of Directors Do?
In addition to the above boards:
- Governing a company
- Setting corporate policies
- Appointing officers and executives
- Setting executive salaries and compensation
- Representing and accounting to shareholders
- Overseeing the financials of the company
- Filling gaps
- Advise the CEO
Roles & Titles
Common titles and roles for directors include:
- Chairman, ‘chair’, or president (the highest ranking member)
- Board members, or simply ‘directors’
When you’re ready for more in-depth information on how to create your advisory board or board of directors, check out this video I have created. You’re sure to find it helpful.
Types Of Boards
Boards can operate in different ways. They may also shift in behavior as things change. For example, if the company is falling into a crisis.
Harvard Business Review makes special note of these styles of board involvement and building a board of directors.
Many confident entrepreneurs prefer this type of board of directors. One which basically sits back and ratifies the founding CEO’s decisions. One that certifies to shareholders that everything is being run properly.
This gives founders the most freedom to operate things as they see fit and choose. This can be highly beneficial, and less intimidating for entrepreneurs.
Though it may also mean missing out on some of the best value and advantages a strong board can offer.
An Engaged Board
This is where founders can get a lot more from their boards. In this format, founders and directors of the board work much more closely in partnership with each other.
Founding CEOs actively look to their board members for direction, insights, and suggestions. They want to harness their expertise, experience, and connections to grow the business efficiently.
This is more of a consultative arrangement. Entrepreneurs consult with board members and lean on them for support in making the best moves and decisions.
This is the type of board of directors that entrepreneurs fear the most. Perhaps with good reason.
There are plenty of horror stories of founders being fired as CEO and effectively removed from the daily operations of the company they started.
An intervening board steps in when they don’t believe things are going in the right direction, and that founders are not up to the job or are behaving appropriately. At least in terms of protecting and maximizing shareholder value.
In these situations, the board may remove and appoint a new CEO. Directors may step in to operating and executive roles to fill gaps until a new candidate is found.
This can often be avoided by keeping an engaged board. It is more likely to happen with a passive board that loses faith in its founders.
Operating boards are active in decision-making for the company. They meet, discuss, and vote on general, strategic, and specific decisions for the company. Then the executive team executes on them.
Note that this is more collaborative and amicable than an intervening board. It may be less comfortable than a passive board. Yet, if you are a new entrepreneur, and have an accomplished board with operating and domain experience, it can lead to the best outcomes.
Building A Board
One of the most important things to consider when it comes to building a board of directors is that it is an ongoing process. Just like building and scaling your company, and the rest of your team. It is not just a set it and forget it task.
Your board will be constantly evolving. Your board will likely grow in members as your company goes through different stages. Especially as you raise capital and conduct M&A transactions.
Members will also rotate over the years.
This also means the strategy is important. Planning ahead and strategizing who you want and need next, before placing anyone now.
Consider how those you put on the board today will impact the options for your company in the future, the ability to get to the next stage, as well as the big picture.
Keep in mind that in fundraising, storytelling is everything. Also when doing fundraising those investors that are investing the higher amounts are going to expect to be on your board. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
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How Many People Should Be On A Board Of Directors?
There is no set number of board members you must have. Though you may want to err on the side of less rather than more. Especially as an early-stage startup. More so if you anticipate raising several rounds of funding in the future. Which you will need to do if you are to be successful, and stay in business.
Your decision may also be impacted by your type of organization. Whether you are a for-profit or nonprofit entity. As well as the knowledge, skill, and credibility gaps you may have.
Boards have been as small as three, and as many as 31.
Having an even number of board members can obviously lead to trouble in voting and making decisions. It can easily create stalemates and in turn more dissension and negativity.
Bain Capital has reported that it believes the optimal number of board members for making decisions is seven. Each additional member after this decreases decision-making by 10%.
As you already know, the ability to make firm decisions, and to do it quickly is incredibly vital to a startup’s ability to survive and thrive.
It seems logical to start out with three to five directors to keep your machine operating and executing quickly and efficiently.
Then as you grow, consider raising that to seven.
Nonprofits that truly want to ensure they are making unbiased, neutral, and objective decisions may opt for building a board of directors with more members.
Who Should Be On Your Board?
First, let’s consider who should probably not be on your board.
This likely includes:
- Family members
- Known rogue and activist investors
- Those who do not share your vision, values, and culture
- Those who are actively seeking to be elected to your board
- Anyone with potential conflicts of interest
Boards are often made up of both internal and external parties.
Internal members of the board may include some of the founders of the company. As well as major investors.
The make-up of a board is often seen as trying to strike a balance between the management team, and the interests of shareholders. The board should be in touch with the vision, and what active executives need to do to make progress, and not sabotage the big picture. While also being able to be objective, and adding the value of grander and broader experience.
It is great to have those with domain experience, operational experience, a strong relevant network and reputation, and those you know that will challenge you to be the best you can be, and who will hold you accountable.
Best Practices For Working With Your Board
Choosing a great board is important. Yet, no matter who you end up with on the board, it really comes down to how you work with them. It is up to you to make the most of it.
Use Them, Listen To Them
Boards are there for your benefit. They provide a huge advantage if you choose and use them well. They can only add this great value if you allow them to.
Lean on them, listen to their advice, and use it. Even if you don’t fully grasp why at the moment. Leverage their connections, wisdom, and experiences.
Try to view them as a sounding board and support system, rather than adversaries or supervisors.
One common and fatal mistakes that newer entrepreneurs make is to fail to be transparent with their board members. They see them as opposition. They may become that way if you are constantly working against them.
Instead, be open. Share the challenges with them, so that they can help solve them. Your relationships and the outcomes will be far better.
What Out For Conflicts
Think ahead, and watch out for potential conflicts of interest, general conflicts between members, company interests, and management. Be alert to potential rogue actors. As well as those who will be governing specifically just for their own interests.
Avoid and head off these situations as early as possible.
In general, those who are actively vying for board seats can be a red flag. It is usually those who are the most hesitant to join your board that can be the best assets.
Be Mindful Of Their Time & Reputations
Your board members have probably built strong and valuable reputations over decades. They could probably choose any high-paying gig they wanted with their time, or spend it with their family.
So, be considerate of these things. Get meeting points and agendas out before board meetings. By the time you get to a short meeting, it should just be a formality to ratify the decisions you have already made.
Annual Board Evaluations
Your board will be evaluating you. You should be evaluating them. Annual evaluations keep this objective. It enables you to make adjustments and changes, with far less confrontation. As well as to keep on optimizing your board for maximum success.
Knowing the process of building a board of directors can make all the difference in the success, speed, and scale of startups.
This guide will get you started with strategizing the right size, type, and style of the board for your company. As well as to get the most value out of these individuals and the board as a team.
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