Your Board of Directors (the ‘Board’) is by far the most integral part of your startup’s internal management structure. A startup’s strategic direction is almost entirely dependent on the decisions of the Board, from fundraising and acquisitions to hiring/firing of executives and more.
In short, you have to get this right. Here is our Guide to Forming a Board of Directors.
What Does a Board of Directors Do?
The Board of Directors at your startup exists to guide and help shape the future of your company.
The Board is responsible for things like setting high-level goals for the company, hiring the CEO, issuing stock, and clearing dividends. Keep in mind that your management team oversees all day-to-day operations, while the Board supervises only the executives and the CEO.
When to Set Up Your Board of Directors
It’s often said that startups should think about forming a Board of Directors only once they’ve raised their first round of funding. However, the benefits of forming a Board earlier in the lifecycle of a startup, irrespective of raising funds, are undeniable. Among the many potential reasons for a startup’s failure are those which are self-inflicted. Disagreements between the founding team, overconfidence, and lack of expertise — these issues can all be avoided with a strong and supportive Board.
Who Should be on the Board
To ensure your Board is effective at its job, it is vital that you select the right people. This process can be difficult, but by choosing the right people, you will increase your chance of them being successful. One of the most important ways to build a model Board is by selecting people who can bring skills and experience you may be lacking that will work in harmony with your skills. When considering members for the Board, focus on diversity, relevancy, and alignment.
Diversity – Having a Board made up of individuals who have different expertise, knowledge, and backgrounds can provide the best combination to keep your company moving forward. You may want to consider individuals with the following areas of expertise: marketing, financial, legal, product development and strategic development.
Relevancy – While diversity is essential, it only works if it is relevant to the direction the company is heading. The concept of relevancy is fairly easy. If your company sells health care devices, you would want someone with experience in health care sales and reimbursement on your Board.
Alignment – Your Board should be comprised of members who share the same vision for the company and are in sync with both the short- and long-term goals that the company is trying to achieve.
Other Business Tips for Startups When Forming a Board
- Establish Structure – Establish term limits, how people can join, will management vote, will members select their successors, how often will they meet, etc. In addition to written governance policies, create a manual with defined roles and responsibilities for board members. This manual is handed out to new board members in order to get them up to speed on the business, including financial reporting, previous meeting minutes, as well as policies and procedures.
- Consider the Future – When selecting board members, consider how they will function in the long-term.
- Responsiveness – Startups move at a rapid rate and you need responsive board members who are committed to returning your calls, texts, and emails in a short time frame.
- Who’s In Control – The majority control of a startup board exists on a continuum between ‘founder-controlled’ and ‘investor-controlled’ with ‘shared control’ living somewhere in the middle. Control of the board equates to control of the business. When raising capital, this can often be a large point of negotiation.
- Effective Board Meetings – Having a simple yet consistent structure for running startup board meetings should be the starting point for all founder-CEOs. Consider utilizing a Board Deck Approach or Board Triangle Approach . . . or a hybrid of the two to serve as a template.
In summary, when it comes to who is responsible for the success and the failure of your company, the Board is where all eyes fall. Having a Board of Directors with a clear agenda and a way forward is essential to ensuring the success of your startup.
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