Building a Board of Directors: Part One 

A Board of Directors can make or break a growing business. Typically, by the time founders start thinking about how to structure their board, the business is already facing many of the challenges associated with rapid growth and seed funding.

Having the wrong people (or the wrong mix of people) steering the business through these challenges can cause the business to suffer. As a founder however, if you do your homework and think carefully about who your business needs at the helm, the board can propel your business to new heights.

In this two-part series, we share the basics of what you need to know when it comes to creating and managing a startup board. Beginning with what a board does and who should be on it, to how to communicate effectively with board members - we’ll help to guide decision-making for your own board.

Creating a Board of Directors

A Board of Directors is composed of the leaders chosen to represent a company’s shareholders. Public companies are legally required to have a Board of Directors, and many non-profit organisations and private companies also require them. A strong Board of Directors sets the tone for scaling success, focusing on the long-term vision for the company. 

Startups usually begin to build a Board of Directors as soon as they receive their first round of funding, and the panel grows with each round of investment. However, there is a case for forming your board even earlier. Why? It could help navigate differences of opinion and lack of expertise earlier in the process.

At the core, a Board of Directors (as defined here by John Courtney) needs to:

• Examine business performance on a quarterly or monthly basis
• Help define short-term and long-term strategies for the future
• Provide you, as founder(s), the time to work on and not just in your business'.

As you set out to create your board, bear the following in mind: 

• Decision making is at the heart of what a board needs to do. Aim to have an odd number of board members to eliminate the risk of tied votes. 
• Every director is legally obligated to act in the best interests of the business.
• Directors need to know all the facts and circumstances in order to make informed decisions: This is defined by duty of care.   
• Hire a lawyer experienced in setting up boards when forming your own. This way, you don’t need to worry about all the legal intricacies and can be sure the correct procedure has been followed.    
• Board meeting frequency varies depending on what stage you are in the scaling journey. However, as you just start out, board members may prefer more ‘informal’ meetings to address early growing pains. 
• Directors can be paid for their services in a variety of ways - including: fees, salary, equity or schemes such as ‘share aware schemes’. Take a look at this comprehensive guide on directors’ remuneration. Ultimately, the size of the company impacts the form payment for services or guidance takes. Process is decided by the company itself as well as its stakeholders.

Who should get a seat at the table?

Usually, in the initial stages of building a business, as you look to secure seed funding, the founder or co-founders of the company are the first board members. One founder tends to act as both CEO and Chairperson of the Board, and the next member of the board is usually your first investor. Each time the business secures another round of funding, a new director is added.

Let’s break this down further

At the outset, having control over shaping the business as founder(s) is vital - an easy feat with one investor and founders outnumber said investor. Securing multiple sources of funding gives you leverage, as you provide competitiveness in this situation and maintain the upper hand. Generally though, each stage of funding brings with it a new investor - and therefore a potential new board member asking for a seat at the table. 

Expertise is essential

Remember to weigh up your investors and what they offer, not only in terms of funding, but also when it comes to experience, insights, expertise and network. This becomes increasingly important as you grow and move on to secure Series A, B, C funding and beyond.

Broadening board horizons

Even at Series A stage funding, consider bringing an independent chairman or non-executive director ‘aboard’, as suggested here. A non-executive director is usually someone with a wealth of experience and industry learnings - which helps shape and guide the company efficiently and effectively.

An independent chairperson also maintains a level of balance between management and wider stakeholders. As you continue to build the company’s funding and profile through several funding rounds after Series A, you’ll need to bring independent directors into the fold too. These external voices will have unbiased perspectives to match as they have no direct or indirect material relationship with the company, other than board membership.

Is a bigger board better?

When you’re running a startup for the first time, it can be beneficial to have other, more experienced leaders around to guide you, but at some point, too many cooks in the kitchen can make things incredibly complicated and lead to slow and ineffective decision-making.

Bo Ilsoe, Partner at NGP in this article suggests five is probably the maximum number you want prior to Series B funding: “While the ideal board size varies from company to company, experience has taught me that five is often the magic number for a Series B company, growing to seven for a pre-IPO business.

“Keeping the number of board members low ensures diversity of views while retaining discipline, focus, engagement, and commitment.”

What to look for in a director

Your Board of Directors will grow and evolve along with your business. In the early stages, for example, a director with experience in product development can be invaluable, but later down the road a director with strong financial skills will be more important.

In addition to the skills required at this particular stage of the business, it’s helpful to know which character traits make for good directors. When evaluating a potential director, ask yourself three questions:

• Have they got the best experience and network? 

Have they been in your shoes and successfully scaled and exited a business in the same or a similar industry? Do they have a strong network and can introduce you to people you would otherwise never  have met?

• Are they a clear thinker with strong (but logical and consistent) opinions?

Your directors, especially the non-executives, are there to challenge you and your internal team. It will be uncomfortable, but you need strong people who are not afraid to speak up or suggest strategic changes when they are in the best interests of the business.

Look for people who can leverage their experience, and make logic and consistent arguments.

• Will they do more than attend board meetings?

Most of the value your directors bring will be in the boardroom, but it pays to look for people who add extra value, for example, by helping to hire senior staff, participating in sales meetings and content creation, and making introductions to potential customers and investors.

How do the roles of executive, non-executive and independent directors differ?

• Executive directors are salaried employees of the business who have day-to-day management responsibilities.
• Non-executive directors are not employees. They are usually paid in the form of equity, and typical workload ranges from 10 - 40 days per year. It’s their job to provide third-party oversight and ensure the organisation is being well-run by the CEO and their team. They also bring a wealth of knowledge and experience to challenge and guide the CEO.
• Independent directors are usually compensated for their services but have no ties to the business. They bring an external perspective and are the most objective and representative participants.

A note about venture capitalists as board members.

If your startup is on the brink of its first seed funding round, you might be worried about what it will be like to have an external person as a director. It’s a valid concern. The thrill of receiving funding can quickly be overshadowed by a poor relationship with the VC. 

In light of this, here are a few things to consider when accepting funding from a VC:

• VCs should bring much more to your business than money. They should know your industry well and have a strong network tol help you test the market and open doors for potential sales. Bo Ilsoe, speaking here outlines: “Without the operational, market, or global investment expertise to merit a seat, many investors can actually detract from — rather than add value to — a board.”
• If you don't have good chemistry with a VC from the start - or if your intuition is telling you not to proceed - it’s important to slow down and think carefully about going down this road. 
• Consider answering the following questions when you need to make a decision about a VC investor: 

1. Will you be able to communicate effectively with this person?
2. When negotiating and creating middle ground - would this individual be responsive and open? 

How will having a Board of Directors affect your control over the business?

As mentioned, the size of your board is usually related to the number of funding rounds the business has received.

It’s logical that the more investors your business has, the less control founders have. This is the typical evolution of a startup from founder-controlled to shared-control, and eventually to investor-controlled.

It’s important to understand what this means for your business and the people working in it. Often, as founders relinquish control to investors, the business loses some of the values and culture that make it unique and comfortable to employees. As a result, you might see a higher-than-usual rate of employee turnover. 

Rather than be alarmed, be prepared for this potential outcome, and think of it as a transition, rather than upheaval. Change can be uncomfortable, but without it you lose the opportunity for growth.