What Startups Need to Consider Before Forming a Board of Directors

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A board of directors helps oversee the activities of a company or organization. Publicly held companies have to have a board of directors, while private companies don’t.  

That begs the question for many startups as to whether or not they need a board of directors, and if so, when? There are many reasons this is a good idea for most startups. So, for the purposes of this article, let’s say you do need one.

In this case, we look at what startups need to consider before forming a board of directors.

Board of Director Basics

In the beginning, your board can just be one person. It doesn’t have to start out in an elaborate fashion.

If you’re adding more people to the board, it usually consists of the startup founder, investors, advisors, and even people in the community with the expertise to help you grow and scale.

You can choose the size of your board. It is usually best to stick to an odd number, so you have a tie-breaker. We like five people for a manageable size board.

When you start getting into very large boards, your efficiency drops, and there are too many voices. You also have a hard time scheduling meetings the larger your group.

Because your board is ultimately responsible for the big decisions such as whether you need to raise more money, hire and fire senior staff, strategic decision making and more, you want to make sure you pick the right people from the start.

These must be smart people who know a lot about your industry or in such areas as marketing and finance.

When Should I Seat a Board?

It’s advisable to make sure you have a board after your initial seed round. You will usually give a board seat to the person/firm who led that first seed round.

Because you want your founding team to maintain control of the board, you want to give two board seats to your founding members, while the new investor has one seat.

Then, as you add investors, you can give them new board seats. Do note that each time you accept an investor, you are most likely bringing on a new board member. In fact, many investors will make that a term of their investment. If you don’t 

After your second round of financing, you can set aside an independent board seat. This is usually not an investor or employee of your startup. They should however have industry knowledge or important contacts in your community.

Watch the growth of your board, and if you find it is getting too big, you can always give out observer positions. These folks come to your meetings, but they don’t have a vote.

What Does a Startup Board Do?

Your startup’s board of directors is responsible for managing your company’s overall vision. They make the major decisions such as:

  • Hiring and firing your management team.
  • Approving budgets.
  • Deciding whether or not to go after more funding.
  • Keeping the company financed.
  • Hiring and/or approving senior management hires.
  • Deciding salaries and stock options. This means your salary as the founder.
  • Providing community connections.
  • Offering advice and guidance.

To Conclude

When forming a board of directors, think carefully about the makeup of your board.

As you put together and grow your board of directors, consider the diversity of the group of people. Do you have enough people with varied skills and contacts so that everyone has something to offer?

In addition, you want to consider people who offer various perspectives and opinions.

Overall, you want to maintain a culture of communication. Your board won’t always agree with one another, but if you have a healthy board with open communication, you can weather your differences.

Do try and reach a consensus before each board vote. If things are divided, you can end up with a trickle down into your company that affects the overall culture of your startup.

If you create a board with thoughtfulness and instill a positive culture, you’ll find that your board has a lot to offer your startup as you scale your company.

Are you a new startup ready to succeed? Are you looking to get your new business off the ground and watch it rise to success? We are here for you. We can help answer your questions and guide you through the process. Outsource your HR duties, finances, payroll and more to us. Contact Escalon today to get started.

Image: Eclipse-USA on Pixabay

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