Beyond the Pitch
5 Tips to Help You Build the Best Board for Your Company
Building Your Board of Directors with Growth in Mind
An engaged and connected board of directors is one of the best tools an entrepreneur has for building an outstanding company. But building the “right” board isn’t automatic—especially if you haven’t done it before.
Before you even think about creating a board of directors, thoroughly understand these facts. Seek advice from trusted advisors and mentors. Talk to other entrepreneurs and company founders about their experience. If you’ve never reported to a board before, you really don’t know what you don’t know.
- The requirement to establish a board depends on the company’s legal structure. State law in all 50 states requires corporations and S corporations to have a board of directors. LLCs are not required to have a board, but may choose to have a board of managers or one manager. Boards of advisors have no legal obligation.
- With no outside investors, the company founder will choose members of the board. At this stage, the board role is more advisory than governance. Who you select is up to you. Consider individuals who bring skills and relationships that you don’t have. Be wary of the limitations and complications of choosing friends and family. Seek other options first. Consider choosing members who may stay on the board after outside investors come in and its mission changes from advisory to formal board of directors
- With funding events, “investor’s rights” in the term documents will likely require that investors be given board seats. Investors typically will take one to two seats on your board. It is important to develop a good relationship with VCs and angels who participate in due diligence and in structuring the deal, as seats often go to the individual VCs and angel investors who participated directly.
- Boards of directors have legal responsibilities. Ask your attorney for guidance in understanding the fiduciary duties of a board. These duties include duty of care and duty of loyalty. Duty of loyalty requires that boards act in the interest of the corporation and not their own interest or the interest of any other entity or person. Duty of care requires that boards act based on all available and material information.
- Boards of directors determine CEO compensation. They hire and fire CEOs. The most outstanding entrepreneurs recognize that boards can be amazing advocates, that they have relationships and connections that can accelerate a startup’s growth. An effective board aligns the financial and strategic expectations of the company with the CEO; most of their activities should be directed toward building the company.
5 tips to build the best board of directors for your company.
- How large do you want your board to be? There are few restrictions on board size. (Some states have a minimum.) An odd number prevents standoffs and ties. Five is a good number to start with; as the company grows, you may choose to expand to seven. The company only needs as many board members as it takes to supplement your in-house expertise.
- Imagine the expertise that your company needs the most and then seek out board members who compliment the skills you already have. If the founding team is heavy on technology—as is often the case—the company will benefit with sales and marketing know-how on the board. If the business needs strategic industry partners (for example a biotech startup) choosing a board member with a background in drug development could be key.
- Seek directors with the highest ethical standards and individuals who treat others with dignity and respect. A board of directors is an amazing resource to the business and a wonderful source of example and advice to the entrepreneur. Choose individuals whose standards of conduct and ethics match the culture that you are creating for your business.
- Boards of Directors (and companies) that are diverse get better results. Make diversity a priority when you are building your board—from gender, to race, to culture, and beyond. Fortune 500 companies with the highest representation of women board of directors attained significantly high financial performance, on average, than those with the lowest representation of women board of directors. The correlation between gender diversity at the board level and corporate performance holds across most industries. It’s vital that your board understands your hiring strategy and the characteristics of your customers—and diversity is an important consideration of both. For every 10 percent increase in racial and ethnic diversity on a senior level team in the U.S., earnings before interest and taxes rise nearly 1 percent.
- Make board compensation and directors’ insurance part of your business plan. If you want an active, engaged board, compensate them. Options align the board with management. Make it clear up front how vesting will work (especially in the case of a director exiting the board). Always reimburse directors for reasonable (startup-reasonable, not corporate-reasonable) and actual expenses. Limit directors’ liability specifically in the company’s charter; seek your attorney’s advice on appropriate indemnification and directors’ insurance for your board.
In the best-managed startups, we see entrepreneurs involving their boards in strategy discussions and using board members informally as “sounding boards.”
The “right” board can be an asset that doesn’t show up on the balance sheet.
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