Boards of Directors Can Help Accelerate Company Success
An engaged and connected Board of Directors is one of the best tools an entrepreneur has for building an outstanding company. Rev1 advisors get frequent questions about boards from entrepreneurs and founding teams. We try to provide the basics in our New Client Orientation and Corporate Governance and Operations Learning Lab and drill down further in articles provided in the Rev1 Toolkit Library. This blog is adapted from those materials.
The requirement to establish a board of directors or managers depends on the company’s legal structure and state law. With no outside investors, the company’s founders and management will choose board members. If and when a company raises capital, the investment terms often require creating or restructuring a board to include experienced, independent board members and investors.
Board Composition and Processes Expand as the Company Scales
When a new company is in the formation stage, board members are typically the founders. Formal board meetings with agendas are rare; however, the company should document the board’s meeting and decisions and maintain board minutes.
Words to the wise:
- Friends and family may be eager and able to help—with advice, functional expertise, and even financial—but high-growth potential companies uniquely benefit from the objectivity provided by less conflicted experts.
- Develop relationships with mentors and experts who could become advisory board or board members in the future.
- Develop the habit of taking notes during early discussions. It’s muscle-building for later, more formal board recording and processes. Ensure your legal counsel has experience with early board formation and board requirements.
- Become familiar with typical Board member compensation. You might not need to compensate early advisors with options, but that likely won’t last long.
Typically, with seed- and early-stage venture investment, boards expand. Expect institutional investors and experienced angel investors to require a three-to-five-member board that will include one or two founders, investor(s), and independent directors who may have had a prior advisory relationship with the company but bring specific, relevant expertise. As companies raise additional capital, board processes become more formalized and frequent.
Meetings are typically set to reflect the company stage and pace at which it’s moving. That means meetings can occur monthly, quarterly, or more frequently, depending on what is happening with the company. Meetings are ideally conversations, not lectures or “show and tell.” While somewhat informal, the format should have repeatable content documented and recorded by a board secretary. The board’s focus is on providing advice and guiding the management team, in addition to acting on legally required matters such as hiring corporate officers, approving financings, and issuing stock options, for example.
Before a startup reaches venture investment, learning to collaborate effectively with mentors, advisors, and an advisory board gives the entrepreneurial team hands-on practice that helps prepare them to eventually work effectively with a board of directors. Like so many things in entrepreneurship, it’s both a process—and a mindset.
Words to the wise:
- Begin to develop reporting formats, operational policies, and KPIs.
- Don’t wait for Board meetings and reports to connect with your Board. Don’t ask the Board to do your job. Do communicate regularly with intent and objectives to build transparent, trusting relationships.
- If Board meetings become formalistic and unhelpful, you are likely not doing it right.
Companies that receive later venture rounds often have five or more members on the board. With more investment rounds, expect more investors to request Board seats. The company can attract higher-quality independent directors.
Board operations become more structured and more engaged in business operations and results. Meetings will occur quarterly or more frequently with increased content and more formal management presentations. The Board’s focus remains on advising and assisting the management team, with increased emphasis on corporate and individual performance against key performance indicators (KPIs).
Words to the wise:
- Avoid having a Board that becomes dominated by investors – start looking for strong, experienced individuals who can serve as independent members.
- Seek balance between management, investors, and independents.
- No surprises! When you have important updates to share with your board, those should happen as they occur through regular updates, not held back for board meetings.
Effective Board Members Are People Who Are as Interested as You Are in Your Company’s Success
To build a successful company, entrepreneurs need advice, credibility, and connections from people who know more than they do—people they relate to and trust. Board members provide all that, plus connections that help entrepreneurs reach potential customers, employable talent, and the “right” strategic partners and service providers to fill a young company’s gaps and needs.
Participation by the “right” Board members—either because of what they do, who they know, or their reputation in the community or industry, adds substantially to the company.