November 22, 2016 | 4-minute read (754 words)
Ask a CEO what early milestone they’re not looking forward to and it’s probably assembling a board to work with. After all, most entrepreneurs are used to being highly independent; the idea of diluting that with a committee structure can be...unappealing.
Early stage companies tend to run with just one or a couple of leaders driving it all forward. In the earliest days, firms tend to be so focused on establishing their market and growing their revenue, rather than building either an advisory board or a board of directors early on.
While it can seem tempting to forgo this until investor involvement makes it a next step, that would be shortsighted. A well assembled board can help demonstrate a commitment to longevity and growth that will influence investors. Adding a member who has previously been on the boards of companies that potential investors have sponsored is a solid tactical consideration.
Advisors vs. Directors
The key differences between which type of board you are assembling will shape who you want on it. A board of directors will have fiduciary responsibilities to the company and offer broad, overall guidance in decisions that are binding. As such you want a comprehensive background to access, as well depth of experience.
A board of advisors, in contrast, is non-binding in their recommendations. Advisors also aren’t typically compensated the way directors would be, so looking for synergistic and mutually rewarding scenarios is often needed. For instance, having a trusted former professor from graduate school as an advisor in exchange for keeping them up on frontline developments. With choosing advisors you want to have specific issues and challenges that you are bring them into the picture for.
Sizing and Involvement
One recommendation - if you are in the pre-investment stage - is to have three people. Odd numbers help avoid any disagreements from becoming polarized and stuck. In addition to the founder, you want two others to provide balance and extended views into potential issues. Working from the beginning with people you trust and respect is essential. Getting started in the early stages is simple as it’s just a matter of the controlling shareholder voting in the candidate. Obviously as investors come in the situation will change.
With the addition of VC involvement there is likely to be a shareholders agreement. Within the agreement one of the provisions will often be the right to place a representative on the board for minding the investors interests in the path forward. They may even have a specific representative in mind already.
You want to keep participant numbers manageable in order for the board to be optimal and functional, to make certain that meetings can come to order and stay focused. Resist the urge to grow the board more than necessary. Even with the addition of an investor appointed director a three-person board can be balanced by two founder directors.
At the next stage of growth, as investor control grows and founder control steps back, a scaling up of the board can be considered. With it an independent investor should be sought out. What should be sought from an independent director is the experience, connections and wisdom that the company can utilize without any conflicting existing allegiances to either founder or investors. An optimal number of members for the board at that stage is between 5 to 7 for most startups.
In choosing the board member you want to be able to honestly asses what are the strengths and makeup already in place. If there is deep technical knowledge, make sure to balance it with a person having sales or marketing strengths as well.
Beyond skill sets it’s crucial to have diversity of the sexes as well as cultures if possible. You want the profiles of your board to be nuanced and complimentary rather than homogenous. In an ever-expanding world, having a contracted view for guidance can potentially be a misstep.
Has your prospective candidate been on the board of a company that has been at the stage yours is? Being able to benefit from their experience is one of the key considerations. Another aspect to consider is what style of engagement did they come away with and are going to bring with them? You want to make sure that levels of assertiveness line up. An overly confrontational board member can be a burden. In the end you want to make sure that everyone chosen makes a suitable and strong council of elders - metaphorically speaking.