Does a startup need a board of directors?
Few jobs are as challenging, pressure-filled, or complicated as building a new business. Someone can have the most outstanding business idea in the world, backed by all the resources needed, along with the right business strategy, and it can still fail if the business doesn’t have the right leadership.
This leadership almost always involves recruiting a world-class board of directors that can provide founders with critical advice and insight that will allow staff to make the right decisions.
So, do startups need to have a board of directors? Do they have to set up board meetings? The answer is almost always yes. Here’s a look at why this is the case and what should be expected from the board.
Why startups need a board of directors
There are countless businesses started across the world every day. Startups are a little different from most regular companies in that they are formed with the backing of a professional investor, institutional support, or a series of investors.
These investors are usually interested in exhibiting some degree of control or supervision over the business in question. As such, they want to make sure that a company has a solid board structure that can be used to safeguard its investment and provide effective leadership.
A board of directors will usually participate in multiple levels of supervision and management of the company in question. For example, a good board won’t necessarily involve the company’s day-to-day operations. Instead, they will provide general supervision and strategic direction to the business.
For example, board members will view reports, speak with staff, and ensure that the company meets expectations and sticks to the business strategy. A board will also perform supervision over the role of c-suite members of the company.
Specifically, a board of directors will commit to executing some of the following tasks:
• Staff evaluation.
• Setting the strategic direction of the organisation.
• Conducting and supervising audits, reviewing finances, and monitoring executive pay.
• Managing the hiring and firing of high-level staff members.
Finally, board members are also used for advice, guidance, and effective leadership. For example, businesses in a startup stage often have staff that is experts in a variety of items — such as technological innovation or creativity — but have no idea how to manage a business, create a budget, or manage staff.
A board member can provide advice and feedback on how these things are done. In addition, more dedicated board members will likely be available to answer questions and provide feedback.
In most cases, startup board members are not paid. Instead, they are compensated for their time by having an equity stake in the company. This type of compensation allows these businesses to limit expenses and fairly compensate board members for their time and effort. It also creates a stronger incentive for board members to perform well.
It is best to have a board that can set strategic guidance, advise individuals who need it, and be involved in attracting additional funding for the startup company.
What do startup boards look like?
Perhaps one of the most complicated questions is ensuring that boards are simultaneously qualified and diversified enough to reflect real-world composition.
Boards usually consist of multiple types of individuals who have at least one of the following traits:
• Representing investors who have invested in the startup or the funders themselves. Whether or not a funder sits on the board depends on the size of the funder and their level of interest in the project.
• Experts in a particular field, such as technology, human resources, accounting, etc. An individual who fits one of these niches will likely have a level of expertise that cannot be matched elsewhere.
• Staff members from the organisation, including their founder and CEO. Sitting on the board allows these staff members to answer questions, give feedback, and ensure that the board regularly hears from someone involved in the organisation’s day-to-day management.
There is no set answer to who sits on a board or what precisely a board looks like. Ultimately, that’s a decision made by the board chair and the company’s CEO. It is best to have a board that can set strategic guidance, advise individuals who need it, and be involved in attracting additional funding for the startup company.
Most startups will need multiple funding rounds when getting off the ground, and investors will always ask about board composition and responsibilities when deciding what projects to fund. It is in the startup’s best interests to have a robust board capable of genuinely managing the business and ensuring its staff is performing well.
There is no set number of board seats for a startup. The only requirement is that businesses generally want to ensure that they have an odd number of board members. Having an odd number of board members avoids the problem of tie votes.
A well-composed board can provide critical advice, give feedback in several areas, and ensure that a business is ready to function.
How to prepare a startup board
Board preparation is critical for the long-term success of a business strategy. Anyone who works for a startup must ensure that a board is best positioned for long-term success. Board dysfunction will lead to a challenged business. It may also challenge the ability of a company to obtain additional funding in the future. Do startups need a board of directors? Yes, is the short answer.
To help a board prepare, consider the following steps:
• Hold a formal board orientation and director training. Orientation will allow the board to learn more about their specific responsibilities and expectations.
• Assign formal positions, like a chair and secretary.
• Create an introductory packet as part of director training. This should contain all legal information, up-to-date organisational charts, budget, planning documents, and any other information that a board member will need to be successful.
• Set up meetings with board members and relevant staffers so that the board members can better understand how the company operates.
• Provide the option of having formal training for board members. Formalised training and education will allow board members to better prepare for their roles.
• Identify the specific strength of the board members in question, and use that information to assign board members to a formal committee or subcommittee. A formalised evaluation will put someone in a position where they can best fit board members into different slots.
• Understand the role of a board. It’s not to be controlled or put a pretty face on business operations. A well-composed board can provide critical advice, give feedback in several areas, and ensure that a business is ready to function in a modern economy.
Most startups will have boards, but those boards are only worth it if they are trained and prepared. Board members need to know what to say, their role, and how they can best serve their organisation.
In the video below, William McQuillan, a founding partner at Frontline Ventures, says the most critical things board members should bring to the table of a startup is their “knowledge, experience and connections”.
