Building a Board of Directors: A Step-by-Step Guide for Startup Founders

Look for the most experienced people in the company when forming a board of directors for your startup. The board should be elected by the shareholders and will determine the company's direction as well as draught the bylaws. Furthermore, when it comes to who is accountable for the company's success or failure, all eyes are on the board.

What Is the Role of a Board of Directors?

Your startup's board of directors exists to guide the company. They aren't the scotch-and-cigar-filled rooms where the wealthy divide their assets among themselves, especially in a startup.

A corporate board of directors serves as a fiduciary for shareholders in general. The board is also charged with a variety of other duties, including the following:

• Constructing dividend policies
• Creating options policies
• Senior executive hiring and firing (especially the CEO)
• Establishing executive compensation
• Providing assistance to executives and their teams
• Keeping company resources in tact
• Setting broad company objectives
• ensuring that the company has the tools it requires for effective management

Remember that your financial investors are not required to serve on your board. Board members can also serve in one of four capacities: board member, advisory board member, board observer (non-voting member who attends meetings), or non-active board member.

Common Directors - The board of directors represents the common stock and the shareholders. Common Stock Directors are frequently one or more of the company's founders or seed investors. Prior to raising venture capital, your board will typically consist of only Common Directors.

Preferred Directors - Preferred stockholders are represented by preferred directors. These Preferred Directors are typically lead investors who make business decisions based on how they affect the interests of all shareholders.

Independent Directors - These are third-party directors who have been appointed to represent only the company's interests. Independent Directors are market experts who make decisions without being swayed by stockholder allegiances. These directors have no stake in the company.

A board of directors with a clear agenda and a plan of action is critical to the success of your startup. The following is a step-by-step procedure for forming a board of directors to guide your company into the future.

The Various Types of Boards

1. Board of Directors

A Board of Directors is made up of appointed members who typically represent both within and outside the company. Members of the Board of Directors are experts in their fields, whether they are related to company leadership or are strategically aligned with what a company does or what industry they serve. A Board of Directors may serve in an advisory or fiduciary capacity, or both. These are the most common types of boards. Inside company representation may include executive board members and even the company's CEO. Outside appointees differ depending on the type of Board of Directors. The composition of a board of directors can also have an impact on how a board meeting is conducted.

2. Advisory Board

An advisory board's main distinguishing feature is that its decisions are non-binding and more informal in nature. Advisory Boards, as the name implies, are made up of appointed experts who advise and assist a company with forward-thinking decisions such as custom acquisition, go-to-market strategy, category tactics, pricing, and even acquisition decisions. The Advisory Board cannot compel a CEO or executive team to act. They are also not appointed to represent any particular interests, but rather are made up of people who are experts in their field or have a proven track record of growing successful businesses.

3. Fiduciary Board

To begin with, Fiduciary Boards are comprised of an equal representation of all shareholders, not just majority owners. Fiduciary boards are required for public companies, but not for private companies. Fiduciary boards are responsible for ensuring that the company makes fiscally beneficial decisions for its shareholders. Because of this high level of responsibility and oversight, Fiduciary Boards are given the ability to vote on the CEO's decisions.

Structure of a Board of Directors

The structure, responsibilities, and powers granted to aboard of directors are determined by a company's or organization's bylaws. The bylaws generally govern how many board members are appointed, how members are elected, and how frequently the board meets. A board of directors does not have a set number or structure; it is determined largely by the company or organization, the industry in which the company or organization operates, and the shareholders.

It is widely accepted that the board must represent both shareholder and owner/management interests, and that it is usually a good idea to have both internal and external members on the board. As a result, there is typically an internal director - a member of the board who is involved in the day-to-day operations of the company and manages the interests of shareholders, officers, and employees - and an external director, who represents the opinions and interests of those who work outside of the company.

The Chief Executive Officer (CEO) is frequently also the Chairman of the Board of Directors of the company.

Advisory Board

Startups frequently choose to forego a traditional board of directors until they receive outside funding.

Remember that boards are not devoted to the founders and are only concerned with what is best for the shareholders. The board essentially supervises the founders.

Alternatively, advisory boards provide advice, investments and introductions to influential people but have no authority over the founders. This advisory council meets quarterly in some startups, while others gather when they require individual investors. Furthermore, these advisors are compensated with company stock.

Board strategy is critical for startups, and many do not bring in outsiders until they have received Series A funding. Prior to this they select dependable advisors and any seed investors for the board. When they receive Series A funding, they may bring on one or two professional venture capitalists (VCs) as outside members, along with a dependable advisor.

Have the Right Number of Members

You must usually choose an initial director or directors for your startup when filing articles of incorporation. Several states only require one director, who is usually the CEO or President.

Many businesses make the mistake of not having a board of directors with the appropriate number of members for their needs. Three to five directors are a good starting point for a new company. This gives you room to grow and eliminates the possibility of a tie when voting comes up.

Hire Independent Directors

When a company raises funds from investors and receives venture capital, the investors request seats on the board to keep an eye on their investment. However, startups must exercise caution because some board members may prioritize the interests of investors or founders over the well-being of the company.

Outside directors can provide professional advice and perspective to the board that a member who is too close to the company may not be able to provide. Outside directors are typically experienced in making objective corporate decisions and do not have a personal or emotional attachment to the company. They can also bring in skills that your startup may lack.

Don't Demand Management Support

Expecting your board of directors to follow management is a recipe for disaster, because the benefit of a board is the ability to make decisions based on divergent viewpoints. Forcing minds that have been compensated and given seats at the table to simply agree with management is a waste of resources that will almost certainly result in poor business decisions.

Avoid Misalignment Regarding the Board's Role

Boards of directors have numerous fiduciary and legal obligations. Nonetheless, boards frequently have additional roles that are related to the stage of the venture.

Members should assist management in early-stage startups (without micromanaging it). They may, for example, aid in product development or provide access to recruits, customers, and investors. Ideally, board members could also serve as mentors to founders. More established startups, on the other hand, may require a different type of help with scaling sales, engineering, logistics and other functions that no longer fit in a garage.

Establish Structure for the Board

Consider imposing four-year term limits on board members, in addition to other restrictions. Plan how people will be able to join the board. Will management cast a vote? Will the members choose their successors?

Your board requires a playbook as well as clearly defined roles and responsibilities. Voting should be used to develop written governance policies. The board should be required to meet at least four times per year in the presence of a quorum or if there are any pressing issues to be addressed.

Attributes to Look for to Build Your Model Board

It is critical that you select the right people for your board in order for it to be effective. This process can be difficult, but by selecting the right people, you will increase your chances of success. One of the most important aspects of creating a model board is to choose people with skills and experience that complement your own. When selecting members for the board, consider diversity, relevance, and alignment.

Diversity

A board of directors comprised of individuals with diverse expertise, knowledge, and backgrounds can provide the best combination to keep your company moving forward. When you have a startup company, you want to make sure that certain skill sets are available on your board. This includes the following:

• A marketing Guru - It is critical to have a member who understands your company's target market and how to reach out to that audience.
• A Financial Professional - For an early startup, having someone who understands finance can help you connect with funding sources and provide oversight for the company's financial plan (Jordensky can assist startups with finance activities)
• An Advisor - A board member with advisory skills can help guide decisions and assist in negotiations that the company may face during its startup phase.
• An Exits Expert - A startup plan almost always includes an exit strategy. Having an expert who can prepare the company for what's ahead is critical, whether the exit is an IPO or a merger and acquisition.
• An expert for each major department. Members with experience in the other major departments that your company will have, such as product development, sales, and so on, will be ideal for the final positions.

Relevancy

While diversity is important in business, it only works fit is relevant to the company's direction. The concept of relevance is simple. If you sell office furniture and supplies, look for board members who have experience in the office supply and furniture industries. If your company sells medical devices, you will need someone with sales and reimbursement experience in the medical field.

Alignment

The final feature to consider when designing the ideal board is alignment. Your board should be made up of members who are committed to your company's long-term goals. Because building a company can be difficult, it is critical that the board collaborates rather than pulling the company in opposite directions.

Choose members who share the same vision for the company and are on the same page with the company's short- and long-term goals.

Choosing the perfect board takes some organization. Begin by making a spreadsheet that lists all of the skill sets that must be filled by aboard member. Then, in the top row, list your potential board members. Mark the skill sets that each board member possesses. When the spreadsheet is finished, you will be able to see where your potential board's strengths are and where you may be falling short.

It is critical that when defining these skills, you include the skills that your company will require to achieve both short-term and long-term objectives. Another factor to consider when choosing board members is including influential people who may have contacts in the fields required for your startup's success. When it comes to building and growing a business, expertise is essential.

Find the Right People for Your Board

Even though board members are key resources who provide support, insight, and professional networks, not all members are created equal.

Consider the future. Consider how board members will function in the long run when selecting them. Choose directors who are ambitious, want to see the company grow, and have a vision for transforming your startup into a powerful business.

Develop a clear job outline. Make each board member's title and description clear from the start. Non-executive and executive positions are included. Define the purpose of each role, including the board's role in risk management and strategy.

Choose your workhorse. Find at least one board member who understands your company's vision and is capable of directing the board. Look beyond accountants and lawyers and actively seek out leaders.

Infrastructure is everything. Create a dependable structure for your team to build on. Remember that as CEO, you must report to the board so assemble a team of people you respect who have the know-how to get things done.

Be impartial. Look to the task at hand and put your emotions aside. Make certain that each member understands their role as well as the roles of the board. Make sure they understand that they are there to protect the company, not themselves.

Choose a mixed-bag approach. Try to instill a sense of diversity in the group. This diversity should include ideas, identity, and skill set. A group is often as strong as it is diverse.

Develop a unified concept of the future. Make certain that these disparate people can come together when it matters. Ascertain that they have a common goal and are aiming for the same destination.

Pay fair and consider the past. Look for those who have extensive and valuable experience. Consider their abilities and pay them appropriately.

How Often Should Your Board Meet?

Many factors influence when a board should meet, including the stage of the company and the needs of its management. A startup company's board of directors will typically meet in person at least once per quarter. This will allow them to review the results of each quarter to ensure the company is on track.

Companies in the early stages of development may find it beneficial to hold more frequent board meetings, which can be done in person or over the phone. Some businesses may prefer informal board phone meetings to stay on top of operations and make the necessary changes to avoid problems.

When there is a crisis or a major change, such as being acquired by another company or acquiring another company, the board is expected to meet more frequently. This can happen every day or even multiple times per day. A typical board meeting will last a few hours, though it may last longer depending on the agenda.

FAQ on Building Board of Director for Startups

Q: What is the role of a board of directors in a startup?

A board of directors is responsible for providing strategic direction, oversight, and guidance to a startup. The board helps to set the company's vision and goals, and works with the leadership team to develop and implement strategies to achieve them. The board also has a fiduciary responsibility to protect the interests of the company and its shareholders.

Q: How should a startup go about building its board of directors?

To build a board of directors for a startup, you should first determine the size and composition of the board, based on the needs and goals of your company. Next, identify potential candidates who have relevant experience and expertise, and who align with the company's values and goals. After conducting interviews, make a final selection and formalize the arrangement with legal documents such as board charters and director agreements.

Q: What qualities should a startup look for in potential board members?

When selecting board members for a startup, look for individuals who have relevant industry expertise and a track record of success in their fields. It can also be helpful to choose board members who have connections to potential investors or customers. Additionally, look for individuals who are aligned with the company's values and goals, and who are willing to offer honest and constructive feedback.

Q: What is the role of the chairman of the board in a startup?

The chairman of the board is responsible for leading the board of directors and ensuring that it is functioning effectively. The chairman sets the agenda for board meetings, presides over meetings, and represents the board to the outside world. In a startup, the chairman may also play a key role in fundraising and strategic planning.

Q: Can a startup founder also serve as the chairman of the board?

It is not uncommon for a startup founder to serve as the chairman of the board, especially in the early stages of the company. However, as the company grows and brings on additional board members, it may be beneficial to have an independent chairman who can provide objective oversight and guidance.

About Jordensky

At Jordensky we want to ensure that small businesses continue to thrive while we provide them the best inputs using the latest technology and tools.

Jordensky helps you in accounting, taxes, MIS, and CFO services for Startups and growing business and are focused on delivering an experience of unparalleled quality.

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