Build An Effective Board Of Directors For Your Startup

Build An Effective Board Of Directors For Your Startup

Every company is required by law to have a board of directors. The board is responsible for the overall direction of the company and for making major decisions, such as hiring and firing senior management, approving a budget and keeping the company financed through equity investments and debt financing. [1] Therefore, building a strong, effective board of directors is very important for your company’s success.
There are some considerations when building the board of directors for a startup.
Have The Right Number Of Members
At the early stage, 3-5 directors are appropriate number for a new company. Too many directors at this stage will make scheduling an issue and be a drain on your funds. Generally, after the initial seed round, the company will have to allocate a board seat to the corporation which has led that seed round. If the founders still want to keep control of the board, it is better for them to retain two seats and the new investor to have one seat. It should be noted that when you accept a new investor, you might have to allocate a new board seat for it. Thus, if you do not want a certain person on the board, you’d better refuse that person’s investment.
At some point, if the board is getting too big or if the investment size doesn’t merit a board seat, instead of giving out more board seats, the company might allow investors to act as “observers.” That is, they can come to and participate in the board meetings, but they do not get a formal vote.[2]
In order to avoid a tie vote, you are highly recommended to have an odd number of board members.
Create A Diverse Board
Establishing a board of directors with different knowledge, expertise, age and backgrounds can be a powerful force for your company's success. A diverse board can provide the company with unique perspectives. You might need a marketing expert, a financial expert, and an exit expert on the board, as well as an advisor who might help guide decisions and aid in negotiations.[3]
Provide Good Compensation For Directors
Compensation is essential, so keep that in mind and consider giving them access to a percentage of stock instead of money. A common amount given is 1 percent of stock or expenses per quarter plus a meager retainer.[4]
Choose People Who Can Participate Fully And Share The Same Vision For The Company
It is important to have board members who can dedicate significant time to the company. The board members should not just be available for scheduled meetings, they should also be available when urgent issues arise. Thus, it is better to have board members who are in close proximity to the company as you can meet face to face when some important issues emerge.
Please keep in mind to establish a board of directors who share the same vision and long-term goals for the company. If the members have different vision, the probability of risk of pulling the company in opposite directions will increase.
Have Independent Directors
An independent director is not a founder or an investor or an employee of the company. Appropriate independent directors can bring their previous business and operating experience to the company. They can also provide the company with their contacts which might be a great asset for the company. However, you should always have independent directors who can establish a long-term relationship with the company and who would like to dedicate significant time to the company. It would be great if the independent directors can provide hands-on mentorship.
 
Rong Gao is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 
References
[1] Samer Hamadeh, Adam Dinow, What you need to know about startup boards, https://techcrunch.com/2016/11/05/what-you-need-to-know-about-startup-boards
[2] Ibid.
[3] Alejandro Maher, Build Board of Directors: Simple How To Guide for Startups, https://www.upcounsel.com/build-board-of-directors-simple-how-to-guide-for-startups
[4] Ibid.