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When is a Board necessary for a start-up?

At what point in a self-funded start-up's existence is a Board necessary or appropriate? What types of people are best suited for this? Is it better to go to people you know who have good business skills but may not have domain experience in what you are building or reach out to people who have domain experience that you don't know? When a Board is formed, how often should it meet and what is the role of the Board in directing the company strategy and direction? Lastly, how are board member compensated? Pure stock options? Mix of money and options? No comp whatsoever?

9 Replies

Sean Hurley
0
2
Sean Hurley Entrepreneur • Advisor
Strategic Marketing Leader with strong financial results for growing organizations
Richard:

Your questions are good but are best addressed in a discussion format. Feel free to give me a call at your convenience.

Sean Hurley
John Seiffer
5
0
John Seiffer Advisor
Business Advisor to growing companies
A board of directors has fiduciary responsibility to the shareholders of a corporation.As such they can hire and fire management (the CEO).If you form a corporation, the state will probably require a board, but in most states, you can be the sole shareholder, the entire board of directors and the CEO.

Angel and VC investors will typically require a seat on a board and that the composition of the board not be totally made up of founders. (Similar structure can be created for an LLC but the names are different.) But if your company is self-funded, then you may not want or need that.

You may want an advisory board. This has no legal or fiduciary responsibility but is composed of people you want advise from. This can range from an informal relationship to a formal structure with regular meetings. There are many ways to do it - beyond the scope of this forum.

Compensation ranges from "I'll buy the beer and be eternally grateful" to a small amount of stock (half a percent or maybe a bit more) to actual cash if the company is profitable.

I strongly suggest if you make any kind of formal board, that you limit the term of service to one year and say so at the start. That makes it easy to get rid of someone who isn't working out, and of course, you can always renew the term for someone who is.

And advisory board has no agenda other than what you give it (unlike a board of directors) so you have to do a bit of planning and prep to get the benefit. But when you do, it can be a wonderful thing.

Expertise on the board can be related to your market, your technology, your business organizational structure or whatever you need. Often a strong benefit to the board members is the ability to work with each other.
Patty DeDominic
0
0
Patty DeDominic Advisor
Chief Catalyst, Managing Partner at DeDominic & Associates (Also Chief Catalyst for Maui Mastermind and Exec Coach)
Boards are valuable but best kept small until you have revenue and find yourself with many unanswered questions or big opportunities that need to be prioritized. Who you ask for hwlp is important in the short run a business coach plus your cpa, insurance, legal and banking advisors can be enough to get you to the next levels
Jason Gibb
2
1
Jason Gibb Entrepreneur
Real Estate, Director & Business Development, MBA, CMA
Richard, get yourself a copy of Startup Boards by Brad Feld and Mahendra Ramsinghani, it answers all these questions and more. Probably the best resource on the subject out there. All the best J.
Bill Warner
1
0
Bill Warner Entrepreneur
Managing Partner of Paladin and Associates
For a self-funded business, you are the board until such time you need more formal governance. Just be sure you are properly incorporated in your state and that all the right board consents are prepared that correctly form your company.

When you are producing substantial revenue and/or take investor money, you should put a formal board in place. Most investors will insist on it anyway. As long as you have the majority shares of the company, you are in control. The constituency of the board changes over time, but these should be people that a well versed in your business model and can guide and assist you in reaching your markets in substantial ways. Rock stars.

The frequency of meetings is what you need to get the guidance and advice you need. Once a quarter is typical.

The role of the board is one of governance. Amongst other things, they approve the business strategy and operating plan, approve financial objectives, approve executive hiring, approve compensation plans and audit financial performance. However, at start-up time, they help get you into the market.

For a start-up board, stock options are the usually form of compensation plus expenses.

Good luck................Bill


Juan Ramon Zarco
0
0
Juan Ramon Zarco Entrepreneur
Managing Director, Silicon Valley Ventures Growth Partners llp
For startups, I see two types of boards -- the C-corp board which is the "true" manager of the corporation and the Advisory Board. Why the two? In a startup world, there is a very decent chance that the company will fail, and, if the C-corp board has directors and the shareholders have the financial resources, then there is the possiblity of a lawsuit on the grounds on how the company was governed. The only way to cover that is through D&O insurance, which is expensive. Any adviser with some reasonable financial self worth rarely volunteers to be a C-corp adviser because of the risk of lawsuits. (Actually, I do know a former director who regrets joining such a board, after the company failed.) An advisory board does not have that risk, plus one can compensate those advisors with equity. Normally C-corp directors receive an honorarium, cost reimbursements, and stock options.
Kenneth Larson
0
0
Kenneth Larson Advisor
Retired Aerospace Contracts Manager, MicroMentor Volunteer and Founder "Smalltofeds"
A board is necessary to register a non-profit organization, together with a charter and registrations at the state and federal (IRS) level. They are key to evolving the charter and merit a tax free status.

In terms of for-profit, an advisory board lends credibility to business proposals and business decisions, straightening the startup and small enterprise.
Juan Ramon Zarco
0
0
Juan Ramon Zarco Entrepreneur
Managing Director, Silicon Valley Ventures Growth Partners llp
No startup CEO is omniscient. Too many things are going on. Employing experienced executives as board directors would be valuable, especially for a startup. But it is unlikely any one of them would be one based on my previous comment. So it pays to create a formal and well structured advisory board.
Benedikt von Schröder
0
0
Digital Health and Life Science Investor/Mentor

A few thoughts on boards for start-ups.

1) they shouldn't be too large as large boards become dysfunctional. 2) Outside board members work best and most efficiently if they have a sparing partner on the inside. 2) For board meetings to be effective and added value they need preparation. A absolute minimum is an agenda but even better some concise preparatory information dove tailing the agendawhich is delivered to brd members ahead of time. 4) People who bring a very specific know how might be better lodged on an advisory board. Regular brd members should have a broader perspective, able to think strategically and have governance experience.5) A board should not be too homogeneous.You wanddifferent opinions and good discussion. 6) Board members should be able to think our of the box.

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