One of the most important things you will do as a startup entrepreneur is to choose your board of directors. Key is to make sure that you choose your board very carefully and give out board positions only once a great deal of thought, communication, and trust has been created. I have seen many mistakes in my days were entrepreneurs gave board positions without the foresight necessary to really understand if the Board member was a good fit. Asking someone to leave the board is a painful process that you want to avoid. Of course there are times when things go sour even with the best planning, but the idea is to make sure that you put in the effort necessary to ensure your board works effectively for you.
What is the role of a Board member?
Board member roles vary to some extent depending upon the size of your company and the structure of your board. I have seen very active board members who will do everything including pickup the phone to generate business for you, and I have seen other board members that meet once per quarter or year to review the company. Obviously there are a lot of duties and tasks between those two extremes where Board members added value.
Board members provide overwatch on the CEO, watch finance and stay involved with the strategic direction of the company. On the negative side, Board members are not there to get involved in day-to-day operations and help run your company. One of the few times where this could occur is when there is a management change and (for instance) the CEO is asked to leave the company. In this case a Board member may have to step in to run operations. Generally though, Board members are there to advise, and usually meet once per month to help you with strategy and direction. They will also look over your reports and documentation to make sure the company is running correctly. Board members will certainly get involved with the financials and the legal structure of the company to ensure that cash is being spent correctly and that items like stock options are handled appropriately.
How are Board members compensated?
Generally, Board members are paid in equity/ownership of your company and are therefore an incentivized to make the company an overall success. In some cases, Board members get some money for expenses if they have to travel to Board meetings. In other cases, especially with large companies, board members will earn a cash allotment annually. For startups however, I would not suggest paying Board members any cash, and if a Board member is asking for cash, they are probably not who you want on the Board.
I would suggest as a startup entrepreneur you offer each Board member somewhere in the neighborhood of 1/10 of 1% of your stock up to 3/10 of 1% of your stock. So, if you have 10 million shares outstanding, you might issue a board member anywhere from 10,000 shares up to 30,000 shares for serving on the board with your company. Also the Board members’ options vest over time just like employee options.
How many Board members should I have?
Usually, for startups I recommend not less than 3 but not more than 7 Board members. Less than 3, and it’s not really an effective Board, and more than 7 is simply too much to handle. If you have friends of the company who want to serve in an advisory capacity, and don’t have room on the board, I would suggest that you add the extra folks to your Advisory board.
Who should be on the Board?
First, as the the CEO and founder, you HAVE TO BE ON THE BOARD. Never, never, never, give up your Board position, no matter what may happen. Let’s face it, sometimes bad things do happen and founders/entrepreneurs are asked to leave the companies they have founded. While unlikely, either way, you need to stay on the Board until you sell the company or exit via IPO.
If you are not the CEO, then you should invite the CEO to be on your Board with you, the founder. So you would have 2 Board seats as a result. There is no need to add additional officers to the board. The rest of your board should be a combination of talented confidants and outside professionals who will add operational strategic value or corporate development value. Sometimes you may add a Board member just because they are a huge name or recognized individual and they build confidence in your company just from using their name. However, usually this is not the case and you should look for Board members who want to and are able to provide value.
The Essentials – Directors and Officers Insurance
Board members have a fiduciary responsibility to your organization and therefore have some liability for the organization. Recall the Enron and Worldcom disasters of early 2000 and you will know that Board Members were scrutinized at least, and held responsible at best. So, you need to acquire Directors and Officers insurance (called D&O insurance) in order to attract Board members as they want insurance against liability. In addition you should secure errors and omissions insurance which also covers officers and board members. This insurance is typically called “E&O” insurance.
What Happens at Board Meetings?
As stated above, Board meetings are held on a monthly or quarterly basis so the Board can interact with the CEO to guide and direct company strategy. On occasion, you might have some of your VP’s attend a Board meeting to report on their given department or duties.
In most cases, you, as the CEO, should build the agenda for the Board meeting. It should be built with the Board in mind, having items that you wish to cover and they want to see and discuss. You should cover all areas of the company so that the Board can provide input and guidance: Sales, Marketing, Business Development, Product Development, Engineering, Manufacturing, Finance, Operations, HR and Administration and more. The meeting should last 1-2 hours unless you meet less frequently (quarterly or annually) or there are extreme circumstances (you need to discuss a merger or acquisition).