A guide to understanding startup boards and how to make the most of them as the founder
For every unicorn startup success story you see in the news, there are ten that end with a founder being ousted from his or her own company, think WeWork founder Adam Neuman as an example. Having a board of directors is part of building a startup—at least, a certain kind of startup. If you are looking to build a highly scalable startup and raise substantial money to do so, then a board of directors comes with the territory.
As a startup company founder, you have probably been spending your time, building out your minimum viable product (MVP) or service offerings, to get users, sales and traction. Next, you may have started pitching angel investors and VC firms to get funded. Maybe things are moving along and you now have landed your Series A round of funding. Interestingly enough Baz Banai a private equity lawyer, wrote an article about this topic in a Medium, in which he asked the question, “should you set up a formal board of directors?” when a startup gets to this stage of financing miles stones.
According to an article published in Techcrunch, Adam Dinow a law firm partner at Wilson Sonsini Goodrich & Rosati. Stating “every company is required by law to have a board of directors when you start a company, Interestingly, it is ok for the company to have only one board member, and it may be you.” A board is set up to handle corporate matters like issuing stock, setting up a stock option plan, authorizing fundraising or getting loans. In most startups, the founder will typically appoint himself or herself to the board. From there, others get added to the board as the company grows.
The board of directors (the ‘Board’) is an integral part of a startup’s internal management structure. A venture-backed startup’s strategic planning and direction is almost entirely dependent on the decisions of the Board — this includes fundraising, acquisitions, IPOs, hiring and firing of C-suite executives, budgets, new product lines, etc.
It’s often said that startups should think about setting up a Board only once they’ve raised their first round of funding. But Baz Banai, explains in his article, that there “are benefits of forming a Board earlier in the lifecycle of a startup, irrespective of raising funds, which are undeniable.” He mentions that among the many potential reasons that cause startups to fail are those which are self-inflicted. Such as arguments and disagreements between the founding team, overconfidence, and lack of expertise — these types of issues can usually be avoided by having a strong and supportive Board in place.
Startup Board Formation – What You need to Do
let’s take a look at a few basic principles that every founder should know when it comes to establishing a Board. First, to create a board, you should consult with and hire a lawyer experienced in board setup formation.
- Legal — It’s a legal requirement in most jurisdictions for private companies to have at least one director (i.e. it can just be the founder). Public companies, however, usually have more than one director (depending on the jurisdiction) on their Board. The Board is subject to fiduciary duties, which, in a general sense, obligate them to act in the best interest of the company.
- What — It’s the Board’s responsibility to ensure that the interests of the shareholders are being considered in the strategic management and overall direction of the startup. At the early stage, the interest of the Board and shareholders are aligned as the shareholders are the founder(s) and VC investors.
- Who — The composition of a Board can vary depending on the stage of a company. However, the typical startup board is comprised of the founder(s), a VC (as the lead investor of a funding round), and independent board members.
- When — Startup boards are usually formed at the initial round of venture capital funding (if not earlier), and upon which, the size and composition of the Board are a negotiating point in the term sheet phase.
- How — The frequency of board meetings can range from monthly to quarterly, but startup board members may also hold more frequent ‘informal’ meetings to address unforeseen circumstances (which there will be plenty under being an early-stage company).
- Remuneration— The remuneration of board members will depend on the circumstances. For example, VCs taking a board seat in their portfolio companies are not remunerated. However, independent board members may be remunerated in the form of a small equity stake.
Who else is on the board and why does it matter?
(image credit: Upfront Ventures)
The first step to getting the most from your startup board is to get the right people on it. It’s a good idea to start thinking about this before you even begin to raise money. An article published by Pilot CPA firm, suggests that to set the board up for success, you’ll want to recruit board members who have expertise in areas that you can benefit from. Stating “if your founding team is very strong technically but has little experience in selling, for example, a board member with strong sales expertise can help guide you in developing that part of your business and hire leaders into that function. Board members who have been operators or founders themselves might have advice for you on hiring, and help you decide how to build out your company as it grows.” said Paul Jun, Chief Financial Officer at Pilot.
The board will ultimately be responsible for making the critical decisions for the company, like whether to raise money, whether to be acquired, whether to enter into important strategic transactions and whether to hire or fire senior management. So who sits on the board is important. It’s crucial to ensure these major decisions are made by smart people who are knowledgeable about the company and the industry in which it operates.
While board compositions often change and evolve, and will vary from company to company, but standard approaches for startups do exist, depending on the stage of the company.
Some startups choose to have an odd number of directors, to reduce the risk of a tie vote, which equals a “no” vote in the board room. Adam Dinow explains in the Techcrunch article that “after your initial seed round, you’ll usually have to allocate a board seat to the firm or person who led that seed round. To ensure that the founding team remains in control of the board, a fairly typical setup at this stage would be for the common stockholders (i.e. the founders) to retain two board seats and your new investor to have one seat.”
Normally there are three types of startup board members: founders (you), investors, and independents. Initially, most boards start with just founders, with investors added as the company raises a Series A. At early-stage startups, it’s common for the lead investor of a Series A, Series B, and Series C to get a seat on the board, usually filled by the partner who led the deal. It is common to allocate a new board seat for the lead investor for each new round of investment. Keep in mind that when you accept an investor, you also typically will be bringing on a new board member. Some investors will attach a board seat to their terms of investment.
You can also set aside seats for independent members, usually outside experts (this person is typically not an investor or a founder or an employee of the company) that you believe will be able to add real tangible value to the business such as;
- Introductions to potential customers and partners
- Or interviewing key candidates
- Coaching senior management
- Speaking at sales events
- Assisting with securing financing, and everything else in between.
For example — a board member who has product development expertise may be of greater value to an early-stage startup in contrast to a board member who has domain expertise in the audit and regulatory space. Usually, the evolution of a startup board trends from focusing on product development and financing to sales and growth.
What does a board do?
The board is responsible for the company’s overall direction and making major decisions, such as hiring and firing senior management, approving a budget, and keeping the company financed through equity investments and debt financing. Key hires will need to be approved by the board, along with salary and other compensation, like stock. This last one includes your salary as CEO.
Finally, board members provide connections with other helpful companies, individuals, and resources and offer overall advice and guidance.
Startup investor Mark Suster states that the function of a board is to:
- Periodically have to summarize how your business performed in the last period (often quarterly; in the early days sometimes it’s monthly)
- Force you to think strategically about what you want to accomplish in the period ahead
- Gives you a chance to pull yourself up from 1,000 feet to 20,000 feet so you can look above the clouds and think about where you’re heading. If you get a smart person on the board , just having a sparring partner with a vested interest in your success can be useful
Who’s In Control – Board Composition After VC Funding?
From inception, startups necessitate the attraction of outside resources to achieve high growth rates, which establishes the need for external funding through venture capital investment. But, here’s the dilemma—a startup’s need for external resources drives a wedge between the startup’s value and founder control. There is, therefore, a trade-off between raising more funds for growth and giving up decision-making control.
Mr Banai explains in his article that the majority control of a startup board exists on a continuum between ‘founder-controlled’ and ‘investor-controlled’ with ‘shared control’ living somewhere in the middle. He states that “as a startup moves upwards in its growth trajectory, majority control moves from ‘founder-controlled’ to ‘share-control’ to ‘investor-controlled’.” This is not something that founders often want to hear. Nevertheless, this is often the nature of venture-backed companies, simply because VC investors build their voting power and gain additional board seats with each round of investment.
As a startup raises each round of funding, the Board begins to go through an evolution, particularly in the context of the number of members and the transfer of decision-making power. Keep in mind, that until an IPO or an exit generally, all external investors will hold preferred shares in the startup, which grant rights such as the nomination of board members and liquidation preference (i.e. they get their money ahead of holders of common shares).
Mr. Banai shared a breakdown of board composition by funding stage of a startup:
- Seed Stage (3 person Board) comprises 1 Seed investor (maybe an angel or micro-venture capital investor) and 2 co-founders.
- Series A (5 person Board) — comprising of 1 Seed investor, 1 Series A VC investor, 2 co-founders, and 1 independent director.
- Series B (5 person Board) — comprising of 1 Series A VC investor, 1 Series B VC investor, 2 co-founders, and 1 independent director.
- Series C (5 to 7 person Board) — comprising of 1 Series A VC investor, 1 Series B VC investor, 1 Series C VC investor, 1 to 2 co-founders, 1 to 2 independent directors.
How to get the most value from your board meetings
Most boards meet quarterly. Sometimes early-stage boards meet annually or monthly, depending on the stage of your company. Startups at the seed stage, or sometimes even at the Series A, are often not concerned with running formal board meetings. However, once VCs and independent directors are in the picture, running effective board meetings becomes a necessity. Having a simple yet consistent structure for running startup board meetings should be the starting point for all founder-CEOs. Sequoia Capital, the well-known VC firm, has long been a proponent of using ‘board decks’ to maximize the value founders get from board meetings whilst minimizing the time spent on preparation.
These startup board meetings have several purposes. One is to ensure that your board members have enough up-to-date context on the business to be helpful when you want feedback. Another is for you to get actionable advice on your high-priority initiatives as they occur.
- Reporting — Directors are required to stay informed, whether that be with financial performance (e.g. unit economics, cash flow, etc.), product development, or the status of financing. However, it’s a waste to spend time ‘reporting’ to your startup board during the actual meeting. Rather, startup founder-CEOs should make as much of the reporting happen outside of the meeting by making all information and materials available in the board pack a few days before the meeting.
- Strategy — Use your startup board and their insights to flesh out strategic issues. This is the purpose of the board. Founder-CEOs should approach the meeting to clarify 1–3 strategic issues, with 1–2 of those strategic issues being the central issues. Some topics of discussion may include competition, pricing, product differentiation, distribution or partnerships, etc.
- Leadership — Your startup board is an excellent resource for your professional development. As a founder-CEO, you should seek to optimize your results by working collaboratively with your greater team and making them part of the process. Bring your senior team members to board meetings to share their expertise and insights (e.g. Head of Engineering to discuss product issues, CFO to communicate cash flow projections, or VP of Sales to outline the pipeline for the next quarter).
So what can you do to make sure you get the most value out of your startup’s board meetings?
Check-in regularly – you’ll want to have an ongoing 1:1 dialogue with your board members, whether that’s scheduled monthly sync or ad-hoc text messages so that it’s not a black box between quarters and you can build strong relationships. Some companies host a board dinner or lunch the day before the board meeting.
Provide context – as a founder, you’re deep in the company’s day-to-day workings – but your board isn’t. Remember that your board doesn’t necessarily know everything going on inside the business and that without the right context, they can’t give the right advice. Plan to catch them up on the vision, what’s changing with the business, and what’s evolved since your last board meeting. Try to distill this into a few clear takeaways (e.g. one-slide “CEO Update”). It’s impossible to fully catch up on everything that has transpired over 3 months in 3 hours, so it helps to prioritize!
Plan ahead about where you need help – before you meet with your board, spend some time thinking about the areas where they would have the expertise/context to be helpful and you’d like them to weigh in. Your company likely has a lot of moving parts, and it pays to think through what will most benefit from the board’s insight. If you’re an early-stage startup this might be something like advice on a key hire or large sales deal; for more developed startups this might be something like deciding on the right goals for the year.
Be specific – keep in mind that the board wants to help you. They can’t do that effectively, however, unless they know where their help is needed. As the person closest to the business, you’ll always have the best idea where the board’s expertise can do the most good. Being concrete and specific with the board on where you want to point their time, and making sure they have the context to understand why will go a long way towards getting you what you need.
Sample Startup Board Meeting Agenda
The pilot article gives some suggestions for board meeting formats for early-stage startups:
- CEO Update (Highlights, Lowlights, Focus Areas for Next Quarter)
- CFO Update (Key Metrics/KPIs, Cash Burn, Runway)
- Product Roadmap
- Other Key Functional Updates
- 1-2 Special Topics for Board Discussion (with 1-Pagers providing context for the discussion)
- Closed Session / Approvals
Your board is an important partner in your company’s growth, and a valuable resource in developing your business. By engaging proactively with your startup board and providing them the information they need, you can help them help you. Seeking counsel from a tax advisor and a legal advisor early on can potentially contribute to a startup’s financial prospects both in the short and the long term.
If your startup needs help analyzing the KPIs your investors will ask about, feel free to reach out to Huckabee CPA with any questions or for a free consultation. We offer outsourced CFO consulting services to select companies.