How to Create an Early Stage Board
Once you’ve incorporated your startup, you’ll need to assemble a board. Your board is an integral part of your startup’s success and will contribute to a range of decisions, including hiring executive employees and helping you raise and deploy funding.
In this article, we’ll explore how to build a relevant, thoughtful board of directors, what to expect from your board during your startup’s early stages, and how to compensate your board members.
What is a board of directors?
Corporations are owned by shareholders, who are paid out in dividends and represented in board meetings by a board of directors. It’s the board’s role to serve and protect the financial interest of the company and its shareholders, also known as a fiduciary duty.
Corporations are required to hold at least one board meeting every fiscal year to discuss topics like executive compensation, executive hiring and firing decisions, funding strategy and implementation, and dividend payout policies. Make sure you keep records of every board meeting to stay compliant with the Secretary of State where your startup is incorporated.
Setting up an effective board for your startup
Build a board for your company composed of people with relevant experience and the commitment to talk through the difficult decisions that your company will encounter.
Your board should be a healthy balance of the different types of shareholders that exist in corporations. These include common shareholders, preferred shareholders, and independents.
Common shareholders have voting rights and can be employees or directors of the startup. Preferred shareholders have no voting rights and are paid out on dividends before common shareholders. Independents have voting rights and aren’t employees or directors of the startup.
Here’s how to create a board of directors:
1. Decide how many seats you will need
There are three main startup board positions to fill on a board: chairperson, director, and CEO. All three contribute to discussions and vote on decisions at board meetings. The chairperson runs board meetings and ensures that discussions are fair, equal, and productive. The director and the CEO represent the shareholders. The CEO can also be the chairperson, although this isn’t recommended—a separate chairperson can help maintain a separation of board and CEO interests. For the same reason, a healthy board should also have directors who are not employees of the company.
Ensure you have an odd number of board seats. Since boards are decision-making entities, a typical board of directors has an odd number of members to prevent a tied vote and decision deadlocks.
There can be as many directors on your board as you’d like, with a minimum of three people recommended to avoid tied votes. Each board member should bring unique insights and experiences to the table.
2. Identify your company’s skill gaps
Your board can supplement your expertise where your skillset is lacking. This support can include aspects like engineering, sales, marketing, design, operations, and growth. For example, if you’re a pure technical founder, you might want executive input on graphic design direction. If you’re a sales founder, you might want tech executives to weigh in.
3. Align personalities and values
Find directors who work like you do, value what your company values, and whose company you enjoy. Make sure you trust them enough to genuinely want to work with them through your startup’s big questions. You’ll be making serious business choices together, and these decisions will affect your coworkers and employees.
If you don’t align with your board, you might have a difficult time coming to shared solutions and reaching consensus—even more so if your personalities as individuals don’t mesh. For example, if collaboration is a core value of your company and your board of directors consists of a group interested in a more siloed approach to production, you might find that your opinions on hiring executive team members don’t match.
A startup board’s main responsibilities
Once assembled, here’s what to expect of your board of directors.
- Internal rules, processes, and policies: Boards help companies figure out how to operate on macro levels. If your startup needs a policy about confidentiality, for example, a board can help manage employee expectations, articulate the parameters of the rules being followed and broken, and even dictate how behavioral rules will be reinforced (e.g. a suspension for breaking a serious rule). Smaller operational choices, such as how to organize a project board, still belong to middle managers and employees.
- Choice in leadership: Executive hiring and compensation are determined by the board. If you need to hire a C-level executive, Vice President, or Head, the board will help vet candidates and determine fair pay for the hire. The board also helps with termination. If a C-level executive is breaking the bylaws of the startup or otherwise jeopardizing the company’s success, a board can choose to fire them.
- Capital allocation and fundraising decisions: Getting funded is pretty exciting, but the deployment of that capital can be nuanced and complex. Your board will help your startup make decisions on this process. Factors like labor costs, business goals, liabilities, values, and departments that are under- or over-served all contribute to why, how, and when capital is allocated throughout your startup. A board will also help you determine if and when to jump into another round of fundraising in a way that aligns with your business’ definition of success.
- Judgment and emotional support to the CEO: Being a CEO can be isolating. CEOs often lack peers and don’t always have people they can turn to when things get hard. Ideally, a board can relate to the CEO’s experience and provide a community.
- Proven connections with other companies, individuals, and resources: Try to find board members with connections to other startups, founders, tools, or nonconfidential insider knowledge that you don’t have. For example, if you’re building an insurtech startup but are new to the insurance industry and have never written a line of code, you’ll want to get insurance and engineering experts on your board.
- Transparency and driving alignment. The board is also a form of integrity police for your corporate decisions. Each board member carries a dual duty to keep shareholders as profitable as possible and to do so within the confines of your startup’s values and the law. Think carefully about the types of personalities that will complement your strengths and help your startup in the long run.
Seed stage boards
Corporations are legally required to have annual board meetings. The number of board members a startup should have depends on the company’s funding and operational stage.
At the seed stage, your board should be pretty small—we suggest capping it at three people. An odd number prevents any tied votes on decisions, offers wide enough perspectives to make discussions valuable, and keeps decision-making relatively simple. Things need to be able to pivot quickly while you’re still refining foundations like product-market fit or logo design. A small board enables quicker decisions during this innovative period.
The first seats are typically filled by the founder/CEO, a high-level employee, like a co-founder or C-level executive, and a non-employee investor.
Having a friendly investor who’s not an employee on your board means you’ve filled an independent board seat with a member who’s likely to be well-involved. Independent seats are required for boards, so it’s great to get this seat filled early on by someone who genuinely cares about the outcome of your business. Plus, having a great investor on your board can help when it comes time to negotiate your Series A term sheet.
Make sure you record board meetings fastidiously, no matter how early on they occur or how casually they may run at this stage. These notes will be helpful for due diligence with the Secretary of State. Even if your meetings are still casual, run them as if there is already a room of investors you’re not as friendly with to get practice running formal board meetings.
Series A boards
At the Series A level, a small board still makes sense. Many startups at this stage are scaling and innovating simultaneously, and you should structure your board with either three or five people. Having more seats than that is too much effort, time, and possibly too many cooks for the stage your company is at.
These two board size options exist because a new stock type known as preferred stocks comes into existence with Series A funding. Preferred shareholders, common shareholders, and independents each need to be represented with a seat. Typically, a lead investor or their associate represents preferred shareholders, the CEO represents common shareholders, and independents offer the outside eyes.
If you opt for a three-person board, one of the founders will leave the board to make room for the preferred shareholder seat. This founder can opt to take an observer seat, which means they can’t vote but will still have direct access to the decision-making process. An observer seat is a good compromise for a founder who agrees that the board should only have three members, but still wants access to it.
If you opt for a five-person board, any non-CEO founders can stay on the board if they wish. What’s important is that all types of shareholders are represented on the board in a balanced manner. For example, if your co-founder stays on, they’ll be considered a representative of common shareholders because they are an employee of the company. The fifth person—in addition to your lead and independent—might be an investor, to represent preferred shareholders. Having more expert voices at this stage is especially helpful as you scale and attempt to keep multiple founders at the decision table. Bear in mind that having more people on your board can impact the pace of decision-making.
Compensating board members
Board members, especially in the early stages of a company, are not usually monetarily compensated. Instead, a startup board of directors’ compensation usually consists of equity and, in the case of lead investors, preferred stock options.
Founders and CEOs are considered company employees and are decidedly not monetarily compensated for serving on their own boards. Lead investors may be compensated, but many opt for preferred stocks. Independents often get equity in the form of common shares, but they’re also the most likely to get monetary compensation at later funding stages, given that they represent neither the company nor the investor.
As your startup scales, your board will too. Build the foundations of your board thoughtfully and it will aid your startup in the years to come.