Do Not Underestimate the Importance of Building the “Right” Board
An engaged and connected board of directors is one of the best tools an entrepreneur has for building an outstanding company.
But building the “right” board isn’t automatic—especially if you haven’t done it before.
Here are some things to know.
- The requirement to establish a board depends on the company’s legal structure. State law in all fifty states requires corporations and S corporations to have a board of directors. LLCs are not required to have a board, but may choose to have a board of managers or one manager. Boards of advisors have no legal obligation.
- As the company founder with no outside investors, you will choose members of your board. Prior to outside investors, the board role is more advisory than governance. Who you select is up to you. Don’t limit yourself to friends and family. Consider individuals who bring skills and relationships that you don’t have. Consider members who may stay on the board long term, even after outside investors come in.
- Once you receive outside funding, “investor’s rights” in the term documents will likely require board seats. Investors typically will take one to two seats on your board. For angel investors, the board seats often go to angels who participated directly in the due diligence process, hopefully people with whom the entrepreneur has developed a good relationship.
- Boards of directors have legal responsibilities. Ask your attorney to help you understand the fiduciary duties of a board which include duty of care and duty of loyalty. Duty of loyalty requires that boards act in the interest of the corporation and not their own interest or the interest of any other entity or person. Duty of care requires that boards act based on all available and material information.
- Boards of directors determine CEO compensation. They hire and fire CEOs. Enough said.
In the best-managed startups, we see entrepreneurs involving their boards in strategy discussions and using board members informally as “sounding boards.”
The most outstanding entrepreneurs recognize that boards can be amazing advocates, that they have relationships and connections that can accelerate a startup’s growth,that the “right” board can be an asset that doesn’t show up on the balance sheet.
Need help building the right board? We can help you get started.
