Start-up Company - Board of Directors

Start-up Company - Board of Directors

Start-up organizations typically look to surround themselves with trusted advisors who can offer business wisdom, open doors, share industry knowledge, and or help raise funds. These advisors are a group of people who are tapped when required and have no real fiduciary responsibility to the company. An advisory board is an important element of successful companies.

As a start-up company evolves and attracts investment, it becomes very important for the organization to form a proper board of directors. It is the responsibility of this board to ensure the overall integrity of the company.

Boards of Directors and Advisory Boards are completely different in function, accountability, and decision making power.

The following excerpt from an article in Inc. magazine provides some tips well worth considering:

Choosing a Board Seek out people who have experience dealing with the growth transitions you anticipate for your company. If you look around the boardroom and none of your directors has ever managed a company bigger than yours, then you have a problem. You need only one person with specific experience in your industry.

After that, pick people who have managed businesses through various stages of development. Try to imagine how each candidate might handle a swing vote situation. Avoid choosing members who seem unwilling to bend every now and then.

Anticipate who might cause fights. Above all, steer clear of bullies and loudmouths. Make changes. As your company evolves, so should your board. From the outset, let members know that you intend, from time to time, to appoint new people with different connections, market knowledge, and strategic experience.

You have a board. Now manage it. Like any group of people within your company, your board members need direction and even encouragement. They also need to be kept informed.

The rest of the article provides additional practical advice on this important topic. http://www.inc.com/guides/growth/20672.html

As start-up companies seek more significant rounds of financing, attracting larger institutional investors, the terms of these investments often stipulate that the investor have a seat at the board.

It is important to strategically consider the current and most likely future state board of directors. Do you have a credible, seasoned, strong board chair ? If the current board chair is the CEO, this will need (in most instances) to change.

A start-up company in the need of investment, is rarely in a position to push back on such a condition and trusts that the designated board member will be generally good for the company. After all the new investor will want to protect their investment. While this is likely true, there are situations where the institutional investor designates a board member who is not an ideal board candidate.

In extreme cases, the designate is a person who is NOT constructive, balanced, experienced, or at all compatible with the rest of the board. Nothing wrong with a different point of view, but in these extreme cases the new board member(s) can have significant negative impact on the company.

Start-up companies who are negotiating investments and who will need to give a board seat to the investing organization should proactively discuss with the investing organization the type of board member who could add significant value to the company. This discussion will sensitize the organization to the fact that the start-up looks to ensure that the board member assigned adds value not the other way around. Ideally, in the right context, the investor will discuss the type of person they would like to see represent them. The two way dialog can be an opportunity for the start-up company CEO and or Chairman to influence the end result.

Not having this conversation sends an entirely different signal and creates unnecessary risk.

This simple but critically important approach, will be seen as strategic by the investor and help prevent some major headaches down the road.

Dan MacDonald