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Feb
22

Every Company Needs a Board of Directors – Startups Too

OK, maybe not every company. Raw startups – two people in a garage kinda thing – shouldn’t waste their time with anything formal. But young companies – those that are established and on their way, regardless of their size or level of funding should, as should any company more established than that. It seems that we frequently relate having a board of directors to some kind of funding event. Of course, it often happens that way. Investors require one or more board seats, which becomes the impetus for creating a formal board – at least one with non-employees on it. But even without funding, companies should establish and use a board of directors made up of people from inside and outside the company.  A board of qualified people can offer great benefits to a company, its management and its founders.

To me, the most important of these is that board members, unlike informal outside advisors, have a fiduciary responsibility to the company and, therefore, offer advice that is often better thought out and more responsible. After all, it’s their job. Additionally, because there is greater long term continuity with board members than other advisors, the input received from directors tends to be more specific, context sensitive and applicable to the company’s long term strategy. Finally, a board tuned in to what the company is doing and how it is doing it can provide dynamic guidance, including a kick in the ass now and then, that advisors without an ongoing, interactive relationship with the company are unable to deliver.

To some new company founders, these advantages may seem to be a bit abstract. In fact, lately, I’ve seen some resistance to the concept of establishing a board of directors entirely. From what I observe, this seems to be primarily driven by three factors:

  • Fear that creating a formal board will somehow turn control of their baby to their new “boss”
  • Reluctance to “spend” the equity necessary to recruit and retain quality board members
  • Belief that they already have advisors who deliver all the guidance they need

Yes, there have been cases where boards have fired CEOs or somehow otherwise wrested control of the company from its leader or founder. I’ve certainly never seen this type of thing from non-investor board members and even with board members who are investors, it’s incredibly rare and definitely a last resort type of move. Virtually no one outside wants your job.  If they did, they’d just go start another company or take their money to another playground.

Yes, you will have to compensate outside, non-investor, board members.  Don’t be cheap. The compensation will be with equity, likely a single percentage point or lower and vesting over four years.  What you will get in return will likely help you immeasurably. It may not be the sole difference between long-term success and short term failure (it might), but the advice you get will at the very least make your life easier and substantially increase your odds for success.

Finally, and I sorta hit on this earlier, having many advisors and mentors is terrific.  You shouldn’t have fewer of these when you establish a board – they are always valuable.  They do not, however, take the place of a dedicated group of individuals who have committed their efforts and wisdom to the success of the fledgling enterprise.  Outside advisors will never have the volume of background data that your directors have to analyze situations nor will they feel the responsibility to do the right thing. Directors are tied to the company’s success and failure. Advisors and mentors are not. There’s a huge difference in responsibility and, ultimately, quality of action.

So there you have it. Do you still have a reasonable excuse for why you shouldn’t establish a board? If so, I’d like to hear it.  “It’s hard,” by the way, doesn’t count. You’re an entrepreneur, just work harder and smarter to get it done.

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 February 22nd, 2010  
 Will  
 Boards, Startups  
   
 17 Comments

17 Responses to Every Company Needs a Board of Directors – Startups Too

  1. This post also appeared on the VetureBeat blog where it's been actively discussed and frequently disagreed with. Check it out here: http://bit.ly/dbqP6l

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  4. It seems excellent advice. My rant is, many “advisors” are too much into the grand “forest” thing (strategy) and not seeing a single tree. That is, they are too much into the vision type of thing without commiting 30 minutes or an hour to “play” with the damn “tree”, the product… If you don't know the product well enough as a user… everything else is blurred…

  5. That's a good point, Don,

    Although knowing the domain of the product is often enough. If you have a
    highly technical product, for example, it may be difficult to find anough
    good board members who can use that product to help you out. I agree
    entirely though that board members who really don't have a clue about what
    the product does – in a lot of detail – can't possibly be engaged enough to
    make a difference.

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  7. I find this article well written. Regarding board members the difficult part is finding someone who's visions and efforts are true to
    the company's success. In other words who's idea of profit & momentum works with the success of the company and not just
    for the popularity of the 'deal'.

    If/when I consult with a member of the board it's to ensure that a partnership with an outside entity, or direction of the product
    as a result of that partnership will yield continued successes to the company without taking on more risk than is necessary to
    ensure the future success using such a relationship. It's a tricky balance that often requires some guidance, or leadership
    from the board who's 'hopefully' been engaged in such a process before and can give the best advice.

    That kind of history is something that a founder such as my self can't simply study then implement. The results of which
    can potentially tank the company.

  8. Pingback: Why Startup Companies Need a Board of Directors | The Sounding Board

  9. But even without funding, companies should establish and use a board of directors made up of people from inside and outside the company. A board of qualified people can offer great benefits to a company, its management and its founders.

    http://www.2.elesya.com

  10. But even without funding, companies should establish and use a board of directors made up of people from inside and outside the company. A board of qualified people can offer great benefits to a company, its management and its founders.

    http://www.2.elesya.com

  11. Virtually no one outside wants your job. If they did, they’d just go start another company or take their money to another playground.

  12. If so, I’d like to hear it. “It’s hard,” by the way, doesn’t count.
    You’re an entrepreneur, just work harder and smarter to get it done.
    aluminyum

    Political leaders and ask them who they and their staff
    and designated representatives have been talking to.

    prefabrik

  13. If so, I’d like to hear it. “It’s hard,” by the way, doesn’t count.
    You’re an entrepreneur, just work harder and smarter to get it done.
    aluminyum

    Political leaders and ask them who they and their staff
    and designated representatives have been talking to.

    prefabrik

  14. The problem with board members is that its hard to find a good group that really care about the product, the customers, the business etc. and that work well as a group. There are plenty of people out there that look like great board candidates on paper, but in the boardroom are useless. I’ve been involved in several boards, some that worked and others that didn’t. I’ve found that if the boardroom dynamics get out of whack because of a few dominating people and/or a lack of real cohesion, then having a board is worse than not having. one. To build the board, startups should have a series of small advisor workshops first that can be used to discover the best potential board candidates.

    • Excellent points. It’s murder to find good board members. I like the idea of a trial run, I just don’t know if truly great people will go for it if it’s too casual. I wonder if a 1+3 year board term might do the same thing? After one year, either party has the right to terminate (of course, termination can happen at any time anyway, but setting the date makes it more clear to everyone that a judgement will be made at a certain time). If both parties agree to continue after the first year, then there is a 3 years added term. As an incentive, compensation can be slightly front-end loaded.

      Thoughts?

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