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.