A board of directors or advisory board is an essential requirement for every start-up company especially if there is an injection of investor funds. Many responsibilities and functions are expected from a board. The vast majority of start-up companies have boards but often in the rush to keep investors happy, not enough attention is paid to the composition of their board.
The board composition varies from organisation to organisation and is likely to change over time. This necessitates the need for certain standards to be implemented on boards depending on company policy. Entrepreneurs nowadays avoid setting up boards until they come across an investor who demands to be a part of the board of directors. This implies that the board of directors may have little or no allure to company owners.
For companies that grow beyond a revenue base of $20 million, they do not maintain the founding CEO’s. These entrepreneurs end up dealing with various challenges in order to go public and attract investors. This is very true for entrepreneurs who haven’t engaged in buying or selling organisations before; they just started a business and need it to be an IPO target and an attractive investment in no time. To overcome the many bottlenecks, they can’t avoid getting themselves board members and experts qualified to lead the organisation. Setting up a board is no shortcut to success as anything can go wrong if attention is not paid to details. Some of the challenges associated with Start-up boards are outlined below:
Have a perfect number of board members.
The size of the board members is very important as size plays a vital role in decision making. For start-ups, the recommended number of board members is 3 to 5. Too many board members are expensive to manage and difficult to schedule. Board members are usually paid a minimum of 1% of the stock or a small cash retainer. For start-ups, the CEO’s equity ranges from 0.5% to 3.0%. This value reduces as the company increases. Any number less than three is not enough to constitute a board.
Try to stay away from external independent directors.
You need a perfect balance of interest and skills to optimize the success and growth of your enterprise. External independent directors might be very good in areas of corporate governance but don’t have the capacity or inclination to roll up their shirtsleeves. This isn’t good enough for the business which is in start-up mode. Ideally, you want directors and advisors that have skin in the game, genuinely believe in your enterprise and its future success and are prepared to allocate the time to a high potential growth business.
Never expect the board to always support your decision.
The board always represents a democracy. You should always expect some board members to have divergent views contrary to that of management. All things being equal, the function of the board is to support, mentor and govern the CEO by setting goals and evaluating the performance.
Ensure that a proper structure is established.
Every board needs a clear mission statement and objective to ensure that it doesn’t deviate from its responsibilities. Company policies and board rules should be clearly documented and voted upon. The board should also meet at least four times annually but in a start up environment it is much more likely that meetings will take place monthly. This frequency can be more if there are critical issues to debate upon.
Try to maintain enough diversity in your board.
Diversity and globalization are very important to the success of a board. These two factors have also been important to the success of start-ups. A board that solely depends on homogenous relationship stands a great risk of retardation. Avoid the use of relationship and ownership in constituting your board. Ensure your directors are picked based on merit and experience from varied geographical locations.
If you are not ready to constitute a board of directors for your start-up, you can start with a formal advisory board. An advisory board is simply a group of professionals that have the needed connections and industry knowledge. Just like a conventional board, they also perform consultative duties for the CEO. However, no liabilities are involved and no formal roles are designated. Start-up CEO’s are mistaken to think that a board of directors can’t be beneficial to them. Baring a few minor challenges which can be dealt with, every start-up should endeavour to have a board.