In every company that is started there is usually just a founder and a co-founder in the beginning. The person, or persons, who came up with the idea and built it and made it all happen but what happens after that? Most entrepreneurs enjoy the freedom they have of starting their own company and not reporting to anyone, this gives them freedom to act as they please and spend how they want. This can be a great thing if you have done this sort of thing before but what about people are great with coming p with ideas and making them happen but bad with all the business side to actually running a company? This is where you need the help of experienced individuals to manage your company, they are called Board of Directors and they add a new value to the company; one, they bring lots of expertise from their areas into your business; two, they have established connections that you can use to get your company out there and into different markets; and three, they act as a stopgap from bad decisions ruining your business.
You Take the Good
Board of directors can be extremely helpful because the individuals you have chosen (or they have chosen you) can pay off dividends in helping your business get off the ground. Normally a board is made of up five members which allows for fair voting in any election (it can be more of less but 5 is good).
The great benefit about board members is having the same kind of people who match the type of business you are starting. If you are starting a tech startup then getting people who have started their own tech business will be a huge benefit in understanding what hurdles you will face along the way. For example, having a member who is a lawyer that has worked with various tech companies will be able to give you insight to all the issues you need to be aware of when creating your software. If another one of your board of directors has worked with high level companies in the hiring department then they will be able to show you how to find high end talent.
Their advice will be extremely helpful when you run into problems and even legal challenges down the road. You can count on them to guide you through the process of raising money, hiring staff, and expanding. When founders start a business on their own they have no one (if they want to do it all on their own) to guide them through the whole process and ask for help (except with paid services) when they need it. If you are pitching to a Venture Capitalist and you have never given a presentation like this one before then you have no idea what they will be looking for in your presentation. A board member who has worked in a VC firm will be able to tell you what your presentation should focus on and how best to present it.
You Take the Bad
In any good situation there is always an opposite side. Board of directors are great to have but if at any point they start to feel that you are not a good fit for your own company (especially if you are the one who created it and you brought them in, they have the power to get rid of you, just ask Steve Jobs).
Board of directors hold a lot of power in the direction of where your company goes. Any major decision is put to a vote and they have the power to see that their vote is followed through with. There are many horror stories of founders going into fierce legal battles with their board of directors over differences of opinion only to be kicked out later on for making them go through all that. You have to remember that anyone who sits on a board of director position, unless they are paid with a full-time salary and benefits, often more than not works another job. Many first time board members will offer their services in the beginning pro-bono or for a small fee anytime they meet. This requires the founder of the company to use the times they meet wisely and only present issues that are important.
Another case of having a board of directors is how often they can meet. Scheduling people who, outside of your company, lead very busy lives can be down right difficult for all of them to meet at the same time. It is often the case that the founder will meet individually with members throughout their duration as a board member in the beginning just to be able to get the advice needed whenever. Late night phone calls are also a common occurrence but only if the founder is very good friends or on good enough terms that their relationship allows that.
You Take Them Both
The pros and cons of having a board of directors is almost too good to pass up so why do many companies still forgo having them when so many fortune companies require them? This all depends on the type of business you really want to have, the culture you want for your employees, and how much control you really want for your company. The advice they give you comes at a price and that price is in the form of how much control they have, which normally is more than 50% of voting power.
Founders of any company who plan to pitch to VCs for money also need to be aware that if they do not have a board of directors then chances are the VC, as part of their terms for lending the money, will bring in their own board members that hold at least a 2/3 majority on the board thus enabling them at any point, if they are not happy with your performance (which most are not at any given point), to be able to force you out. This point is very key in understanding the power outside board members can have once they are brought in if they hold majority power on your board. In any case though all VCs are just after your idea and want to get you out as soon as possible so they can retain full rights to your company.
There you have, The Facts of Life
So why do people still use board members if there is a high chance that they might lose their company in the process? The connections board members provide are too invaluable to pass up. They might get you into social groups you would have never known about otherwise. You might end up with another team of people who are working on another business idea that could go big.
But what if you don’t want to have a board of directors? That is fine as well but you have to be realistic with yourself to know what you are doing. In the case of SAS corporation, Jim Goodnight, holds full control over his company with no board of directors to report to but the culture his has created is better than what a board of directors could offer him. Plus, he also knows a lot about what he is doing to run his company efficiently.
So how do you pick a board of directors as a first time startup founder? The process is not easy and should not be something you rush through but if you really feel your company needs it, then these are a few areas to consider.
What to Look for in a Board of Director
1. Their background experience and Education
All founders would love to snag a Ivy league corporate business person with Ivy ties but the chances of that happen are very slim to nothing. An important factor to consider is where the person went to school, what time period (before the internet, after the internet bubble, or before the recession), what companies they have worked for and in what positions and for how long. This will paint kind of picture you are looking for.
You need to be aware of what kind of person you want as on your board of director. That person might have the right education but their work experience is all over the map, giving no clue as to what kind of job, or jobs, they’ve held over the years. You also need to look at titles, where any of their positions VP or just mid-level status? If this is the first time they are serving on a board, then what else in their background makes them qualified?
2. What is the previous relationship?
How did you come to know the person you are considering for a board position? If you met them through a mutual friend and have never worked together before, how well can you trust them to know what they are doing with your business? The quickest answer to that is, you don’t. You need to really spend time with that person if they have something you really want. Their spot on the board shouldn’t be because your friend recommended them at a party, it should be because they have something you need and you can offer something they need. No position should be given because of a obligation to a personal friend, that is just a disaster waiting to happen and they happen quite a bit. It is also important to keep personal and business relationships completely separate unless you want to run into problems later on. Friends will test the trust in a friendship by asking you to do more than you should in your position. This can cause many problems and also create resent from other co-workers who see that you are playing favorites.
Maybe the person you have worked with is a former boss who you know to have worked with many startups in the past and have come to know on personal terms. That is a better way of starting out in determining whether or not they are a right fit for the company. Your previous work relationship gives you enough experience and knowledge to know how they work with people, startups, and business environments and to determine what they will be able to bring to your company.
I mentioned before that VCs will often put their own people on your board in order to ensure that they have control of your company if you are using their money. This relationship can cause many problems because if a founder keeps running into problems with getting their ideas passed them they might start to feel they are losing control of where their company is headed. These types of situations happen all the time when under the control of a VC so that route should also be the last one to consider.
3. Small is better to ensure direction and focus
Founders have the ability in deciding just how many people they would like on their board. In some cases you can have three, or four or five, or six. This all depends on what you expect to get from the board members and what they expect to get out of serving on your board. In any business relationship, it is all about what each party gets in return for their services.
A founder can have just four, including themselves but voting can be a bit difficult at times but it also prevents from being voted out (hopefully) but five members tends to be the right fit most of the time. There are many ways to change it but the important thing to remember is that you want people on your side helping you ever step of the way and if they really believe in what you are trying to do, then voting will never become a stressful experience.
4. Be Upfront about everything
Just like when a professor in a course tells you what they expect you to know by the end of the course, you need to set up expectations with what you expect from your board of directors but also what they can expect from you. They need to be clear about their role in the company before accepting any position. This is very key to creating a trustful business relationship.
Board members do not like being put into positions they were not expecting to deal with. A common example of this might be a founder who has brought on a board member with previous VC experience raising money in order to pitch to investors. If it is not made clear that you are bringing them on for their past experience then assuming that you can set them up with presentations is a disaster waiting to happen. But if you are upfront with them about needing their help with pitching to VC then ask them if that is something they would be comfortable doing for your company; nine times out of ten, a board member will expect the founder to do most of the heavy lifting including raising money but it doesn’t hurt to ask and be clear about everything. A potential board member will actually end up respecting you even more for being so upfront about it in the long run.
5. Be Clear about Everything
Board of Directors want to know every little detail of the company so if they find out that you have been hiding accounts or information from them then that will create distrust about you. They need to make sure that they company they are working for is a profitable business otherwise they are wasting their time consulting for a company that might be on the edge of going under in the hopes of getting the next round of funding.
You can inform your board members of where they can access all that information. Most of the time that information will be presented at board meetings but it’s good for them to know that if anything is left out where they can find the details. The more upfront you are with everyone in the beginning the better they will feel about how much they trust you.
Make sure you really think about why you want a board of directors. I have heard from people that it just makes the business look more professional. If that is the only reason you want a board of directors that you do not understand business at all and also gives a good idea that you do not know what you are doing. It is great to have business mentors who offer their personal advice now and then, and for some that might be all they need, but for others having a board of directors they have to report to every month helps keep them on their toes about what is expected of them in the business world. It all depends on how great you are at what you do, Jim Goodnight didn’t need wallstreet or a board of directors telling him what to do to get his company, one that has been rated the best workplaces for employees many times over, up and running in the beginning because he already knew what he wanted.
If you need to start a few companies up before you know what you are doing, join an incubator or think tank so you can surround yourself with people that can help you refine your ideas and put them into working order before you present it to the world. That experience will give you a better idea of whether or not you really need the help from some board members.