When you start a company in your garage, you are the king. You answer to no one. You make every decision from the logo design to the product roadmap. However, as soon as you accept outside capital or incorporate as a serious entity, the power structure changes. You gain a boss. That boss is the Board of Directors.
A Board of Directors is a group of individuals elected to represent shareholders and establish corporate management policies. In a startup context, they are the governing body that ensures the company is acting in the best interest of the people who own the stock.
Technically, the CEO reports to the Board. This is a jarring realization for many entrepreneurs. You might be the founder, but if the Board decides you are no longer the right person to lead the company, they have the legal authority to fire you.
The Three Main Duties
#The Board is not there to manage day to day operations. If they are telling you which color to make the button on the homepage, the system is broken. Their role is high level governance.
Generally, their responsibilities fall into three buckets:
- Hiring and Firing the CEO: This is their most important lever of power.
- Fiduciary Oversight: They ensure the company is financially sound and acting legally. They approve the annual budget and option grants.
- Big Strategic Decisions: They vote on major events like selling the company, raising a new round of funding, or pivoting the business model.
Board vs. Advisors
#Founders often confuse Board Directors with Board Advisors. They sound similar, but the difference is legal power.
An Advisor is a mentor. They are usually industry experts or seasoned founders who you give a small amount of equity to in exchange for help. They have no voting power. You can ignore their advice completely if you want to. They are coaches.
A Director has a fiduciary duty. They have a legal obligation to protect the company. When they vote on a resolution, it is binding. You cannot ignore a Board vote. They are referees.
The Composition of the Board
#In the early stages (Seed to Series A), the Board is usually small. It typically consists of three or five seats.
- The Founder Seat: Usually held by the CEO.
- The Investor Seat: Held by the lead investor from your VC round.
- The Independent Seat: A neutral third party agreed upon by both the founder and the investor.
It is crucial to keep the board size an odd number. This prevents deadlocks when voting on contentious issues.
The Strategic Balance
#Building a board is effectively choosing your bosses for the next decade. Founders need to ask hard questions before offering a board seat to an investor.
Do their incentives align with yours? Some investors might push for a quick sale to get a return, while you want to build for the long term. Others might be risk averse when you want to be aggressive.
Once a board seat is given, it is very difficult to take back. Control is the currency you pay for capital. You must ensure that the people sitting around that table are people you respect enough to listen to when they tell you that you are wrong.