How to Handle a Board of Directors for Your Newly Founded Startup
One of the most important matters that startup founders have to deal with is the makeup of their startup’s boards. What’s more, the composition and makeup of the startup’s board will vary greatly depending on which stage of the life cycle the startup is at, meaning that startup founders will have to choose carefully at each stage and make any suitable adjustments if necessary. Still, amazing board members can provide invaluable mentorship and guidance that can stimulate the startup’s growth, as well as bringing in other superb board members through their extensive network connections. How the startup’s board should look like, from the first day it is founded to its later series A and subsequent funding rounds, will largely depend on the choices the founder makes for the company.
When the startup is just newly established and there isn’t any significant amount of capital raised (or none at all), then there is really no need for a formal board to be set up at this point. Usually, most startups will have managed to raise a little amount of capital from relatives and friends or from angel investors when they’re just founded, and at this point in time there’s no urgent need for a board of directors. The only exception to this is if the people who would be getting a seat on the board have vast experience with boards of startups, and they also have your complete trust.
Why choose only trusted, deeply experienced individuals with startup board experience for your board when you have just started your company? It’s because once people have a seat at your board, it’s extremely hard to persuade them to relinquish their seats. Angel investors may pressure the startup founder to establish a board, usually with the expectation that they will get a board seat. If that is indeed the case and you don’t have sufficient authority to refuse, then it is advisable to form a three-member board whereby all of the seats are given based on appointment by the common stock. You agree that the angel investor gets appointed to one of the board seats, but with the condition that it is either event-based or time-based, meaning to say that once the condition is met – perhaps a tenure of one year, or until the startup has raised a predetermined amount of capital from other investors – then the terms for the seat can be reviewed again, and renewal is based on mutual consent of all board members.
As long as the seat isn’t guaranteed and permanent, it affords you more leeway to handle downstream investors as they appear. As well, if the angel investor turns out to be a great board member who has earned your trust and has proven to be indispensable to the startup, you always have the option of renewing their seat and retaining them on your startup’s board at your sound judgment.
A startup that you’ve just newly founded probably doesn’t need to establish a formal board right away. Still, there might be outside influences such as angel investors that may pressure you to form one. Handling them with prudence and sound judgement will go a long way towards ensuring your startup board’s integrity and independence.
