How To Form A Board Of Directors: 4 Steps For Startups
For every unicorn startup success story you see in the news, there are ten that end with a founder being ousted from his or her own company.
Having a board of directors is part of building a startup—at least, a certain kind of startup. If you have aspirations of remaining a small business, you can be a sole founder, part of a founding team, or you can even have one or two investors in the business without needing to create a formal board of directors. But if you are looking to build a highly scalable startup and will need to raise substantial money in order to do so, then a board of directors comes with the territory.
When my co-founder and I were fundraising for our company’s seed round last year, we asked ourselves a lot of questions about what we wanted our board of directors to look like.
This was something the startup community, and many of our friends, had encouraged us not to rush. Like I said, ask ten different entrepreneurs what their experience has been with their board, and you’ll get ten different answers. It can be very difficult to anticipate what it will be like having new people formally join the company—and so your job, as the founder or as co-founders, is to do the hard work of determining what it is you’re truly looking for (besides money) in an investor and partner.
At the end of 2019, we closed our $2.8M seed round for our company, Slumberkins. And as we have started 2020 now with a formal board of directors, we have reflected a lot on what we went through in order to make the best decisions we could for ourselves and the business.
If you are on a similar journey, here are a few things we would recommend.
1. Control is more important than equity.
As we were educating ourselves during the fundraising process, we had an interesting conversation with another experienced entrepreneur who had built multiple companies.
As first-time founders, we had heard the phrase, “You don’t want to lose control of your company.” But what does that actually mean? When and how does that happen? The advice we were given was to think a few rounds into the future and be honest with ourselves about how much we were going to need to raise—not just to protect our equity in the business, but to protect our voice at the table. When you bring on investors, you aren’t just negotiating check size and ownership in the business. You are deciding who gets to decide where the business moves next.
That conversation helped us realize that, starting with our seed round, we needed to be strategic about who we brought on and how we were planning to maintain majority control of our board and the decisions that get made.
2. A board of directors means dynamics within the business will change. So pick people you believe will be a value-add to the business, but who you also trust and want to spend time with.
There are all different types of investors.
Some get too involved. Others don’t get involved enough. Some only want big-picture updates. Others micromanage. The reality is, bringing on investors is no different than hiring employees. When someone offers to write you a check, you have to consider whether you would like to have this person (as a human being) on your team.
My co-founder Callie and I used to joke that our board meetings in the early days would be in the car. There was nothing formal about them—it was just us riffing, talking, and making decisions as we went along. That dynamic, of course, changes dramatically once other people join the team (especially when you bring venture capital into the mix). So try to imagine what you want those conversations to sound like—what do your new business partners bring to the table?
Are they open to you sharing ideas and thinking through things out loud?
Or do you imagine them expecting something different?
3. Be open to expanding your board of directors if you feel that’s what is best for the business.
When we first started our seed round, we were pretty adamant that we only wanted a three-person board: me, my co-founder, and our lead investor.
The reason was that we wanted to get our feet under us and really understand what having a board was like before bringing more and more people to the table. But in the middle of fundraising, another large investor came to us and wanted to oversubscribe the round. We saw the value this second investor was bringing to the table so we needed to decide if we were willing to make our board bigger in order to have both large investors involved.
We made the decision to create a five-person board in our seed round. We negotiated favorable terms for the seats we gave up, and brought on an independent board member who has been a huge resource and supporter of what we have been building—to act as a tie-breaker if needed.
4. Having a board of directors will change the way you approach your business.
Having a board should be a positive thing—not a looming cloud over your business.
For us, it has added a level of organization and strategic thinking that’s simply harder to tap into when you are in the early stages of building a startup. Having board meetings feels like an opportunity to see the business from a 30,000 ft perspective, and to also see it through the eyes of everyone else at the table. There is a ton of valuable information to be gathered by having other smart people in the room deeply questioning what it is you’re doing—and not so much “reporting” to them, but trusting they will point out any blind spots you haven’t noticed yet.
Don’t avoid forming a board of directors just because you think having other people in the business will make your life harder. It should. Your board should be your dream team, your war room and mastermind.
That said, don’t rush forming your board either.
It’s better to take the time to make sure the right people are joining the team.