Getting Real About Early Stage Company Boards
By Ross Finlay
Every entrepreneur knows that they are going to require a Board of Directors as soon as they bring in outside investment. Most investors, be they institutional, solo angels, or angel groups, will insist that the company have at least five Board members with three of them being outside directors. (If insiders have a majority of seats, then it is not a board meeting – it’s a management meeting!). They will also insist that the Chair of the Board be one of the outside directors.
Why? In a word: accountability. The entrepreneur, through the Board, will be held accountable for achieving the growth goals of the company. They are also held accountable to the shareholders who, through their investment, have become the entrepreneur’s business partners.
The key purpose of a Board is to oversee the strategic direction and financial health of the company. So, when assembling a Board of Directors, the company must consider the value that each potential Director brings to either of those concerns.
The important thing to remember is that the Board must grow in ability as the company matures. This does not mean more board members. It means having the appropriate board members with the skills and experience required by the company at that time. Too many entrepreneurs appoint a relative, their mentor or their first investor to the Board, and in many cases, over time, that individual becomes the wrong person for the Board. This creates the difficult situation of having to request their resignation from the Board to make way for a more appropriately skilled Director.
To the entrepreneur in this situation I will pass on advice penned by Joseph Addison three centuries ago: “He who hesitates is lost.” The meaning is clear- swift and resolute action leads to success; delay and self-doubt is a prelude to disaster. If needed changes to the Board (or, for that matter, management or direction) are not completed in time, the company is at serious risk. Don’t start with a Board that’s friendly and available, start with the Board you will need for the next growth period.
Boards likewise need to be swift and focused on the performance of the entrepreneur. Once the founder has run out of money, it’s too late to start searching for new leadership. Board members have to understand that they are there for a limited time and for a specific purpose. It is not a life-long appointment. Once your time or ability to contribute is over, you should recognize the value of your involvement and gracefully let the next Director add their expertise. This enables the long-term success of the company.
Acting on the Board of an early-stage company is not easy. It will take more time than you imagine and you will have to deal with problems you may never have encountered. However, in the long-term, it can be very rewarding.