Every large public company has a board of directors. The news is filled with stories about prominent people joiningboards, about boards kicking out presidents and founders, andabout personal liability of members of the boards. In a largepublic company, the board plays an incredibly important and oftencontroversial role in the governance and development of a company.
Given this, should a start-up or small entrepreneurialcompany have a board of directors? I say an emphatic yes!
By definition, every corporation has a board of directors. The minimum legal size of the board varies by state. In somestates, the minimum size is three people (typically a president,secretary, and treasurer -- also referred to as the officers ofthe company). In other states, the minimum size is linked tothe number of shareholders -- if there is only one equity holderin the corporation, there only needs to be one board member. Of course, there are several different types of companies, suchas partnerships or sole proprietorships, that do not require aformal board.
For many companies, the board of directors ends upbeing the founders of the company. However, I believe there ishuge value in expanding the board to include outsidedirectors -- those who do not work for the company but offertheir time and advice to help shape and guide the company. Theseoutside directors serve a similar function to those of a publiccompany, but often with a much different approach.
It is important not to get a board of directors confusedwith a board of advisers or a strategic advisory board. Theseother boards are incredibly valuable tools for a company, butthey serve a dramatically different purpose.
I have been a member of many boards of directors,and I have come to classify each board as one of three differenttypes:
- Working boards: Theseboards roll up their sleeves and help the founders andmanagement team of the company get the job done. They meet frequently,have animated, engaging discussions, and offer significant ongoingsupport and help to the key owners and managers of the company.
- Reporting boards:These boards meet four to six times a year for a statusreport on the company. If everything is going well, they tendnot to have much to say. If there are problems or issues, theyare often critical of the CEO and the management team. If thingscontinue to go poorly, they often take action of some sort.
- Lame duck boards:These boards have no influence on the company. In manycases, they are simply rubber stamp exercises for the CEO or founders.
The only type of board that I believe is useful fora small, entrepreneurial company is a working board. The pressuresin an entrepreneurial company are great enough that the foundersand the management team need everyone involved doing everythingthey can to make the company successful. This does not mean thateveryone agrees on everything, or the members of the board arenot critical of the management team. But it does mean that thereis an active, open commitment to work with the founders and managementteam to make the company wildly successful.
Board members come in many shapes and sizes. Inmy experience, a good size of a board is five to seven people,including the insiders. If there are only one or two insiderson the board, a total board size of five is plenty. If thereare more than two insiders on the board, seven board members ismore appropriate. I recommend that several of the outside boardmembers be highly experienced entrepreneurs in the market thatthe company is going after. The rest of the board members shouldbe experienced entrepreneurs in other business segments, but witha particular interest in something about the company.
The chairman of the board is often one of the insiders,such as the president or CEO. However, in many cases, you maywant the chairman to be one of the outsiders, especially in asituation where one of the outsiders helped start the companyby putting up some of the initial seed capital. The role of thechairman varies dramatically, but it often raises the level ofcommitment of the individual board member that is the chairmanand the overall board in general.
Significant outside investors, especially venturecapitalists, will want board seats. I recommend that you limit thenumber of outside investors on your board unless they fit thecriteria listed above. A venture investor needs only one boardseat -- if you have a syndicate of venture investors (several differentventure capitalists who invested together in the round), consideroffering one board seat and extending observer rights (e.g., theright to attend any board meeting) to the other investors. Theserights should be negotiated as part of the investment.
In addition to functioning as a regular soundingboard for the management team, board members can contribute substantiallyto the business, both as a group and individually. Board memberscan be incredibly useful during financings, merger and acquisitionactivity, general corporate strategy, and executive recruiting. Do not overlook the experiences and skills of each of the individualboard members -- they can often play high-value, short-term consultingroles as needed.
Board members should be compensated for their efforts. At the minimum, their travel expenses should be paid. Most entrepreneurialcompanies should set up an option package for the board members-- depending on the level of effort requested of the board, thiscould be as little as 0.25% of the company or as much as 2% ofthe company vesting over four years. In addition, many boardmembers are willing to invest in the company. I always believe that it is in the best interest of a companyto have the board members have a meaningful equity stake in thecompany.
In some cases, the directors whom you recruit willhave a substantial personal net worth. In these cases, they mightask if the company has director and officers insurance(D&O insurance). This insurance protects the directorfrom having personal liability in case the company gets sued. Small companies cannot afford D&O insurance (in fact, mostprivate companies cannot afford this), while most public companiesmust have this as a requirement of the underwriters in an initialpublic offering. So, when confronted with the question, thebest solution is to make sure that the articles of incorporationof the company provide the directors with the highest limitationon liability afforded by the state in which the company is incorporated. Don't waste your time investigating D&O pricing -- itwon't be economical.
Finally, take good care of your board members. Theseare busy folks who are making a substantial time and energy commitmentto you. They share in the rewards if you are successful, buttheir time and energy are at risk since their primary form of compensationis equity in your company. Feed them. Make them comfortable. Have fun together! You'll be pleasantly surprised how much fasterthe relationships evolve and how much more valuable they becomewhen everyone is working hard but having a good time together. Don't ever let your board get bored.
Bradley Feld is a general partner in Softbank Technology Ventures, a U.S. venture capital group affiliatedwith Softbank Corp. He is also active in the Young Entrepreneurs Organization.
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