How should I select and compensate a board of directors for my high-growth start-up?

 

Finance & Capital mentor Guy Kawasaki responds:
Board members can help enhance the expertise, experience, and network of the managers of a start-up. Before selecting any members of your board, thoroughly assess your start-up's needs. Then try to find directors who can help meet those needs.

When picking members, always complete your due diligence. Directors will have a big impact on the success of your business. Be sure you pick people whom you respect, people who can help your business grow and succeed. Make sure they understand your business and the competitive landscape. Also, find out how they think the business can grow and achieve its potential. You want people who buy into your vision of a successful company. Spend plenty of time asking the candidates incisive questions and, if you don't know them personally, check their references.

Outside directors should be able to devote a significant chunk of time to being active participants of your board. In my opinion, no board member should sit on more than seven other boards. If a director serves on too many boards, he or she won't be able to commit enough effort to yours. Keep in mind that outside directors may not shape the day-to-day management decisions, but in the end they too are responsible for the success of your company.

As compensation, early-stage start-ups that hope to take on professional investors and grow rapidly usually offer equity to board members. In my experience, the equity stakes granted to each director in such cases generally vary from 0.25% to 1% of the start-up.

Remember that, if you succeed in attracting professional investors, they will likely want seats on your board. After the first round of financing, a board usually consists of about five people. (For voting purposes, an odd number is best.) At that point, board members typically include your lead investor, other investors, outside directors who are not investors but have a good understanding of your business environment, and the CEO or founders.

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