The Importance of a Board of Directors
A Board of Directors is composed of Founders, Investors (VCs) and Advisors.
At an early stage it is typically the founders that compose the Board of a company. Board meetings are often informal, as time is limited and the founders are interacting with each other on a daily basis and addressing issues as they arise.
However, I recommend making board meetings a regular practice, especially if you are in need and search of capital (seed or venture). While there are many benefits to holding regular board meetings, this will especially resonate with Investors and signify the maturity of a company during due diligence. At minimum, I suggest holding a board meeting every 3 months, although it is encouraged to do this on a monthly basis during the initial stages of development.
So how do you choose the right board members?
First, think about these data points.
Founders are typically tied to number of shares. They will have plenty of common shares. As a founder the objective is to make sure the company accelerates on a path to success, as they will be rewarded based on that. However, founders don’t typically have dollars for subsequent financing and so if the board is composed of mostly founders, the process in raising the next round will be difficult one.
Investors (let’s talk about VCs in this case) tend to invest and receive back a different class of shares, called preferred shares, which typically carry a liquidation preference. It is important to balance the VC board seats with founder board seats, as it is most likely that these board members will lead your next round of funding.
Institutional Investors will favour a board that is uniform and is not only comprised of founders. Therefore, before raising round A, plan to add industry advisors such as former entrepreneurs, angels and/or industry experts. This will ensure there is a heightened level comfort at the board level.
It is also important to understand how many of your board members are part of your management team, relative to the other board members. The next set of financing will offer a different class of shares, let’s call them Preferred B Or Round B. The seat associated to those shares will be on your board, and so the decision will vary depending on that seat and class of shares.
If you take on VC money, it is expected that the VC will want influence in certain aspects of the business. This will include spending dollars for example on operations, which typically an entrepreneur will not want to give up to someone who was not a part of the founding team, or when taking on a debt with a bank. Be prepared to adjust your engine to what items will need to be approved by the board.