This post was originally written by Mac Lackey and appeared on the maclackey.com blog.
During a recent #StartupSession event, I was asked an important question: “When is the right time to form a board?”
This is a great question for a few reasons:
1. There are legal and practical implications to consider.
2. There is a big difference in the various types of boards you can create.
3. Boards are “people,” so making the right choices can become a catalyst or an anchor for your business – and success.
Despite the fact that a board of directors has a series of legal definitions, it is, in short, a group of individuals elected or appointed to represent the shareholders of a corporation. This is important because a lot of founders think the board is just there to support, guide and help the founder himself/herself and his/her specific needs. In reality, boards are in place for the shareholders and have the power to fire a founder, if need be.
Directors also have what is called a fiduciary duty. This duty insures that they provide the highest standard of care or a significantly heightened responsibility to the shareholders. So if you have employees with stock options or investors, for example, the board is responsible to them as shareholders. In many cases, their duty is greater to non-founder/controlling shareholders.
As you can imagine, this scenario can lead to all kinds of conflicts and challenges. Something that is good for a CEO or founder might be something different for an investor, for example.
There is a time when a board is not only valuable, but also mandatory to create proper checks and balances, like when you raise a formal investment round from outside investors or venture capitalists. Therefore, it is important to understand the role and expectations for a board. Special note: Many individuals (myself included) will not accept many board of directors roles/appointments unless there is significant D&O (directors and officers) liability insurance as the risk/reward skew isn’t in the director’s favor given lawsuits and plenty of other challenges.
Now that I have thrown water on your fire, let me give you the good news: You can (and often should) form what is called a board of advisors. If structured properly, a board of advisors can address almost any of your needs and do so without the inherent risk and challenges you may encounter with a board of directors.
Here’s my personal definition of a board of advisors: Individuals who are selected to provide agreed upon services and support in the advancement of a company’s goals. This “agreed upon” component is most critical because this is your opportunity to create alignment with an individual. For example, you may choose an industry expert who will serve as an advisor on industry strategy OR you may find a sales expert whom you ask to advise the company on market or growth strategies.
The best way to create this alignment is through the creation of a simple, but clear agreement. This agreement should lay out expectations for both parties – everything from the time and commitment you expect to the various things they agree to do as well as any compensatory arrangements (ie. stock options or pay) and length of term.
I often recommend founders and entrepreneurs form a board of advisors very early in the process. When doing so, they should focus on finding and incentivizing the very best people they can find for these roles. These individuals can be VERY helpful in growing your business so choose them wisely and respect their time and perspective. As well, set and manage clear expectations. One approach you may consider is using what is called a FAST Agreement, which many in the startup industry will use to lay out everything from the services provided to equity/stock to be shared to how the relationship is terminated.
Creating a board of directors or a board of advisors is a serious decision. You should speak to your legal advisors, mentors as well as other founders about their experiences and the pros and cons before forming a board.
Always remember – businesses succeed or fail largely based on people.
For more information and education on entrepreneurs, startups and growth, please visit Mac Lackey’s website.