Choosing a Board of Directors

I am curious about the best recommendations about how to build a board. My last board, foolishly was a group of well intended friends. However, as the org got rolling they were not very resourceful for the org (it was a non-profit).

I want to build a start up corporation now. I don’t understand even the most elementary methods of scouting, recruiting and retaining a good board. I have also seen other people put their board through board trainings. Can you help me understand where to begin on this?

I guess the first thing I also should have asked is WHEN do I need a board?

Even when you are not legally required to, you should have a board from when you form your company. 

Serving on a Board of Directors is a serious matter. Directors have legal responsibilities for overseeing the management of corporations and have specific legal duties and obligations. (More on legal duties in the governance class.)

As far as what is minimally required, for a C corporation (the typical for-profit corporation in the United States), your Board of Directors can initially consist of one person. For a non-profit in California, for example, you need at least two directors and the law limits how many directors can be “interested,” meaning they are employees or related to each other. If you are a limited liability company, you can be run by your members or a subset of members which mimics a corporation’s Board of Directors. 

In corporations, directors are elected by shareholders, but even that statement becomes complicated as you will often have agreements with your investors or others to designate certain director seats. In non-profits, new directors are usually appointed by the existing directors, so the Board of Directors becomes a self-perpetuating organism. 

For a normal startup, you ideally want three directors in the beginning, three or five after your first professional financing, and up to seven prior to an initial public offering. More directors will needlessly complicate your life and often add little value. 

Think of building a Board of Directors as building a team. You would never build a soccer team with eleven goalkeepers. You instead want the team as a whole to have the broadest skill set. 

Here are some skills directors can bring: 

  •    Industry connections and networking
  •    Business judgment (how to solve practical business issues relevant to you)
  •    Industry knowledge
  •    Credibility to the outside world (especially in medical companies)
  •    Specialty knowledge (like regulatory, marketing, sales, or operations)
  •    Customer knowledge
  •    Can prepare you for an exit, like an IPO
  •    Can help you raise funds

You want a team that is diverse, that challenges you, and that can work together. You should communicate with your directors regularly and they should always be engaged. You should focus on what you most need at your stage.

More than anything else, each director should care about your company and should be willing to put in WORK to help you. You do not want people looking for glamour listing for a resume. You want someone in the trenches with you during the hard times.

Some individuals can provide great advice, but are not suitable as directors, because of lack of time, lack of temperament, or other reasons. For those people, you can have an advisory board, which has no legal duties. I will discuss how to use an advisory board in a class coming up soon. 

I would love to hear from some others about their experiences and best tips for selecting directors.

See also: 3.104: Best Compliance Practices

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