Startups may launch with an innovative idea, but it takes a lot of work—and fundraising—to turn an idea into a successful business. Fifty percent of businesses fail within the first five years, and the number one reason cited is failure to raise funds. Overall, 90% of startups fail, with 82% citing financial reasons. The path to success hinges on a number of factors related to leadership, governance, and finance. A high-functioning, working board of directors that provides strategic business, operational, and financial leadership is critical to the success of most businesses. A board shapes the future by bolstering the strategy, staffing, financials, and systems needed to build a profitable and resilient organization. Get the board right, and founders have the guidance (and potentially connections) needed to raise funds, pivot as needed to meet the market demands, scale, and achieve a favorable exit.
Attracting the right board members
When considering the composition of your startup board, aim for a symphony approach. You’ll want experts with complementary skill sets who can work in concert to achieve the desired outcomes. Fill expertise gaps in your leadership team, and your operations will benefit. When recruiting, consider your candidates professional seniority, area of expertise, and prior board service (or comparable professional or life experience) to create a pool of quality candidates who together can help your organization evolve into its next phase.
Diversity and inclusion
Startup leaders have the opportunity to create a rich environment for decision making by ensuring the life experiences and backgrounds of their board members are sufficiently diverse. Diversity and representation at the board level must be a top priority. James Surowiecki noted in The Wisdom of Crowds that groups make better decisions than sole individuals, but only if certain parameters are met:
- The groups have diverse perspectives
- The groups are decentralized
- The people are close to the problem
Studies from Richard Florida (author of The Rise of the Creative Class) and Gary Gates—among others—have also repeatedly shown that diversity and creativity work together to power innovation and economic growth. However, as the Harvard Business Review reported, to reap the benefits of more diverse boards, the body itself must adopt an inclusive mindset. For example, boards that effectively integrate diverse board members experience a more collaborative decision-making process and better performance. This highlights the need to truly welcome diverse perspectives when it comes time to deliberate and make decisions.
When seating your board, you will also have to seek individuals who are a good fit with your organization’s culture. Temperamentally compatible directors come from all backgrounds, so this should not be used as an excuse for lax diversity or inclusion efforts. Directors are a team. As such, they should be able to congenially work for the good of the organization with board colleagues. If directors excessively clash, the company loses. Yet, groupthink can be equally destructive, so a free exchange of ideas is the best antidote. Prioritize your company culture and seek people who can add value while minimizing disruptive friction.
Board influence comes in several forms, and productive disagreements often improve business outcomes. Smaller boards with three or four members (which may include founders), will of necessity look to their board members to fill skill gaps in the current leadership team. Important criteria for startup leaders to consider in their board recruitment efforts includes the following skills:
- Financial: Can you fulfill fiduciary duties related to capital structure, financial gearing, and case flows?
- Strategic: Can you translate the financial outlook into sound strategic thinking, while factoring internal and external realities?
- Relational: Can you step back and advise at a big picture level without micromanaging? (The best practice is generally to advise and empower corporate leaders and other board members, while being an effective listener yourself.)
- Role: With a set number of board meetings per year and limited speaking time at each, can you make an effective contribution in the areas where you add the most value? (This generally requires board members to work between meetings to review and prepare documents.)
- Cultural: Can you foster an open environment of transparency and trust where company leaders can seek the guidance they need to fix problems?
Certification
Beyond board composition, a clear understanding of the role and responsibilities is paramount. Board certification can be beneficial for all involved. The National Association of Corporate Directors (NACD) reported that 77% of newly-elected public company directors had never served in that capacity before. Whether an independent board member or a member who represents a venture capital firm that has invested in the company, director certification will ensure the directors you choose have a solid foundation of knowledge about the expectations, responsibilities, and issues unique to a board of directors. For example, there are duties that every director should understand in order to minimize harm and exposure to litigation. This includes the duty of loyalty (avoiding or disclosing conflicts of interest) and duty of care (a fiduciary responsibility) which—when directors fulfill the business judgment rule—should protect them from general personal liability. Directors who do not have sufficient understanding of their duties could unintentionally harm the company, shareholders, and consumers—in addition to putting themselves at risk.
Directorship is its own discipline. It requires leaders to demonstrate their ability to oversee matters such as corporate transformation, organizational culture, cybersecurity, and long-term value creation, while addressing issues like business strategy and risk exposure. Many new directors in particular would benefit from intentionally developing or enhancing these skill sets by way of certification. Should your startup go public, a skilled Board can navigate raising capital and maturing operations to keep up with evolving regulations. For example, this year, the Security and Exchange Commission (SEC) rules for public companies accelerated disclosing a broader definition of material cybersecurity incidents than the European Union’s General Data Protection Regulation (GDPR). The new four-day turnaround makes cybersecurity incidents consistent with reporting requirements for other U.S. public company events reported via SEC Form 8-K. Plus, the SEC’s rule update requires new annual disclosure of information about public company’s cybersecurity governance, strategy, and risk management.
The power of bylaws
One of the first acts of a company upon incorporation, bylaws can be a powerful recruitment tool for board members. Directors are most effective when startups have sound bylaws and structures in place to support the board. Strong bylaws that identify the roles, duties and powers of the board of directors is essential. Bylaws should also detail the management structure, code of conduct, processes for leadership succession, and even evaluation of both leadership and board members (more on this later). Bylaws should include methods for how the rules can be amended as well. This is particularly important to have when dealing with potentially difficult situations like founder exits. Without well-conceived bylaws, promising startups can fail to reach their potential.
What board members look for in an organization
While it’s appropriate for startup leaders to be choosy when seating a board, they must likewise remember that evaluations go both ways. Leaders would do well to understand what potential directors look for in startup organizations. Foremost, of course, is a strong strategic vision. Additionally, be sure to communicate the following:
- What is the purpose of the company; why does it exist?
- What unique value does it bring to the marketplace; what are the differentiators?
- What are the plans for go-to-market and scaling?
- How is diversity and inclusion demonstrated as a core value among the leadership team?
Having these questions clearly scoped in a strategic plan is a strong recruiting tool for organizations.
Another key consideration is compensation. A solvent startup with strong recurring revenue and customer pipeline can solve many issues in a young organization. When budgets are lean, board compensation is usually limited to equity, and general expenses. Performance escalators can be an effective way to reward director engagement when a company performs well, and can be a powerful incentive to retain board members.
Once the company scales, per-meeting fees, retainers, and bonuses may enter into the picture, but aren’t an expectation at early startup stage. Instead, board members often seek startup directorship to expand their professional networks, share expertise, and make meaningful contributions that don’t require full-time work.
Keep boards as agile as your company
A board of directors is a living body, not a set-and-forget dusty institution. Periodic reviews give insight into board effectiveness, improves alignment on key issues, and identifies areas to strengthen board policies and procedures. Feedback begets improvement, so board members and executives should welcome the opportunity to work better together for the good of the company.
It’s also a good idea to put a time limit on seats or tie board size to the achievement of growth milestones. With each new round of funding, it’s often customary to add a board seat for the new investor. This may be a good time to add an independent director to be sure decision making has the broadest possible perspectives, including those without a significant financial stake, but with a fiduciary responsibility to work in the organization’s best interests. A strong board can be a stabilizing force should CEO transition become necessary. Clear bylaws and processes governing how boardseats transition reduces potentially testy confrontations among leaders when it’s time to make a change. Codifying requirements in bylaws makes those conversations smoother.
Consulting an expert
With so much to know about the business of startup boards, consultants can be a valuable aid. Management consultant firms, as well as some law firms like Wilson Sonsini and banks can provide advisory services to help startup founders, leaders, and boards stay current on evolving regulatory requirements and macroeconomic conditions that can affect fundraising, new product launches, etc. McKinsey & Co and other management consulting firms also offer such services, sometimes with pro bono programs available depending on the leadership in place at a particular time the inquiry is received and/or for companies meeting specific criteria.
If a company started via an incubator, then it likely has already received sound advice about its company formation and board structure. That advice could very well suffice until Series A or Series B funding. Absent of that, board reviews should happen annually, coinciding with employee reviews. If you don’t have the infrastructure in place for that, seeking advice from a consultant can help to prevent future difficulties.
Some startup CEOs may mistake board oversight as an unwanted intrusion from people less familiar with their business. But that would be a short-sighted approach. Distance lends itself to perspective, and that is one of the key assets board members bring to help startups avoid pitfalls. A board of directors is more than a legal requirement for corporations; it’s an opportunity to establish a group of experts to guide the business in a positive direction.
The takeaway
A stellar board of directors can be the secret ingredient that propels a promising startup to success. By thoughtfully constructing a board with complementary skills, embracing diversity, codifying clear governance policies, regularly reviewing performance, and remaining open to outside perspectives, founders put their organizations on a secure footing. A board helps startups make wise decisions in seasons of both scarcity and plenty, stabilizing companies through inevitable ups and downs. Rather than an imposition, an active board that earnestly desires the organization’s best interest is an invaluable asset. Taking the time to set up governance right from the start prevents problems down the road and accelerates a founder’s dream becoming reality.
