Building a strong board of directors: Tips for early-stage startups
Founders of new businesses often face numerous challenges, and creating a board of directors may not be a top priority. However, the right board members can help to think strategically, bring market perspective and provide a piece of advice to avoid failure.
Startups often fail due to misaligned strategies, lack of experience, running out of cash, and disagreements between founders. Without proper guidance, valuable ideas can go to waste.
A supportive board can benefit a startup in the long run, increasing chances of success and helping avoid costly mistakes.
Looking for board members
The board is established at the very beginning of a startup's life, taking responsibility to make the startup’s strategic decisions, including attracting capital, hiring and laying off key personnel, and making budget and market changes.
In the early stages of a startup, it's common for the board to consist of the co-founders. It works well when they possess complementary skills, such as marketing expertise and technical know-how.
However, adding non-executive members to a startup's board can be transformative. Typically, a board has three-five members, including at least one investor in 92% of cases. Other members could be legal experts, other CEOs, or top executives — someone with industry knowledge and valuable contacts.
Startup PromoRepublic, for example, brought its American angel investor to the board. He was extremely involved in the startup’s story and, apart from financing, wanted to help it with his own expertise. He became the chairman of the board at PromoRepublic.
I talked to Max Pecherskyi, PromoRepublic co-founder and CEO, about the board he set up. The entrepreneur managed to form a strong 4-person board at his startup’s early stage and says it helps in tough negotiations, boosts networking, and drives business expansion.
Here’s some advice on how to pick a board member from him.
Find knowledge gaps. Identify knowledge gaps in areas where additional guidance could benefit you, such as strategic planning, fundraising, legal compliance, marketing, or tech expertise. Once you have identified your needs, begin searching for suitable individuals.
Talk to the best people around. Engage with top experts who align with your company's values and vision. Consider if their expertise can aid your growth.
Conduct due diligence. Before choosing a board member, ensure they possess a positive reputation and no conflicts of interest. Assess their professional background and consult with previous colleagues.
Communicate expectations. Outline clear expectations for the board member's role, making sure they comprehend the expected level of involvement and time commitment.
Discuss compensation. It is clear to everyone that at the early stages, a startup cannot provide much compensation to the advisors. But it is quite possible to negotiate with them a retainer of $500-1000 per month or provide advisory stock options.
Choose your board members as responsibly as your husband or wife (and maybe even more so). After all, a mistake causes multiple headaches for your business. Lack of confidentiality, disagreement and conflict will destroy trust between the board. This will affect the success of decisions made and reduce the likelihood of achieving the goals of the community.
Alternative: Advisory board In some countries, shareholders can sue the startup board of directors if they fail to perform their duties. It’s no surprise that it can be hard to convince top experts to serve as formal members at an early-stage startup. “An advisory board is a less formal structure, no contracts are signed. You can also involve investors in the advisory board,” says PromoRepublic CEO Max Pecherskyi. This is a good option if a startup only seeks advice, without needing to implement a full-blown corporate governance process. Although the advisory board operates informally, its members need to be compensated at least minimal hourly pay or share options. Once you understand that advisors have given the maximum benefit to the startup and you can move on without it, it is time to end the partnership.
Using board’s network
You've assembled a board. Now, how can you effectively leverage the expertise of each member?
While a board's primary function is typically centered around strategic planning and fundraising, it can also play a pivotal role in other key areas, such as negotiations. The chairman can represent your interests and use their expertise to broker a more advantageous deal with investors or clients.
“The most important benefit of a chairman to me is that he can lead delicate negotiations with investors, partners, clients, and future employees,” says PromoRepublic’s Pecherskyi. “The chairman can play the role of a "bad cop" to push through better deals and then step back.”
The board can also be a powerful networking tool. Board members can help open doors that seemed closed: new partnerships, markets, and capital.
No ‘reporting’ at board meetings
For small startups, quarterly board meetings are enough, according to TechCrunch. If held more frequently, these meetings might become less effective. However, for urgent issues, there may be ad hoc sessions to brainstorm ideas, make an urgent announcement, or discuss last-minute changes.
Many board meetings resemble a school – the founders report to their “teachers,” aka investors, answer their questions, and defend themselves. It is better to have no board at all than to have it like this.
According to F1V principal Alexei Yermolenko, a board is a tool and must be handled efficiently.
“The founder should tell (the board members) what the goals were, what stage they are at, and share the current challenges. This is what happens, for example, at Liki24 and Mate Academy, which boards we join,” says Yermolenko.
“We address questions on development, scaling, new product launches, and fundraising: when to do it best and how to do it. It's a place for brainstorming sessions — not reporting,” he adds.
Several days before any meeting, provide board members with relevant information and materials, such as financial data (e.g. unit economics, cash flow), updates on product development, and progress on fundraising efforts.
Following each board meeting, generate a report that can guide business development for the nearest future. This report will also help communicate with the startup's investors.
Cover photo by Vicko Mozara on Unsplash