Creating a board is a foundational part of every truly successful and disruptive startup. Giving this part of the venture priority and getting a handle on creating a strong board can make a huge difference in results and traction. Here’s what you want to know.
Sooner or later a board isn’t optional. You might even have very little say in who is on your board one day. Especially if you haven’t stayed ahead of the game in fundraising and remaining well capitalized. So, the earlier entrepreneurs take a moment to embrace this pivotal factor, the more control they’ll have, and the better results they can harness.
What is a Board?
There are two distinct types of boards startups can have.
A board of directors is a formal, legal group of shareholders who make the highest level decisions and are tasked with protecting other shareholders and the company above all else. These are the people who can fire you as the CEO of your own company.
Once you incorporate your legal business entity you will have a board of directors. That might just be you right now as the chairman of the board. As you grow and take on more people and investment, you’ll gain more members of your board.
The second type is an advisory board. These are not mandatory positions. Yet, every startup can benefit from assembling their own board of advisors.
When you are going out fundraising, potential investors will expect that you have already some form of corporate structure around an advisory board or board of directors. In your pitch deck, one of the slides will be allocated to describe the people that are involved with your company in this regard. For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel that I recently covered. Thiel was the first angel investor in Facebook with a $500,000 check that turned into more than $1 billion in cash. Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400 million
Who Chooses the Board Members?
When it comes to the board of directors, startups will inevitably have to give up board seats to incoming investors. Expect this at virtually every fundraising round. Certainly from your seed series on. This is a great reason to really vet your investors in advance. You don’t want someone sticking their son of the board just to give him a title and keep him busy. As one of our guests on the DealMakers Podcast that has built and sold two companies for $1 billion puts it, “it would be better to put a sloth on the board, because at least that’s cool.”
When it comes to selecting advisory board members, that’s all up to you as the founder.
Why Do I Want an Advisory Board?
If it’s not mandatory, why take the extra to set up a board of advisors when you are so busy already?
An advisory board member is like a coach if you are an athlete, music artist, or corporate executive. If you hope to be a real contender you need great advisors in your corner. If you want to be a top performer and to reach your peak performance you MUST have them.
These individuals can lend instant credibility to your brand and venture. It provides valuable social proof. That not only matters for gaining users and revenue growth, but for fundraising too.
The right members can give you great access and connections. Aside from being a support system and accountability partners. Even without that, they can provide intelligent business advice. Often they can help you see what you are overlooking and propel your results to far greater heights.
Imagine if tomorrow you could announce Mark Cuban, Warren Buffett and Bill Gates as a part of your board, how much of a difference could that make to your startup?
When building your board make sure that you have a diversity of backgrounds. This could be having an expert in operations, an expert in capital raising efforts, or an expert in marketing to name a few. These individuals may provide very valuable guidance as you are building and scaling the business.
Compensating Your Advisory Board
You can have unofficial members who you just rely on for advice and consulting now and again. They might not even realize what an important role they are playing. Or you can have a more organized board. If you are asking busy people to give up their valuable time to help you essentially make money and build a multi-billion dollar business, it’s only fair you compensate them for that. Especially, if you want them to stay on board, and really give you their best.
Founder of Firebrand Group, Jeremy Goldman says 0.25 percent to 2 percent of equity is reasonable, and more if they are really going to add significant value. Startus Magazine says up to 0.5 percent is fair for startups with valuations under $5 million. Possibly with a scaling plan to increase their equity or cash compensation as future milestones are achieved. Startup daily says this can be as little as 0.1 percent of equity. TechCrunch says you’ll probably start at half a percent.
Just make sure you are getting real value for this. Keep in mind the impact on future fundraising rounds too. You’ll constantly be diluting ownership at each round. The more complicated structures are, especially with people who may no longer be adding value, the more stressful the fundraising process is going to be.
Who to Choose as a Board Member
Again, make sure you are getting value. Just 2 percent of your company could be worth $100 million in 10 or 20 years from now.
While you want keen supporters who believe in you and your mission, you don’t just want a bunch of ‘yes men’ on your board. You want balance in skills, experience and perspective. In fact, you probably want some friction there. For example; if you are the gung ho, act and think later, risk it all and just get something done type of entrepreneur who isn’t a fan of getting bogged down in math, then you are really going to benefit from someone who can balance that with sustainable business practices.
You don’t need too many other people fueling your crazy entrepreneurial spirit. The opposite may also be true. You probably want a mix of business smarts, operational excellence, values, passion and marketing expertise.
In my experience, the best board members are those that have significant operational experience. Folks that may have dealt with the challenges you may have ahead of you that could provide solid strategic perspective.
As a startup you’ll want to careful curate your board of directors as much as possible. You also have the opportunity to create an advisory board. This team can catapult you far higher and farther, faster, and ensure your business can last. So, don’t put it off.
As discussed above, I have interviewed some of the most successful entrepreneurs on the DealMakers Podcast. This is one of the most discussed topics. You may be able to learn from those discussions as you are putting together your own corporate structure.