A board of directors has the ultimate authority to direct the management and affairs of a company. Legally, a board authorizes the issuance of stock; hires (and fires) senior executives; approves material compensation arrangements; approves the grant of any stock options; and authorizes the company to enter into significant agreements. The board also provides advice on and approves strategic and operating plans, adopts company budgets, and oversees the preparation of the company’s financial statements and audits of those financials. In short, the board helps management navigate the myriad of critical business decisions that will determine the ultimate success or failure of the company.
In the initial startup stage, a board of directors might consist solely of one or more founders. A small board can be useful to keep a startup moving at a quick pace. However, finding an additional board member with insight and experience that no founder has, but who knows the company’s market or technology well, can also be particularly helpful in building the business: that director can provide validation that a startup’s business has promise, and offer valuable input and an independent voice.
As the company enters the growth phase, it may look to bring specific industry or domain expertise on the board, if it has not already done so. A company may consider compensating these independent directors for their services, usually in the form of equity. According to the 2015 CompStudy survey of technology companies in the US, 56.5% of startups awarded equity to independent board members that represented between 0-0.25% of the ownership in the company, and 21.7% of the respondents gave between 0.26%-0.5%. (View the data as a chart generated via CompStudy's online reporting platform using 2015 data.)
At the time that a company raises capital, particularly from venture capital funds, board composition will be a negotiated part of the transaction. A board of directors typically will consist of a combination of founders, investors and independent directors. The number of board seats given to investors usually depends on the size of the financing in the aggregate, the amount invested by each investor and the leverage that the company has in the negotiations—at the time of a Series A financing, founders may retain control of the board, but beginning with the Series B round, that balance may shift to investors.
Finding directors who offer complementary skills and who work well together and with founders and management is critical for a well-functioning board, although it’s also important to have board members who are willing to voice their opinions and speak up when they disagree. Directors should not only show up for board meetings, but should also be able to devote time and attention to the company outside of meetings and should come to meetings prepared. Companies should carefully interview prospective directors prior to electing them to the board to determine whether they can meet a company’s expectations and needs.