Startup Boards
Startups that are backed by professional financial investors almost always have a Board of Directors that consists of some set of founders, investors and sometimes independent directors.
While the management of a startup company deals with the day-to-day decision-making within the company (strategy, budgets, goals, tasks, compensation) ultimately the Board of Directors has the legal governing responsibilities for these things. This is often called “corporate governance” — in case you’ve never heard that term.
It is worth pointing out that there are actually three levels of governance in venture-backed startups. What most founders think about is the daily management of their businesses and they realize that they periodically need to check in with their board of directors to get buy in for key decisions.
But there is ultimately another level of governance I might call “investor governance” in that once a board of directors has decided on an action there are times where the company still needs “shareholder consent” in order to achieve their objectives. This is often true when the action of the board could dramatically affect shareholders such as raising new capital, acquiring new businesses (that drain existing cash or dilute shareholders), selling the company or raising a lot of debt. You will often find these governing conditions in the “protective provisions” section of your company’s legal documents.
These are truly protective even though sometimes founders find them to be an unwelcome level of approval required. Without these protections there is little to stop a board, for example, from issuing new cheap stock that dilutes all of the shareholders so that certain individuals could take control of the company. Equally without protective provisions a board could vote to load the company with a ton of debt that can’t be repaid and thus diminishes the value for shareholders. Equally it could vote to increase the stock option plan to 99% of the company. These are edge cases that would be fought in court regardless but they speak to why protective provisions exist in the first place.
If you’re going to be effective as a founder you need to understand what rights and expectations you have in daily decision-making, what issues are relevant for a board to decide and what your limitations are in your legal governing documents and what votes are required to achieve big changes.
What exactly is the purpose of a Board of Directors and how do boards best function? I plan to write a series of posts on the topic. One goal I have is to help founders better figure out how to structure boards, how to communicate with boards and how to get the most out of boards. Equally, I plan to write for the benefit of investors and independents, too, to offer some tips on how can you get the most out of the boards on which you sit.
For this summary post I will outline the following objectives:
In many cases management teams confuse the roles and responsibilities. At times this means management teams brining issues that a board isn’t required to weigh in on and thus subjecting everybody to meaningless debate and unnecessary arguments when a certain board member disagrees with a decision that could be handled by management all along.
At other times boards try to micro-manage details that should be left to management teams and therefore offer “helicopter advice” without having to actually own the results or knowing the daily idiosyncrasies. Don’t confuse “advice from a board member” with a “board matter.”
I plan to cover the following topics. I’m open to lobbying via Twitter (I’m msuster) which order to write them in and/or if you think I’m missing a topic.
Startup Boards
Research & References of Startup Boards|A&C Accounting And Tax Services
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