Words of wisdom from our business insurance experts.
Building a board of directors, investors, and advisors can be the best decision a founder can make with their business (or often, the worst decision). A board of directors will participate in the company's structural, directional, or financial decisions in return for ownership in the business. As the board grows, the founders will have less ownership and control over the business and how it operates. It can speed up scale and generate a faster route to success.
If you're careful and smart about how you select and structure members of the board, it can prevent issues as your business grows. We combined tips from businesses that have Directors and Officers Insurance to help founders considering a board of directors.
"Timing is everything"
As a founder you've probably considered raising money, partnering with smart people for advice, or trading equity for resources. If your business is bootstrapped and growing fast, managing the business with limited resources can be tough. There's not an exact moment for a board of directors, but there's usually an aha moment that leads a founder to the decision.
The best time to start building your board is when one of the following situations occur --
- You are legally required to have a board (hello, corporations)
- You realize you need to raise money in order to grow
- You don't have experience or knowledge with financial auditing and strategic planning
- You need access to a network that will help grow sales
- You are thinking about taking your company public
ADVISOR TIP: an alternative solution to a board of directors is what's called an "informal advisor board". Here you can put together a team of experts to provide planning, direction, resources, and advice but without being bound by fiduciary or legal responsibilities.
"Regulate power while growing"
With most startups or growing businesses, a board of directors usually consists of the founders and lead investors from each round of financing. If you go through multiple rounds - seed, series A, B, C, etc. - then things can get noisy and complicated when decisions need to be made... especially if you have a large number of board members.
Board members should influence decisions for the business, not control them. If you give too much power to the board, they can end up running the company and removing you. Your best friend in this scenario is a credible law firm that can structure the board's duties and limitations. Work with your attorney to create legal agreements with your board members that clearly explain their duties.
Generally speaking, a board of directors should provide the following support --
- Approve accelerating initiatives like fundraising
- Approve large business expenses, like a new office
- Provide guidance with financial planning, partnerships, and company strategy
- Approve management level hires and compensation
- Suggest changes to help scale, growth, and progress
- Review and monitor financials like burn rate, revenue, costs, etc.
ADVISOR TIP: keep the number of board members an odd number so there are not any "ties" when voting a big decision. Further, if you do have an even number, make sure to elect a founding member as the "tie-breaker official".
"Don't let the board distract the vision"
Too often do we hear the stories about a founder building a board and losing sight of what they sought out to do in the first place. If started the business, the last thing you want to do is give it up. The saying "there are too many cooks in the kitchen" can happen quickly if you lose sight of your vision and mission, so remind yourself about your goal on day 1 whenever you think about board members.
Your board should be a tool to help growth, not something that creates conflict. Similar to the business you started, planning for the future is key.
Speak to a Fullsteam advisor today about questions related to board of directors or D&O insurance.