Building a Board of Directors
Over 20 years ago I formed my first company. It was an imposing task as I had never formed a corporation or built a board of directors. I hired a lawyer and spent a significant amount of time and money “doing it right.” It was a good learning experience. I wish someone had told me it did not have to be that difficult. Since then I have formed two additional companies and they were much easier to do.
In the recent article by George Deeb about how to build a board of directors or a board of advisors the value of a board far outweighs the cost or effort to get it put together. It is something you can do and for the best results have a professional assist you. Deeb best describes the definition for the board of directors as “the people that manage the CEO and formally approve all key decisions of the company. They protect the interests of the shareholders.” The article goes on to add best practices for structuring your board of directors which includes:
For the not so obvious recommendations, firstly, you should structure your board relatively in line with the equity ownership of the company. For example, if one investor owns 20% of the company’s equity, it would be fair for that investor to have one of five board seats, or a 20% voice at the board table. Or, vice versa, if you own 100% of your business, you may not want anybody on your decision making board, instead relying on your advisory board for advice and direction. Secondly, when you have an outside investor involved, it is important there is a mutually acceptable third party board member that has a non-biased perspective on the business (e.g., not a manager and not an investor), who, in essence, tie-breaks all disputes between management and the investors. I typically want to identify and nominate that outside candidate (so I know I can trust them), for approval by the investor. Don’t do the reverse, as most likely they will be loyal to the investor. And, thirdly, you do not want a passive board member, simply showing up at scheduled meetings. You want a passionate member that you can assign real work to, that is providing real effort and deliverables in between meetings.