Does your early stage venture
need a board?
By Yohan Albo
Like most things in life, it depends. But here are some key considerations for your Startup when appointing a board.
Understanding the types of boards
The two main types of boards are advisory and formal boards respectively, which are similar but perform slightly different functions. It is important that Startups understand the difference between the two, especially because they have legal ramifications and consequences.
An advisory board is a group of external consultants so-to-speak, who offer strategic advice and guidance to the founders of the startup. This group ordinarily operates informally, with board members typically receiving a small equity stake in the startup (normally less than 0.5 percent).
Also referred to as a “board of directors”, a formal board has legal responsibilities and fiduciary duties to the company under laws and contractual agreements.
One of the main differences then between these two types of boards is that the decisions and recommendations of formal boards are legally binding, unlike advisory boards, which merely offer informal advice.
However, advisory board members must still be careful not to fulfill the exact same role as formal board members. If an advisory board member does so, even though officially an informal advisor, then he/she may actually have the same legal liabilities as a formal advisor.
Generally speaking, early investors want startups to have at least an advisory board whereas later round investors usually demand a formal board in order to ensure a strict form of governance and accountability. Nonetheless, even in the early stages of a startup, it is important to prepare monthly financial statements, have meetings with advisors and budget ahead. If you do this in the early stages of your startup, will hold you in good stead when it is necessary to appoint a formal board.
Who to appoint ?
When choosing who to appoint to your board, it is a good idea to have a mix of diverse board members, with varied skill sets and experiences. One person who must be on the board is a reputable venture capitalist that has well-rounded experience and a vast network. Having access to a VC’s network can result in further capital funding, if needed. Additionally, experienced VCs have gained knowledge over the years as to what works and doesn’t work with startups.
Startups should also look to have both a functional and domain expert. A functional expert has deep knowledge in a particular area of the business such as marketing or sales whereas a domain expert has experience in a particular sector such as agritech or medtech.
Having said that, when appointing your board, ensure that you are not just merely ticking boxes with the titles of people your investors require on your board. Rather, it is essential to make sure that you will have a positive relationship with your board members and that they will bring value to your startup through their deep industry and functional knowledge. Both these criteria are necessary. If you don’t have a positive relationship with your board then you will find it difficult to accept their advice and get along with them no matter how good it might be. If you have a positive relationship with your board but they give you bad advice, then it could have disastrous consequences in the long run no matter how positively you feel in the meantime.
When to appoint ?
As a rule of thumb, your startup won’t require a formal board until the second round of capital raising. However, as mentioned earlier, it is still a good idea to have an informal advisory board from who you can receive guidance and bounce ideas.
So should your startup have a board ? Short answer: Yes.
Long answer: In the beginning your startup should have an advisory board and transition into a formal board as it receives more rounds of funding. However, those on your advisory board do not necessarily have to be on your formal board as well. In fact, most startups appoint completely different members to these boards. Just ensure that you pick the right people that will provide value to your venture.
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