Okay – so let’s be clear on what a “board of directors” is. According to Wikipedia, “A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. The body sometimes has a different name, such as board of governors, board of managers, board of regents, board of trustees, board of visitors, or executive board. It is often simply referred to as “the board.”
All right – that’s done… so, let’s try to answer the question: Does a startup need a board of directors? The answer is… it depends. To be more clear – it depends on what stage the “company” is in specifically relating to its idea or product.
Scenario #1: Very early stage company
If you are a couple of entrepreneurs just getting started, having a formal board of directors doesn’t make any sense. First, you’re just getting started. Second, you may not have solidified what it is that you want do. Third, you may not even have formed a formal legal entity (e.g. corporation)… should I go on? Focus on the idea / product – let the rest wait. Build it… and they will come!
Scenario #2: Making some progress – looking for seed round
Okay, so you’ve formed a company (even this step is debatable) and made some progress on your idea and it’s about time you brought, what you believe to be, is a small amount of outside capital to help continue the momentum.
It starts to get a bit tricky here. If you do a FFF (friends, family, and fools) round, at the end of the day, these investors, while they may like your idea, are probably really investing in you first – followed by whatever it is that you are doing with the money. Furthermore, let’s assume that Uncle Buck, who gave you $10K isn’t really a “sophisticated” investor (I know, it’s a stretch, right?) – the last thing he probably wants to do is be on the board of anything. Truth be told, he may have just given you the money so you stop bothering him! Okay, I digress… but I think you get the point.
Conversely, if you start seeking amounts of money that transcend the “FFF” round, (i.e. angel investors), having a board (in some capacity, which I’ll explain shortly) is probably going to be required. As an angel myself, I can tell you my golden rule – “it’s not that I don’t trust you with my money, I just don’t trust you with my money!” So, with that in mind, more sophisticated investors aren’t going to just write you a check and walk away – they are going to be part of the process. The aforementioned statement brings up another very important point – remember, it’s not always about the money – having the “right” money (right partner) is just as important, so choose wisely!
Now, to specifically answer whether you need a board of directors in this scenario, the answer is, once again, it depends. Depending on whom you partner with, they may or may not, make this a formal requirement.
If the option exists, you can consider a “Board of Advisers”. In short, an advisory board can provide you with the same guidance as a formal board of directors but they will not have any fiduciary responsibility towards the company. The good? If you do something crazy, they can’t come after the investors. The bad? That you have the potential of doing something crazy and there is no “formal board” to prevent that from (legally) happening.
If you do end up having a formal board of directors, remember to obtain D&O (Directors and Officers) insurance. While it’s not that expensive (maybe a couple thousand per year), it will help protect the board from any mishaps – accidental or otherwise. Conversely, with a Board of Advisers, you don’t need D&O insurance so considering putting that money to use on extending your company’s runway… you’d be surprised how far small amounts of money can take you.
Scenario #3: This idea is gonna be big – we need institutional money!
Simple – you’re not going to get big money without big oversight. So yes, a board of directors is imminent when raising VC money.
Regardless of which “board” option you choose, do the right thing by keeping your board of advisers / directors informed about what’s going on in the company. Remember – managing up is sometimes more important than managing down and/or across.
Finally, even in scenario #1 where you are too small for a board of directors, consider seeking out guidance and form your own advisory board. People love to help other people – it’s in our DNA… you’ll get what you want (i.e. guidance) and you’ll give those helping you the opportunity to make a difference and that’s what they want – a real win/win!