How to build a great startup board

1.???Responsibilities and remuneration of a startup board

The most successful startups are those with the right ideas and people to guide them through each stage of growth. Boards play a critical role in helping these businesses scale. Directors can bring significant experience and expertise to complement founders’ abilities, as well as opening doors to new networks and sources of funding.

What is a board of directors?

In Australia, proprietary companies are required to have a minimum of one director (who must ordinarily reside in Australia) but can have as many directors as desired. The size of the Board should be appropriate to best serve the company; it’s a fine balance to ensure the size of the Board encourages a mixture of the right skills-set to best govern the organisation, as well as be functional and nimble when required – that is, be able to make decisions efficiently and urgently when needed.?The board oversees the overall governance, management and strategic direction of the organisation. Where founders start to introduce non-executive directors to the Board, then this is really when founders are looking for that ?check and balance on their decision making and are looking to be challenged on the vision and growth ambitions they have for the company. ?

Directors owe fiduciary and statutory duties to the company which they serve – that is, to the shareholders as a whole. These duties are personal to each director, and each director must actively participate in company decision-making to meet their obligations.

Directors should not be confused with members of advisory boards, which are effectively panels that a company can establish to provide the Board and management with expertise and an external stakeholder lens on matters concerning the company and the industry and legal and regulatory framework in which it operates. Advisory Boards deliberately have no decision making power (ie no voting rights) and as a result and are not legally responsible for company decisions. Instead, Advisory Boards make recommendations to the Board and the Board then makes the ultimate decision based on any such recommendations and any other relevant factors.

When most for-profit companies are formed under the Australian Corporations law, they are formed as private companies limited by shares (as opposed to public companies). This is advantageous to founders, as the legal regime for private companies is a lot more understanding around the inherent conflict that often exists within private companies. For example, private companies can enter into related party transaction which are not on arms’ length terms, directors of private companies can vote on matters for which they are conflicted. In this way, the law understands the conflicts that often exist within private companies, such as where the founder(a) is the shareholder and director.

“As a company director, you are held to the highest standard. The Board (whether that Board is comprised of 1 director or more) is ultimately responsible for any risk associated with any action (or inaction) taken by the Company” explains Hoda Nahlous, Partner, KPMG Law.

“I’ve heard of scenarios like having a board member with no voting rights, effectively being a passive director – that is concerning for the induvial director involved because by being passive they can’t be actively making decisions in relation to the company. It is only by being informed about the circumstances concerning the organisation and actively making decisions that the director can effectively discharge their personal directors duties and absolve themselves of any liability if something goes wrong.”

Roles and responsibilities

While all directors must be actively involved in board-level decisions, their role in day-to-day operations and investment can vary:

·??????Executive directors are those employed by the company in a managerial or operational position, and can include the CEO or MD.

·??????Non-executive directors are not employed by the company and may include investors (or representatives of investors – that is, nominee directors).

·??????Independent non-executive directors (INEDs) are valued for the external perspectives they offer. They often do not own a substantial holding of shares or have any other relationships that could impact their ability to provide an independent opinion.

?According to KPMG High Growth Ventures research, the average startup board comprises four members. Most boards include executives and investors; INEDs and non-executive directors are rarer. Only about 1 in 4 Australian startups have an independent director on their boards.

Most startups are born with one to three directors: co-founders who typically have specific technical expertise. As businesses look to scale up, they may look to recruit directors with operational, marketing, or financial skills either proactively or through their venture capital investors.

To fulfil their legal decision-making obligations, directors should be meeting regularly to discuss any issues facing the organisation. The law does not impose meeting requirements for private companies, but it is common for startup boards to meet anywhere between four and 12 times a year.

Remuneration of company directors

Executive directors typically receive a salary for their employment. In contrast, non-executive directors are engaged via a letter of appointment and do not always need to be paid.

About half of Australian startups provide no remuneration for board members, while 17% pay directors in equity only, 12% in cash only, and 15% in both cash and equity.

As a start-up grows and it looks to appoint professional non-executive directors, expectations begin to become more aligned with those of a listed company.?While some of these directors will accept an equity only arrangement (often with vesting conditions that require achievement of an exit event), others may request cash fees.?

Cash fees for Boards vary depending on the associated time commitments and responsibilities, but as a guide, a typical structure for a company with a $100m EV would be a fee of $60-90k p.a. for the Chair, and $30-50k p.a. for a Board member.

HKPMG High Growth Ventures is a high performance advisory group designed to nurture the personal and professional growth of Australian founders and their businesses. Designed for startups and delivered by specialists, KPMG High Growth Ventures offers business services to support your growth.

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