When and how should startup founders evolve their Board of Directors ?
When a company is established, it is common for the founders to be appointed as the board of directors.
However, as the startup begins to mature, the question arises.
When is the appropriate time to adjust the board's composition from being exclusively founders?
The decision to evolve a startup's Board of Directors is not a one-size-fits-all matter; it varies greatly depending on several factors, such as the company's growth rate and the types and levels of risks it faces. Startups can encounter substantial liabilities and risks from their inception.
Consider, for example, a startup that distributes self-diagnostic medical tests from a foreign manufacturer. If these tests produce inaccurate results, it becomes critical to determine who is responsible and who will bear the legal and financial repercussions. These significant risks require board-level oversight, which includes reviewing contracts, managing customer relations, and setting terms and conditions. While some responsibilities might seem suitable for an advisor, it's important to remember that advisors do not take on the legal and financial risks associated with the company—a responsibility that falls to the board of directors. Therefore, in such cases, it is advisable to appoint independent board members right from the beginning.
On the other hand, a startup with no employees beyond the founders and lacking significant contracts or exposure to risk may not immediately require the inclusion of external board members.
The dynamics begin to shift notably when external investors enter the scene, often seeking representation on the board.
A common question that comes is: should the startup elect an independent board member prior to or following the introduction of investor-nominated board members
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From our perspective, appointing an independent board member before welcoming investors' representatives can be advantageous. Independent members can serve as mediators, fostering a balanced relationship between investors and founders. They play a crucial role in ensuring that discussions and decisions are conducted fairly and without bias, acting in the best interest of the company.? Electing an independent member ahead of investor representatives provides founders with the opportunity to select someone truly independent, free from external influences.
Furthermore, in situations where the board consists of several founders, introducing an investor representative often leads one of the founders to step down. This helps maintain a board size that is manageable, ensuring governance and decision-making processes remain efficient. Such a practice allows the board to remain agile, adjusting and evolving in response to the startup's growth and shifting needs.
In summary, the development of a startup's board of directors should be a strategic process, carefully customised to the company's unique situation. It is essential to focus on risk management and the cultivation of productive relationships between founders and investors.
However, it's important to recognise that remaining on a board of directors should not be pursued at all costs.
It is advisable for members to annually reflect on the board's composition and assess their individual contributions. Given the rapid pace at which startup phases progress and their evolving needs, there may be a requirement for specific profiles on the board.
Virginie Verdon, Managing Director