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Company too young for a formal board? Practice with an advisory panel

In the early days of a company, founders benefit from more freedom and fewer layers.

Company too young for a formal board? Practice with an advisory panel
[Source photo: geralt/Pixabay]
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Q. I understand why companies planning to go public need to set up a board, but if you don’t need to set up an audit committee, compensation committee, or establish that kind of governance, do you even need a board? 

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-Founder of an early-stage startup backed by angel investors

Dear Founder, 

It’s a great question. In the early days you really don’t need a board. In fact, we coach our founders to avoid having a formal board for as long as they can. Having more degrees of freedom is better than having fewer degrees of freedom. The more flexibility you have in the beginning, the better it is for you. 

Bill Trenchard, a partner at First Round Capital, says that at the seed stage, investors don’t even form a board, but they meet with the founder every two weeks to six weeks, depending on what’s needed and they text, email, chat, and call in between. 

In the early days you can build an advisory board, which we see a lot of companies do, and then the founders get expertise when they need it. At the same time, they are also getting to see how these advisors operate and work together. Often, companies act as though it’s a formal board, even though it has no formal authority. This is a good way to get into the into a rhythm of working with a board, which can be both art and science. It’s helpful to build that discipline, so that you’re ready when the time comes. 

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By the time a startup raises an A round, there is often another investor at the table, and you will need to think about setting up a board. Giving an investor a board seat is usually something that comes with a term sheet. It’s not a choice but a legal obligation. Always proceed with caution when you are bringing on investors who expect a seat on the board because they will likely have that position for the duration, or their firm will. Don’t be foolish about these decisions. You will live with them for the life of the company. Do reference checks. Find the companies that didn’t work out; you want to know what happened when things got bumpy. Before you sign a term sheet and give someone a board seat you want to know how they behave in good and bad times. 

The B round usually introduces an option to add an independent board member. At this stage a typical board would include cofounders, two venture seats, and an independent. The founders can decide whether or not to fill the independent seat—it’s not required. When it comes to picking an independent, you have a lot more flexibility. We suggest having term limits on these positions. It’s just as important to pick carefully as you are tied to this person for one or two years, which is still a long enough period of time for someone to make a profound impact. By this stage the board is reviewing compensation and governance and committees are forming. As you get to the C or D round the board will expand from five to seven members and you’ll often add another independent and an audit chair. You want to be auditing the financials of the company for three years before you go public, so you should be forming an audit committee around that time. 

If your ultimate intent is to go public, adding outside directors can be helpful so that you’re not adding everyone at once before an IPO. (These searches take time and are more successful if you have more time.) As you get bigger, you’re going to need more board members to help with the regulatory overhead and these roles have to be filled by people outside of your company because of conflicts of interest. 

It’s tough to build the right board—and shape a culture—when you have to race against the clock to do so. Board members are with you for a long time, so take the time to choose wisely.