Board Governance in Startups

What is different about governance in startups?

Startup governance has specific characteristics which are not always found in governance processes in other kinds of companies. These are:

• Informality: because a startup is a small, new business, and startup founders are often young people and friendly with each other, startup governance is usually informal. For instance, 65% of startups have no formal process for recruiting board members.
• Flexibility: because startups are focused on developing their own business model, it’s much easier to adapt governance processes in startups than in larger, well-established companies.
• High pressure: since startups are do-or-die companies, with high failure rates, there’s usually more pressure on startup founders to make the right choices than on decision-makers in larger companies.

As a startup grows, governance processes become formalized and established, and decision-making can be shared among more people, reducing the pressure on the founders.

Why do startups need a board of directors?

Usually, local law requires that a startup have a board of directors once it accepts investors. Simply put, a board of directors is a group of people that the startup CEO is accountable to, and who make sure the company is run so that the shareholders profit from it. 

But that’s not the only reason for having a board of directors in a startup. When board members are well-chosen, they can take away some of the pressure on executives. Board directors do this by helping executives draw and implement the best strategies through:

• Experience: the right board members can bring to the startup professional experience that the founders lack.
• Mediation: when executives disagree on important decisions, the board can help them reach compromises and agree on solutions.
• Realism: board members who have business and life experience can bring overconfident executives back to earth and help them draw realistic strategies.
• Trust: when potential investors know the company is run by a strong, expert board, they are more likely to invest in it.

These are some of the reasons why startup founders should consider having a board even if they haven’t yet reached the point where it’s a legal requirement. Sure, having a board of directors means sharing power, so it’s important to choose the right people for it. It’s also important to make the most of the board members’ time and expertise by giving them the best tools to do their job.

When do startups need a virtual boardroom?

As a board of directors grows, and governance is formalized, board members should consider simplifying their tasks by using a virtual boardroom. Among others, virtual boardroom software makes it easier for company managers and board members to:

• set board meeting dates
• create, distribute, and edit meeting agendas
• create, share, and comment on board packs
• conduct and take part in online meetings
• vote on proposals and sign documents
• record meeting minutes
• assign and follow-up on tasks
• store board documents

So, when exactly is the time for a startup board to go virtual? Let’s look at the typical startup development stages:

• Seed stage — the board comprises only three members: two co-founders and one seed investor. At this stage, a boardroom is probably not yet necessary, since governance processes are still very informal and unfixed.
• Series A — after the second round of funding, the board will usually have an additional Series A investor, and an independent director (a professional not involved with the company in any way besides sitting in the board). At this point, processes are more formalized, and boardroom software starts to be helpful.
• Series B — after the third round of funding, the Seed investor will usually be replaced by a Series B investor, so that the board still has five members, but the configuration has changed. As with Series A startups, using boardroom software will now be an advantage for executives and board members.
• Series C — a Series C investor joins the board, and so does a second independent director. The board has now seven members, and boardroom software will be a great help for organizing and carrying out board meetings and work in the fast-paced startup.

Conclusion

At first, board governance is usually informal and flexible, and happens among a few people. But as the company grows, governance processes become established and involve a greater number of stakeholders. 

After the second round of funding, startups are usually required to have a board of directors. As it grows, it’s important that the board work with tools that will help board members make the most of their time. One such tool is boardroom software, which allows startup boards to easily organize meetings, share and store board documents, conduct meetings and keep track of tasks and goals.