By Lak Ananth, Global Managing Partner & Will Smith, Venture Partner — Next47
As you grow your startup — usually when you’re making the transition from seed to Series A — you’re going to reach the point where you need to put together your first board of directors. In fact, when you’re working with a VC on your Series A funding round, it’s going to be a key element of your term sheet.
This is a big step for any founder, and it’s one that can have a tremendous impact on your growing business. So, the decision to have a board — and who will populate it — is a serious one with far-reaching implications for your long-term success.
Founders often ask us for advice when it comes to structuring their first boards. In this article — the first of two parts — we offer several things to keep front of mind as you structure your own.
The good news about having a board
Not only will you have the opportunity to gain valuable advice and connections from your prospective board members, but one or two of those people — most likely representing the lead investor — may be with you for years to come. This can provide you with some much-needed stability and an ongoing source of advice and support as you scale.
From the entrepreneur’s perspective, it’s helpful from the beginning — while you’re still in seed — to have a board, even if it’s an informal one. When the people on your board have enough context about your business, they can give you an outside perspective and mirror back to you what you’re saying. We often see founders set up informal boards and do regular calls with them. That’s a good habit to get into before you create your first formal board.
The bad news about having a board
While there are many good things that can come out of your first board, there are also some potential pitfalls. First, there’s the question of giving up some control of your business in exchange for the funding. While you and your cofounders have enjoyed complete control over your business from the very beginning, once your board is in place, you’ve got other people — some of whom are going to be from outside your business — to answer to. Not only that, but there’s the possibility that you and your new board members may not always see eye to eye. This can, at minimum, cause friction and ongoing distractions, or in the worst case, blow up your board — and your business.
Regardless, you’re going to need a board
When you get the term sheet for your Series A, you’re going to see a provision that requires you to have a board of directors. This provision will typically spell out the board composition, more specifically, how many board members your company will have and who has the right to designate them. There’s pull from the investor side — they naturally want some oversight of the company when they’re writing a big check. And there’s pull from the founder side too as they begin to want to put more structure around their business: What are the milestones for growth? What are the financial goals we’re trying to hit? Who am I going to hire? So, the board naturally tends to happen at Series A, when these two vectors converge.
There are two things founders often think about when they encounter this provision in their term sheet. First, “What does this board composition mean for my control of the company?” And second, “How is this going to make me successful?” There’s usually a lot of angst with founders about control. We think that angst is often misplaced — the way you have control, if that’s what you’re solving for, is either by being profitable or by executing at a world-class level.
How big should your first board be?
In our experience, a smaller board is better than a bigger board. Your first board will likely have a minimum of three people: whoever is leading the financing, two co-founders, or a co-founder and an independent. Be very thoughtful about what your threshold is as a founder for the level of ownership, capital, and expertise that merits a board seat. We strongly advise not putting angels or seed investors on your board because they typically don’t have the bandwidth necessary to be productive on a board. You can still use them as advisors, and that’s a great role for them to be in as your company scales.
So, if you don’t already have a board in place, chances are, there’s one in your future — especially as you make the leap from seed to Series A. But be very deliberate as you create your first board. Invest time thinking about how to make your board work for you, and how your board can make the company more successful. A good board can be the catalyst that will spark your startup’s long-term success, while providing you with the advice and connections you need to grow as a founder.
In the second part of this article, we’ll take a close look at the nuts and bolts of running a highly effective board — one that can be instrumental in the long-term success of your venture.
