· Mark Davis · Board Relationship · 6 min read
Understanding the Roles of a Startup Board of Directors
Understanding the Roles in a Startup Board of Directors
Early in your startup journey, you typically own most of the shares. However, after securing your first round of funding, you realize the importance of having a startup board of directors (BoD). Building a strong BoD is crucial to avoid poor decisions and support your company’s growth.
But how do you structure your BoD effectively? The answer lies in understanding the roles within this structure. Let’s explore it all!
What Does a Startup Board of Directors Do?
A startup without a board of directors is like a ship without a compass: it lacks direction, guidance, and the ability to navigate big business challenges. The direction your business takes will depend entirely on your BoD’s decisions, from attracting investors and issuing stock to hiring the CEO and setting budget limits.
Typically, a startup board of directors has around three to five members, including company executives and stakeholders (National Association of Corporate Directors, 2023). Beyond the numbers, it’s the right structure that determines your startup’s success. Having the right people in the right roles ensures your company’s critical objectives are met timely.
The ultimate goal of the board is to protect and serve the interests of the shareholders.
Roles in a Startup Board of Directors
To maximize your board’s effectiveness, ensure everyone understands their responsibilities. Research shows that diverse workforces make better decisions 87% of the time. Therefore, a diverse BoD with varied skills and experiences is a great idea.
Here’s a rundown of typical roles in a startup BoD and their key responsibilities:
Chief Executive Officer (CEO)
The CEO, often the founder or co-founder, holds the top spot in the BoD hierarchy. Over 80% of CEOs in top-performing organizations are insiders. They use their knowledge to drive changes, allocate resources, devise strategic goals, and help achieve the company’s vision. CEOs are the driving force, ensuring the business stays on track and meets long-term goals.
Chairperson
The chairperson moderates board meetings to ensure productive discussions. They can work part-time or full-time and have defined roles, including:
- Company Representation: Externally, they promote goals and policies to stakeholders and the public.
- Chair Board Meetings: They lead BoD meetings, set agendas, ensure accurate information is discussed, involve all directors, and guide discussions toward consensus.
- Manage Board Structure: They ensure the board has the right people and skillsets to achieve long-term objectives.
- Coordination with Stakeholders: They maintain open communication lines with shareholders.
Executive Directors (EDs)
EDs serve dual roles as part of the startup’s staff and board members. They often include founders or co-founders, giving them significant influence over company decisions and strategies. EDs are personally liable for the company’s actions, so they ensure everything is above board. Typical designations include financial experts, exit strategy specialists, marketing experts, and departmental experts.
Non-Executive Directors (NEDs)
NEDs aren’t employees of the company and don’t have personal stakes, allowing them to make impartial decisions. While this is beneficial for corporate governance in public companies, startups might prefer advisors who are more invested in the company’s growth. To align interests, you want to get all advisors to invest in your company.
Independent Directors
Independent directors are third-party members with no financial stakes in the company. They represent the company’s best interests without bias, ensuring decisions are made objectively.
Quick Tips for Choosing Your Startup Board of Directors
When selecting your startup BoD, consider these tips:
- Look for candidates with practical wisdom and extensive networks in your market.
- Opt for individuals with bold opinions for a productive board.
- Choose members who respond quickly to calls, texts, and emails to address urgent issues.
- Assess the tangible value candidates bring to your BoD team.
Final Thoughts
A well-structured startup board of directors can predetermine your venture’s success. Invest time and resources to build a solid board with individuals who can realize your company’s growth potential.
Onboard an AI-powered board management platform to give your startup the edge it needs to compete and grow!
FAQ
What are the primary responsibilities of a startup board of directors?
A startup board of directors has three primary responsibilities: fiduciary oversight, strategic guidance, and CEO support and evaluation. Fiduciary duties include approving budgets, major expenditures, and ensuring legal compliance. The board provides strategic direction on market positioning, fundraising, and growth initiatives. According to the National Association of Corporate Directors, boards should dedicate approximately 40% of meeting time to strategy discussions, 30% to risk oversight, and 30% to operational performance review.
How many board members should a startup have?
Early-stage startups typically begin with 3 to 5 board members, expanding to 5 to 7 members as they mature. A study by Correlation Ventures found that startups with 5 board members at Series A raised subsequent rounds 23% faster than those with larger boards. The optimal composition includes founders, investor representatives, and independent directors. Boards smaller than 3 members lack diverse perspectives, while boards exceeding 9 members often struggle with decision-making efficiency and scheduling conflicts.
What is the difference between board members and board observers?
Board members have voting rights, fiduciary duties, and legal liability for company decisions, while board observers attend meetings without voting privileges or formal fiduciary obligations. Observers typically include junior venture capital partners, advisors, or potential future investors. According to standard venture capital practices, observers receive the same materials and information as voting members but cannot participate in executive sessions or vote on resolutions. Most startups limit observers to 1 to 2 individuals to maintain meeting efficiency.
How much equity compensation should independent board members receive?
Independent board members at early-stage startups typically receive 0.25% to 1% equity, vesting over 2 to 4 years. According to Carta’s 2023 Equity Benchmarking Report, the median equity grant for independent directors at Series A companies is 0.4%, decreasing to 0.2% at Series B. Board chairs often receive 1.5 to 2 times the standard director grant. Cash compensation ranges from 15,000 to 25,000 dollars annually for early-stage companies, increasing significantly post-Series C or profitability.
What legal protections do startup board members have?
Board members are protected through Directors and Officers insurance, indemnification clauses in company bylaws, and the business judgment rule legal doctrine. D&O insurance typically provides 1 million to 5 million dollars in coverage for early-stage startups, increasing with company valuation. Delaware corporate law, governing most startups, allows companies to indemnify directors for legal expenses and judgments unless they acted in bad faith or with gross negligence. The business judgment rule protects directors who make informed decisions in good faith, even if outcomes are unfavorable.
Part of our Board Member Guide — Your go-to resource for board member roles, responsibilities, and best practices.
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Mark Davis
Founder, I'mBoard
Mark Davis is Founder of I'mBoard. Having served on dozens of startup boards, he knows the pains from both sides of the table - as an exited founder/CEO turned investor.
