The Board of Directors in a start-up is quite different from that of a mature company like Disney or Coca Cola. In both cases, the Board has a fiduciary responsibility (required by law) to the owners of the company, i.e. shareholders, and is usually composed of an odd number of directors to prevent ties. However, what happens if a company doesn’t have any shareholders?

In a start-up, it is quite common to have a Board of Directors of three members or less. In fact, it could be only one, the founder of the company. All of the Board Members either will be part of the company, or handpicked by the company founder, who would most likely also be the Chairman of the Board. In established companies, this could raise a red flag. The Board should be approximately 75% independent and the CEO and Chairman of the Board are different people. The Chairman is supposed to be a watchdog over the CEO and represent the interests of the shareholders. If he is also the CEO, he isn’t going to watch over himself, and investors may believe the company is serving the interests of management, not the shareholders.

The Board of Directors has four main roles:

1. Obtain financing for expansion plans (debt and/or equity)

2. Approve budgets

3. Approve compensation for management team (including CEO)

4. Execute the strategic plan of the company

The Board usually meets 2-4 times a year. However, in a start-up, meetings incur much more frequently, possibly weekly or even daily. Therefore, it is vital to have board members who understand the business and can take an active role.

A typical Board comprises of people who have:

1. Extensive experience (C-Level) in the start-up’s industry

2. A successful track record as entrepreneurs

3. Experience in a discipline related to the start-up, such as marketing or finance

4. Certain strengths that offset the weaknesses of the Founder

5. The ability to raise financing

The ability to raise financing is arguably the most important quality for a start-up. The Founder most likely has already created the strategic plan. What she needs is money to execute it. However, obtaining financing comes with a cost. Since it will be difficult to obtain financing using traditional methods, start-ups usually obtain financing from two main sources: Venture Capital and Angel Investors. Established companies pay Directors a fee for their services. Venture Capital and Angel Investors usually want a seat on the Board. As the company proceeds through each round of financing, they add more and more Board members. Eventually the Board morphs into what you’d see at a Disney. These new members are not directly connected to the Founder, but they do have knowledge of the industry. It isn’t uncommon to eventually push out the Founder altogether.

Ultimately, a company wants a Board of Directors that provides direction and offers credibility in the marketplace. It doesn’t matter it that company is a day old, or 100 years old. What does matter is that there is quality people running the organization, and people ensuring those people represent the interests of its owners.

How would you set up the Board in your company?