Building a Board at an Early-Stage Company

Among the advantages of starting and/or owning a private company is the freedom to run it without external interference. Unlike at public companies, where a board of directors is mandatory, founders and leaders of private companies can decide for themselves whether and when to form a board.

For entrepreneurs, deciding to have a board and who should be on it are decisions that can have a significant effect on a fledgling company’s survival and growth. As entrepreneurs grow their companies from an organization of one or two, they often invite an investor – or an investor asks them – to form a board of directors.

“Most entrepreneurs push off starting a board for as long as possible so they can run their business as they please,” says Sapna Shah, principal, Red Giraffe Advisors, a New York City-based angel investment firm. “But by the time a business grows enough and has the intent to attract venture capital, they know they’ll need a board.”

While some private companies maintain a board consisting solely of the management team and their investors, it’s become more common to add independent directors who are not employees or investors. These directors can offer guidance on a range of critical issues, including investment, regulation, strategy, and the best path for growth.

When It’s Time to Expand Your Board

Darnyelle Jervey Harmon, CEO of Incredible One Enterprises, a Delaware-based consulting firm for entrepreneurs, and author of Move to Millions, believes that a board that includes her business coach, small business attorney, accountant, business banker, chief financial officer, financial advisor, and estate planner is essential to give her insight and help her grow her business. She encourages her consulting clients to establish an informal board of advisors early as their business grows.

The trigger to start a more formal board of directors can be the recognition that you have grown as much as you can on your own or that you want an outside perspective, according to Harmon.

“When you’re to the point that you’re frustrated, stuck, or feel that you’ve plateaued, that’s the time to bring on a board or a business coach to move forward toward new goals,” she says. “I always say that it’s hard to read the label when you’re inside the jar.”

Typically, private companies wait until they are in the later rounds of raising capital to expand their board beyond the operators and the first few investors, notes Julie Castro Abrams, founder and CEO of How Women Lead, a networking organization for female executives based in San Francisco.

“It can be dangerous to start a board before you’re ready, especially if you don’t know what stage you’re at in the life cycle of your business,” Abrams says. “If you’re preparing for a public offering, how far away is that?”

How to Recruit the Board Members You Need

Knowing your goals for your board can help you recognize the type of people you want to recruit.”

Ideally, you want your board members to complement your leadership to create a nice skills matrix,” says Abrams. “Or at the very least, you want to start with someone who can be a bridge between the operations staff and investors.”

Early-stage companies may want to recruit board members for their connections to potential funders and for talent acquisition.

“Depending on the company, they may want to recruit people with skills around cybersecurity, audits, and governance,” Abrams says. “If the business is in a regulated industry, you need someone to help prevent a crisis.”

Other potential skills to look for include marketing or, if the founder isn’t a tech person, a tech expert, Shah says. He notes that recruiting for a private board tends to be more organic rather than strategic compared to recruiting for a public board.

One thing to consider when identifying potential candidates is diversity. “For the past 20 years, numerous studies have shown that everyone performs better with a diversified company and a diversified board,” Abrams says.

While public companies have increased the representation of women and people of color on their boards, 65% of private companies don’t have any female board members, Abrams says. One reason is that the first seats on private boards are typically given to venture capitalists, where there is still a significant lag in female participation, she says.

Finding the right candidates to fill specific roles on your board can take time, especially if you need to fill in specific areas where your company is missing expertise, Shah says. She recommends asking for referrals from your network or investors to find board members if you don’t personally know the right people.

Harmon suggests asking mentors from a previous job, a college professor, or even a client either to be on your board or to suggest others who could be helpful. Attending conferences can also be helpful.

When recruiting board members, it helps to understand why someone would want to be on a private board, which typically doesn’t offer financial compensation.

“Many people want to join the board of a startup company to share their experience and pay it forward,” Shah says. Other reasons include wanting to gain more insight into the startup world, enhancing their expertise, and positioning themselves for an opportunity down the road. “Being on a private board can also be good experience if you hope to be on a public board in the future.”

Nurturing Your Board

Once a board member has been decided on, he or she should be introduced to your leadership team and other members of your board. It’s also critical to set expectations and provide whatever training is needed.

Sometimes new board members or those with different skill sets or backgrounds than other board members will be reluctant to contribute insights. For example, in a tech company, most of the board may come from the tech industry, but an outsider could have applicable business insights that could be valuable. “If you have a diverse board, make sure that everyone’s voice is heard,” says Abrams.

Shah recommends sharing with board members the same materials you prepare for investors, so the board understands your business proposition. “It’s best to set up meetings individually with a new board member and current board members and the company leadership,” Shah says. “It gives people more context ahead of the actual board meeting.”

Everyone wants to contribute, notes Harmon, but it’s up to the CEO to set board members up for success. “In a private company, the primary function of the board is to support the CEO. It’s important to make that clear.” Her approach when recruiting and training board members is to tell them, “Here’s what I’m doing, here’s what I need, here’s what’s in it for you and how I think you can help me.” “

Once someone has joined the board, maintaining communication and the personal relationship is key. “I send out a monthly report and keep people abreast of major decisions, challenges, and what support we need,” Harmon says. She offers a small stipend for the charity of their choice as an extra enticement and to show her appreciation of their support. She’ll also occasionally send a note, a gift card, or a book she thinks they’ll find interesting.

Whether your business has grown substantially or you’re simply looking for expertise from outside your company, strategically identifying, recruiting, and nurturing board members can help you achieve greater success.