Why Every Start-Up Needs a Board of Directors

Most people would associate a board of directors with bigger companies where the influence and guidance of an independent board is crucial to good corporate governance and the success of the business. However, although a start-up or small business can also reap substantial benefits from them, many owner/founders still question why they need (and shy away from) accessing the advice and guidance an in-person board can give. Instead, they turn to sometimes dubious online accelerator programs.

Take Your Foot Off the Accelerator

Ask a start-up founder what they look for in an accelerator program and many will say they want:

Advice from entrepreneurs who’ve “been there and done that”; or
introductions to potential investors including prominent venture capitalists.

Both of the above are something you can also get from a carefully selected board of directors.

Those who signed up with Texas-based Newchip, a virtual accelerator provider, didn’t get what they bargained for when it entered into Chapter 7 bankruptcy in May 2023 leaving creditors owed $4.8 million. Ironically, Newchip was itself something that may have benefited from a strong and independent board. Newchip’s founder, Andrew Ryan, admitted it grew much too fast and that he’d never been a CEO of a company that big.

A Board Adds Value

Part of the appeal of running your own company is independence, the freedom from process, and the ability to pursue your own unique vision. That said, there is no doubt that start-ups with professional boards tend to be more resilient, as well as more attractive to investors and talent. Diverse and independent board members can add value to a start-up company by bringing skills and experience that the founder may lack as well as giving access to business contacts and networking opportunities which are so crucial for an early-stage business.

Nor is there any need for the founder to relinquish control of their company. For many entrepreneurs and smaller businesses, an advisory board might be better than a fully mandated board. An advisory board does not have any legal responsibility but is solely there to advise and give feedback. Fully mandated board members also steer and guide strategy, enabling you to do the best job you can, not act as your ‘boss’.

In particular, the role of non-executive directors (who have the same legal responsibilities as executive directors) is to ensure good corporate governance, provide oversight, expertise, knowledge, and if needs be, constructively challenge management. They are not involved in the day-to-day running of the business and are not employees of the company but can still give clarity around strategy and help to differentiate between long-term and short-term goals.

Attracting Investment

The independent advice of a board can also be important in attracting investment by giving investors greater confidence that important decisions are being made solely in the interests of the company, free from any conflicting interests. If that investment in your firm is from venture capitalists (VCs) it’s probably even more important to have a board that provides strong oversight. After supplying capital, instead of monitoring their portfolio of start-ups to reduce hazards, some VCs are unfortunately using their role in corporate governance to persuade founders to pursue high-risk, rapid growth strategies to maximize returns, with all the dangers that poses to young firms. An independent board can balance the need for ongoing innovation with sustainable, accelerated growth.

Attracting and Retaining Talent

Having a board can also help when it comes to attracting and retaining talent. Getting independent board members to interview candidates not only takes the load off the owner/founder but is also very appealing for potential recruits as it can give them a wider picture of the company vision. Post-recruitment a board can also provide the oversight to ensure that you have the right HR systems and policies in place, helping to retain that talent by looking at remuneration and incentive structures as well as training.

Pick the Right Board for You

As a start-up, you should look to recruit board members with different professional experience and a range of perspectives to embed diversity of thinking which increases creativity and innovation. Many larger companies have entrenched cultures which do not harness diversity. In 2021, a report (The Hidden Truth: Diversity & Inclusion in the FTSE All-Share) revealed that less than half of companies met the target for 33% women on boards and only 3% of board members in the FTSE All-Share ex350 were ‘directors of colour’ (male or female). Start-ups can take advantage of recruiting board members with a range of perspectives to embed diversity of thinking from the outset and gain a competitive advantage.

The team of start-up lawyers at Motion Paradox can give you legal advice and guidance in corporate governance, as well as assistance in structuring a board that suits your needs to ensure your firm is more resilient, scalable, and profitable.