Who Should Sit On the Board of Your Start-up or Scale-up?

CEOs often worry about who should join their Board of Directors – and when. There’s good reason for this: a great Board member can transform your business, giving you guidance, access to their connections, and leads for additional team and Board members.

A bad Board member, however, can set your business back – or create other serious issues.

Why set up a Board of Directors at seed funding?

Many founders choose not to set up a Board of Directors early on, but I believe that by the time of seed funding, the Board can prove to be hugely advantageous.

What does the Board of Directors do?

  • Examine and summarise business performance on a quarterly or even monthly basis
  • Makes you devise short-term and long-term strategic direction for the future
  • Gives you the ability to work on and not just in your business – and helps you bounce ideas off of other smart, talented people

At seed funding, my recommendation is to have a Board dominated by the founder. Whether you will be giving a seed investor a temporary or permanent Board position depends on how much of the seed investment they funded, as well as the landscape.

If you have many different sources of funding, you should have significantly more leverage over your funders.

Finally, giving a permanent seat on your Board to an investor should be based largely on how useful that person may be. While some seed investors offer insights, connections, and opportunities, others may simply take up space, dilute your influence, and make it harder for you to keep control when you raise additional funds later on.

Give serious consideration to having an independent Non-Executive Director or, at the very least, a Board Advisor who is not a Director. This will stand you in good stead in the long run.

What goes on with A stage venture capital?

By your A-round, VC firms will almost always ask for a seat on your Board. Unless your funding round is hugely competitive, this is typically non-negotiable.

If you don’t trust a VC with a position on your Board, you should seriously wonder whether it’s worth taking funding from them.

Currently, most founders keep control of their Board through A-round funding in a 2-to-1 or 3-to-2 ratio. In some cases, the Board will contain three founders, but this can lead to unique challenges of its own.

An Independent Chairman or NED is strongly advised at this stage and, if you have addressed this at seed stage, so much the better.

What about B stage funding?

If your fundraising is hugely competitive, you may keep control of the Board through B-round financing, but this isn’t common or likely.

By this point, you should be willing to take on the best investors you can get access to, even if they want to be on your Board, and I wouldn’t advise saying no to someone because you need to keep control – some companies like Snapchat, Uber, and Facebook kept control to their founders, but this is the exception – not the rule.

In most cases, the result after B stage funding is an “independent Board.” Your business needs a process that determines how independent Board members get nominated, approved, reappointed, and removed.

What about the C stage? Can I get fired from my own company?

After a C round of venture capital, it’s unlikely that you will still control your Board.

After having gone through four rounds of funding, you will have at least three groups asking for seats on your Board. Partners and VCs almost always want a say in how their investment is used, and by this point, you’re likely looking at over £10 million in funding – and, at the very least, an independent Board that’s 3-2 or 4-1.

That said, being fired from your own company shouldn’t be considered a serious risk.

Legally, it could happen, but VCs are rarely investing in companies, installing their own managers, and ousting founders. Your early stage investors invested in you as much as they invested in your company, and they want to keep you in that position.

The Board represents the business’s stakeholders more than it represents the CEO, which means that they represent you as a large shareholder, but likely a minority shareholder. It needs to take into account the interests of all stakeholders and should only think seriously about removing the CEO when they can’t continue to grow the company.

This is something that no VC firm truly wants to do. Removing a CEO dilutes often shareholder value, can lead to executives and customers leaving in protest, and can lead to bad press coverage.

All of this means that it is absolutely a last resort. It is a time-consuming, risky process, and happens most often when the CEO is the person who decides to move on or no longer believes they are the person best suited to run the company.

So, if you’re worried about this, my advice to you is simple: build positive relationships. Do good work. Make people loyal to you. Bring people into your organisation to fill in the gaps in your skillset and find ways to work with people when you discover weaknesses.

However, you may come to the conclusion that you’d like to work with the Board to find someone to replace you. Some founders are better at starting companies than scaling them – and if your skills are in early execution, product, vision, and inspiration more than process, team management, and consistency, it could be time for you to exit and launch a new company.

What do I do after the D-round?

The smaller your Board, the better. If you can convince your investors to work with a 5-person board, that is often ideal. Promoting efficiency, efficacy, and letting your investors choose who stays on the Board at this stage can help.

By this point, many VCs are also sitting on so many boards that if there’s trust and rapport within the Board, one VC will be willing to cede their seat and entrust another to work on their behalf.

But, if you need to have a large Board to bring in funding, that’s that. Many D-round investors will want to be Board observers rather than full members, but this is in many ways the same thing as a full seat, so proceed with caution as you give these.

Contact your Regional Director of Boardroom Advisors

Written by: John Courtney

John is highly ranked in the Top 100 UK Entrepreneurs list by City AM and is winner of the Lifetime Achievement Award from techSPARK. He has been a Board Director himself for over 40 years and first started placing Non-Executive Directors over 25 years ago. John founded and ran seven of his own businesses including a Management Consultancy for 10 years, a Corporate Finance offering for 10 years and a mid-sized Digital Agency for another 10 years.