For founders in the early days of startup building, assembling an advisory board often takes a backseat to more pressing needs like developing a product, hiring key roles, and raising capital. However, taking the time to form a strong board can provide immense strategic benefits, even for young startups.
Why a Board Matters in the Early Days?
While boards play an important governance role for larger companies, they can offer additional strategic guidance for early-stage startups:
➡️ Advice: Founders gain access to expertise across functions like marketing, operations, engineering, and finance. Board members can provide critical strategic and tactical advice.
➡️ Network: Boards can open doors to valuable industry connections, potential customers, partners, and even future employees. These connections can be crucial for business development, sales strategies, and recruiting efforts. Furthermore, board members can introduce startups to potential investors and other funding sources. Board members open access to partnerships, talent, and future fundraising through their networks and connections. This accelerates growth.
➡️ Status: Assembling a strong board signals legitimacy to investors, partners, and the market. Big name advisors offer credibility.
➡️ Accountability: Boards are instrumental in setting performance metrics and monitoring the progress of the startup. They hold the management team accountable, ensuring that the company meets its strategic objectives and operates efficiently. This level of accountability is crucial for keeping the startup focused and on track towards achieving its goals. Board oversight creates accountability for managers to execute plans and meet milestones. Quarterly updates impose discipline.
➡️ Strategic Guidance and Governance: Boards play a crucial role in setting the strategic direction of the company. They help in defining long-term goals, shaping the company’s vision, and ensuring that the startup stays on course. This strategic guidance is invaluable for early-stage companies navigating the complexities of the market and seeking sustainable growth paths.
➡️ Expertise and Experience: Board members often bring a wealth of experience and specialized knowledge to the table. They can offer insights into industry trends, competitive landscapes, and business model optimization. This expertise is particularly beneficial for startups that need to make informed decisions in areas where they may lack deep experience.
➡️ Mentorship and Support to Founders: Founders of early-stage startups can greatly benefit from the mentorship board members provide. This includes advice on leadership, management practices, and decision-making. Board members can act as sounding boards for founders, offering support and guidance through the challenges of building a business.
➡️ Credibility and Reputation: Having a well-respected board can enhance a startup’s credibility with investors, customers, and partners. It signals that the company is serious about its governance and strategic direction, which can be a competitive advantage in fundraising and business development efforts.
Building an Effective Startup Board — How to do that? 🤔
Keep these tips in mind when constructing a startup board:
➡️ Seek members with functional expertise in your startup’s key areas of need and growth. Avoid inviting just big names.
➡️ Aim for 5–7 members max. Too many voices leads to confusion.
➡️ Ensure members can allocate adequate time for monthly/quarterly board meetings and advising in between.
➡️ Compensate board members fairly with cash or equity for their commitment.
➡️ Structure the board to allow founders to still control key decisions, but receive quality input.
How many board members should a startup have at each stage of development?
1: Seed Stage
- Board Size: 3–5 members
- At this early stage, a smaller board is often more effective. The board typically includes the founders and possibly one or two external advisors or angel investors. The focus is on getting the business off the ground, so members with strong entrepreneurial experience and industry knowledge are valuable.
2: Early Stage (Series A & B)
- Board Size: 5–7 members
- As the startup raises more significant funding rounds, the board often expands to include venture capital investors. At this stage, it’s important to maintain a balance between the founders, investors, and independent members who can provide unbiased advice. This helps in refining business strategies, scaling operations, and navigating growth challenges.
3: Growth Stage (Series C and beyond)
- Board Size: 7–9 members
- At the growth stage, startups might add more board members to bring in specialized expertise, such as international expansion, corporate governance, and financial acumen. The board’s role becomes increasingly focused on steering the company towards profitability, strategic partnerships, and possibly preparing for an IPO or acquisition.
4: Mature Stage
- Board Size: 7–11 members
- Mature startups or those that have gone public may have larger boards to comply with regulatory requirements and to reflect a broader range of stakeholders, including public shareholders. The board at this stage focuses on long-term strategic direction, corporate governance, and compliance.
How to Find the Right People for Your Startup Board?
Define needs 🙏
➡️ Analyze gaps in expertise your team lacks. Do you need a technical advisor? Marketing guru? Operational wizard?
➡️ Consider what stage of growth you are in. Early stage? Scaling up? Identify relevant mentors.
➡️ Map board composition to current and future fundraising needs. Recruit those who can help close rounds.
Leverage networks 🧑🤝🧑
➡️ Ask your investors and lawyers for recommendations of strong candidates they’ve worked with before.
➡️ Reach out to portfolio founders of peer startups further along for referrals.
➡️ Attend events, conferences, meetups to network and identify respected subject matter experts.
Assess fit 🤝
➡️ Interview prospective board members to evaluate their experience, communication style and commitment levels.
➡️ Ensure they have expertise relevant to your startup but avoid competing interests.
➡️ Prioritize those able to dedicate time and who align culturally over big names.
➡️ Look for experience guiding other startups through phases you are entering: scaling, fundraising, exits.
➡️ Onboard new members slowly. Start as advisors before giving board seats.
‘Vetting and selecting the right board is vital. Move slowly and be thoughtful about who you empower to guide the startup’s strategy’.
How To Incentivize Board Members? 💰
Compensating the board of a very early-stage startup often involves creative, non-cash methods due to limited financial resources. Compensating board members in very early-stage startups requires a balance between recognizing the value of their contributions and managing the startup’s resource constraints.I saw different models but below I listed the most common instruments:
➡️ Equity Compensation
- Most Common Method: Offering equity is a standard practice for compensating board members in early-stage startups. The amount varies, but typically ranges from 0.25% to 1% of the company’s equity, vested over a period of time (often four years), with a one-year cliff.
- Considerations: The equity percentage should reflect the board member’s contribution, time commitment, and the stage of the company. It’s important to clearly define roles and expectations upfront.
➡️ Deferred Compensation
- Some startups opt for deferred compensation agreements, where board members are promised a future cash payment based on certain milestones or events, such as the next funding round or an exit.
➡️ Expense Reimbursement
- While not compensation per se, reimbursing board members for any expenses incurred as part of their board duties (travel, lodging, meals) is standard practice and shows the startup’s appreciation for their contribution.
➡️ Advisory Shares
- Similar to equity but often with different terms, advisory shares can be allocated specifically to advisors or board members who are not acting in an operational capacity. These shares might come with different rights or restrictions compared to employee or founder shares.
➡️ Performance-Based Incentives
- Some startups may offer performance-based incentives, such as additional equity or bonuses for achieving specific milestones. This aligns the board member’s interests with the company’s success.
➡️ Professional Development Opportunities
- Offering opportunities for professional growth, such as access to exclusive industry events, training programs, or networking opportunities, can also be a form of compensation, particularly for board members looking to expand their skills or connections.
➡️ Product or Service Access
- Providing free or discounted access to the company’s products or services can be an appealing perk, especially if the products are valuable to the board members’ personal or professional lives.
While easy to deprioritize, assembling a strong advisory board can provide strategic guidance, networks, credibility, and accountability vital for the growth of early-stage startups. Allocate time to thoughtfully build this resource. The value of boards for early-stage startups is considerable, providing strategic guidance, expertise, mentorship, and much more. While the formation and management of a board come with its challenges, the benefits can be substantial, helping startups navigate the early stages of their journey more effectively and setting a foundation for future success.
