Dear Unicorn Founder,
Let’s talk Boardroom dynamics this time. Shall we?
Your company’s board of directors are basically the masterminds that call the shots when it involves your company and the workings of its vision. They fundamentally help with the corporate governance of the company. This corporate governing body provide oversight and supervisory functions that set your business policy and strategy in motion.
On a more hands on note, the board of directors of a company get their hands dirty doing work like: business strategizing, fundraising, employee management, onboarding the right management team, developing branding, avoiding legal and compliance issues, and growth and expansion strategizing etc.
Your company’s board of directors are the architects that will either make or break your business – by virtue of the quality of the decisions that they make. Early on in the course of your business, your startup’s board seats will usually be filled by founders. It is however advisable that a startup should only onboard aligned board members as your startup continues to evolve.
Board of Directors vs. Board of Advisors
In the world of corporate governance, although the terms “Board of Directors” and “Board of Advisors” are sometimes used interchangeably, there is a number of fundamental differences between their distinct roles within a startup. The Board of directors serve as the formal governing entity entrusted with pivotal decision-making for a company or organization. Distinguished from an Advisory Board, the Board of Directors hold significant legal sway and bears fiduciary obligations. The Board of Advisors on the flipside comprises external individuals who offer their expertise and guidance to a company’s leadership team and executives. In contrast to a Board of Directors, an Advisory Board lacks legal jurisdiction over the operations of an organization, and its members are not bound by fiduciary obligations towards shareholders. Instead, they function as valuable assets, providing insights and guidance for strategic decision-making processes.
The Right Fit for your Company’s Board of Directors
The composition of a board of directors evolves alongside a company’s growth trajectory. Initially, the board typically comprises the company’s founding members. As the company secures investments, occasional addition of investors to the board becomes customary. With the influx of investors, the inclusion of independent board members becomes imperative to harmonize the interests of cofounders with those of investors.
Types of Board Members and the Interests they Represent
Insider Board Members. Founders are the main individuals that make up the Insider Board members of a Company. The founders and company management hold a fundamental role on the Board as they principally sponsor the interests of the founding shareholders on a typical Board of directors.
Investor Board Members. As your startup progresses and attracts external funding, along with external shareholders beyond the original founders and advisors, the incoming investors will encompass various shareholder categories. Consequently, they will seek representation on your company’s board of directors, these category of board members are termed: Investor Board Members. The level of their involvement on the board should typically correspond with their investment stake and the competitive dynamics of fundraising efforts.
Independent Board Members. As your startup continues to grow, it may be prudent for you to introduce an independent director. Their core attribute of not being synonymous with allies coupled with their being seasoned experts makes them valuable. The role of independent directors is to prioritize the collective interest of shareholders across classes. Independent directors are essentially external directors who play an important role in corporate governance. They provide unbiased advice, perspective, and judgment to the board of directors. Independent directors bring a unique perspective, mainly because they have no conflict of personal interest with the company.
How Can I Incorporate an Individual onto My Startup’s Board?
The procedure for adding new members to a board of directors is governed by the corporation’s bylaws and may vary among corporations. Generally, the board of directors vote to ratify any prospective members during a convened board meeting,
Should you require professional services with respect to the management of your Startup’s Board and required paperwork, kindly reach out to us via: (get in touch) or via our email address: hello@unicornvalleylaw.com.
Board of Directors at Series B
At the outset of your fundraising as a startup, you may be able to retain founder control. However as you journey down several rounds of liquidity injection, particularly at Series B, your founder control ratio with respect to your startup’s board may come to a ratio of 3:2, where “2” connotes two different VC firms or two different sects of investors.
It is also probable that, as you journey down several fundraising efforts, investors will seek to mitigate founder influence on the board, albeit without expressly aiming to assume control themselves. Opting for independent board members serve to fulfill this objective.
Your Company’s Board of Directors at the Series C Financing Round
It should interest you to know that it is highly improbable that as the founder, you will continue to maintain control of the board by the time Series C funding is secured. During Series C fundraising round, new venture capitalists inject substantial funds into the company, often demanding significant representation on the Board. At this stage, it’s customary for the board’s composition to lean towards a ratio of 3:2 or 4:1 in favor of investors over founders.
Investors who participated in Series A and Series B likely did so under the belief in the capability of a startup’s leadership, particularly that of the CEO, to steer the company towards success. The optimal course of action for a CEO at this juncture is to continue executing their duties proficiently and maintain positive rapport. The startup’s focus evolves over time, transitioning from inspiration and vision to team management and operational efficiency. Some founders excel in the earlier stages while others in the latter. As a founder, you may contemplate stepping down from the board at a later juncture. In such instances, it’s advisable to collaborate with the board to identify a suitable successor and gracefully transition out.
About the Author
Taiwo Lawal Esq. is a corporate and transactional lawyer. With about half a decade’s experience servicing startups (including on transactions regarding intellectual property rights), she is the founder of Unicorn Valley Law, doing what she loves the most- providing bespoke advisory from the “well of water” within her.
Taiwo is happy to read from you and provide bespoke solutions to your startup’s legal and commercial needs. Kindly write her via taiwo@unicornvalleylaw.com or schedule a call via calendly here: (get in touch).
