How to assemble a board for your early-stage startup

By: Mercury
March 15, 2022

Once you’ve incorporated your startup, you’ll need to assemble a board. Your board is an integral part of your startup’s success and will contribute to a range of decisions, including hiring executive employees, and helping you raise and deploy funding.

In this article, we’ll explore how to build a relevant, thoughtful board of directors, what to expect from your board during your startup’s early stages, and how to compensate your board members.

What is a board of directors?

Corporations are owned by shareholders, who are paid out in dividends and represented in board meetings by a board of directors. It’s the board’s role to serve and protect the company's and its shareholders' financial interests — also known as a fiduciary duty.

Corporations are required to hold at least one board meeting every fiscal year to discuss topics like executive compensation, executive hiring and firing decisions, funding strategy and implementation, and dividend payout policies. Make sure you keep records of every board meeting to stay compliant with the Secretary of State where your startup is incorporated.

Setting up an effective board for your startup

Build a board for your company composed of people with relevant experience and the commitment to discuss difficult decisions your company will encounter. Your board should be a healthy balance of the different types of shareholders that exist in corporations. These include common shareholders, preferred shareholders, and independents — and have varying rights and responsibilities.

  • Common shareholders have voting rights and can be employees or directors of the startup.
  • Preferred shareholders have no voting rights and are paid out on dividends before common shareholders.
  • Independents have voting rights and aren’t employees or directors of the startup.

Here’s how to create a board of directors:

1. Decide how many seats you will need

There are three main startup board positions to fill on a board: chairperson, director, and CEO. All three contribute to discussions and vote on decisions at board meetings. The chairperson runs board meetings and ensures that discussions are fair, equal, and productive. The director and the CEO represent the shareholders.

Ensure you have an odd number of board seats. Since boards are decision-making entities, a typical board of directors has an odd number of members to prevent a tied vote and decision deadlocks. There can be as many directors on your board as you’d like, with a minimum of three people recommended to avoid tied votes.

2. Identify your company’s skill gaps

Your board can supplement your expertise where your skillset is lacking. This support can include aspects like engineering, sales, marketing, design, operations, and growth.

3. Align personalities and values

Find directors who work like you do, value what your company values, and whose company you enjoy. Make sure you trust them enough to genuinely want to work with them through your startup’s big questions.

A startup board’s main responsibilities

Once assembled, here’s what to expect of your board of directors.

  • Internal rules, processes, and policies. Boards help companies figure out how to operate on macro levels.
  • Choice in leadership. Executive hiring and compensation are determined by the board.
  • Capital allocation and fundraising decisions. Your board will help your startup make decisions on this process.
  • Judgment and emotional support to the CEO. Being a CEO can be isolating.
  • Proven connections with other companies, individuals, and resources.
  • Transparency and alignment. The board is also a form of integrity police for your corporate decisions.

Seed-stage boards

Corporations are legally required to have annual board meetings. At the seed stage, your board should be small — capping it at three people is often suggested. The first seats are typically filled by the founder/CEO, a high-level employee, and a non-employee investor.

Series A boards

At the Series A level, a small board still makes sense. Many startups at this stage are scaling and innovating simultaneously. You should structure your board with either three or five people.

Compensating board members

Board members, especially in the early stages of a company, are not usually monetarily compensated. Instead, compensation usually consists of equity and preferred stock options in the case of lead investors.

As your startup scales, your board will too. Board members can serve as trusted guides, helping to in-fill any gaps in subject matter expertise and experience, steer the company on the right trajectory, and make high-value decisions.