Does a Startup Company Need a Board of Directors?

When startups are just getting off the ground, their founders are usually focused on building products, finding customers, and securing funding. In the flurry of activity, one governance question often arises: should the startup establish a board of directors? While the answer depends on various factors, this decision can profoundly impact the company’s growth trajectory, strategic direction, and long-term sustainability. Let’s examine the role of a board of directors in a startup and the considerations founders should weigh when deciding whether to establish one. I also want to ask the ultimate question; which is more valuable to a startup, a board of directors or an advisory board?

The Role of a Board of Directors in a Startup

A board of directors serves as the governing body of a company, responsible for ensuring that the organization adheres to its mission, follows legal and ethical guidelines, and remains financially sound. In many cases, the board provides strategic oversight, sets company policies, and holds the executive team accountable.

For a startup, a board of directors can offer the following benefits:

Guidance and Expertise: Seasoned board members bring experience in areas like finance, product development, scaling, and fundraising, helping guide founders through challenges.
Accountability and Governance: By providing accountability, a board can encourage transparency and adherence to best practices, which is valuable for startups navigating rapid growth. Getting governance right by setting up processes early on, is a winning formula for startups. The opposite can have dire consequences for the company.
Credibility: Having a strong board can boost the startup’s credibility with investors, partners, and potential hires, signaling stability and commitment to structured growth.
Networking and Fundraising: Experienced board members often bring their own networks, potentially leading to further investment or partnership opportunities.

When a Startup Needs a Board of Directors

In some cases, startups are required to establish a board, while in others, it’s optional. Below are key scenarios in which a startup might benefit from – or be required to have – a board of directors:

When Registering a Company: In many jurisdictions across the US, startups that incorporate as a C Corporation (rather than as an LLC, for example) are required to have a board of directors. In most countries, as soon as you register a company, you need to set up a board of directors. It may only be one director but someone needs to take responsibility for governance.
Raising Venture Capital: Once a startup raises venture capital, investors often require a board seat to influence decisions that affect their investment. In these cases, forming a board is non-negotiable, and it will include both investor and founder representation.
Company Size and Complexity: As a startup grows in size and operational complexity, it faces more intricate strategic decisions. A board can provide critical oversight, helping founders manage resources, comply with regulations, and navigate high-stakes growth decisions.
External Accountability: Having a board promotes accountability, which is particularly important for startups with substantial funding or operating in regulated industries (like healthcare or fintech) where compliance and ethical considerations are essential.

When a Startup Might Not Need a Formal Board

In certain cases, a formal board of directors may be premature, or even counterproductive. Here are situations where a board might not be necessary yet:

Early-Stage Bootstrapping: For startups that are self-funded or bootstrapped, a board of directors may not be necessary, as these businesses don’t have outside investors to satisfy. In these cases, founders often choose to work with an advisory board, which is a more flexible, less formal arrangement than a board of directors.
Small, Agile Teams: If a startup is still a small, tight-knit team working on proof of concept, adding a formal board structure could add unnecessary layers of oversight and slow down decision-making.
Founder-Led Decision-Making: In the early stages, many founders prefer to maintain as much control as possible, prioritizing agility over formal oversight. In these instances, the founders can create an advisory board for input and guidance without the constraints that come with a formal board.

The Advisory Board Alternative

For startups that are not ready to establish a formal board of directors but still want access to expertise and advice, an advisory board can be a valuable alternative. Advisory boards consist of experienced individuals who provide insights and guidance without the legal or fiduciary responsibilities that come with being a board director. This allows startups to leverage expertise in areas like technology, operations, or go-to-market strategy without sacrificing control.

Establishing a Board: Tips for Founders

If a startup decides to establish a board, the following steps can help make the most of it:

Choose Diverse Members: Seek board members with diverse skill sets and backgrounds that complement the executive team. This might include expertise in areas like finance, product development, legal, or industry-specific knowledge.
Set Clear Expectations: Define the role of each board member, and establish clear goals for how the board will support the company. Decide on the level of involvement you expect and set a cadence for meetings.
Find a Balance Between Advisors and Directors: If a startup has both a board of directors and an advisory board, it’s important to differentiate their roles. Advisory boards should provide expertise without crossing into governance, while the board of directors should focus on oversight and accountability.
Create a Productive Dynamic: Founders and board members need to work collaboratively, with mutual respect and trust. A productive dynamic allows the board to challenge the founders constructively, leading to better outcomes for the company.

Balancing Independence and Oversight

While a board of directors can be incredibly valuable, it’s essential to balance oversight with the flexibility needed in a startup environment. This balance often evolves as the startup matures. Early on, founders may retain more control, but as the company scales and attracts more capital, the board’s role will likely grow in importance.

So? Should Your Startup Have a Board of Directors?

Whether or not a startup should have a board of directors depends on factors like company stage, funding, complexity, and the founders’ vision for growth. For many early-stage startups, a formal board may be unnecessary, and an advisory board may suffice. However, as the company scales, a board of directors can become a critical asset in steering the company toward sustainable growth and responsible governance.

Ultimately, establishing a board is a strategic decision that should align with the startup’s goals and the founders’ long-term vision. Founders who choose to form a board early can leverage its benefits – guidance, accountability, and credibility – while keeping their startup’s agile spirit alive.

How NED Careers Can Support Your Startup?

At NED Careers, we specialize in helping startups build the ideal board to support their growth. Whether your company requires a formal board of directors with deep governance and oversight expertise or an advisory board to provide hands-on, practical guidance, we have a network of highly qualified professionals ready to assist. Through our Board Placement Program, we connect you with seasoned board members from around the world and across diverse industries, all eager to help drive your startup toward lasting success. Email us at info@nedcareers.com to see how we can help your startup.