How to Set Up Your First Board of Directors

Board members of entrepreneurial companies can be an incredible asset or a time-wasting liability.  For entrepreneurs who are looking to get the most out of the company’s operating resources, this is a big gap to overcome!

I’m more hopeful about companies achieving their goals when founding entrepreneurs proactively increase board member engagement, rather than lessen it. Unfortunately, this attitude of maximum director engagement doesn’t come easily to most company founders.

Why the resistance?  I find that founders would rather not shine attention on their company’s shortcomings. Founders also assume that they should have all the right answers, even if the problem is entirely new to them. And of course, founders worry about losing control of the company’s they love. If board members see too much weakness, founders worry that they will be replaced by some corporate know-it-all.

Despite these reservations, taking the time to attract great board members can extend the reach of any privately-held business in a low-cost way.  When acting in a collaborative way, boards can bring focus to entrepreneurs who have too many ideas as well as help reinvent businesses that have grown stale and narrow.

So how can you create a high-functioning board of directors?  Here are my recommendations.

Don’t wait for funding. It’s true that many angel investment clubs and certainly venture capital funds have the right to name one or more board members as a condition of investment.  But why wait for that good day?  Get the board boost going now.

Start by thinking through what skills or knowledge you lack most.  Fill those gaps first. Ideally, each board member should bring a different discipline or area of expertise to board level discussions.  Favor “independent” board members who have stellar business reputations and ethics.  No best friends or family members!

Also shoot for “been-there done-that” expertise.  If you are a startup organization, the Fortune 1000 executive who has never worked in a nimble, cash-starved business may not offer relevant help during a company’s first years in business.

Seek experience.  Experienced board members have served on other boards before and understand that their job is not to micro-manage entrepreneurs.  Experienced board members don’t overwhelm board discussions or try to prove that they are the smartest person in the room.  They understand nuance, strategy and how to ask tough questions without demoralizing the management team.

The National Association of Corporate Directors (“NACD”) maintains a membership directory of individuals who serve on public company and private company boards.  NACD-designated “fellows” (like me) have participated in education-oriented conferences on good governance, audit, compensation, risk management, crisis management and other issues.

Seek additional diversity.  Target Corp. has a smart approach to board diversity.  Its board is comprised of experienced board members who are representative of their customer base.  Similarly, if you sell to women and minority customers, put women and minorities on your board.  If you sell most of your products in international markets, select at least one non-U.S. board member.

Understand board member risks. Most first-time entrepreneurs don't appreciate that board members of privately-held companies assume certain financial liabilities for management screw ups.  For example, if a company fails to pay payroll tax obligations, board members can be held liable for the tax shortfall including interest and penalties.

For this reason, experienced board members often turn down board seats in companies with unreliable accounting practices.  Board members have to trust management to pay attention to the right details.

Meet with purpose. Entrepreneurs have tremendous power to get a lot of value out of individual board members. If you want the full attention of board members, don’t allow board members to check email, Twitter or sports scores during board meetings. Be clear about what you want to accomplish at board meetings and discuss the agenda in advance with at least one independent board member.  Organize other ways to tap board members outside of board meetings, too.

Share the good and the bad. Great board members for startup companies already understand that companies face considerable unforeseen problems. What they don't accept is any delay in learning about serious company problems from management.

Entrepreneurs who promise to deliver the bad news just as fast as the good news in an honest way will be able to get great board members to help them overcome obstacles and achieve their goals with confidence.

Susan Schreter is a veteran of the venture finance community and entrepreneurship educator.  For more easy action steps on how to attract investors and make any new business idea bigger, better and more profitable, it’s time to  Start On Purpose .  Follow Susan @StartOnPurpose