Choosing the initial board for a startup

When a company is formed, one of the first things it does is form the board of directors. This article provides a high-level overview of the board's role in a company, how directors on the board are elected and how the board changes as a company grows.

What does a board do?

The board is responsible for the management of a company’s business and affairs unless otherwise provided in the company’s charter or bylaws. Among other matters, the board is responsible for hiring and firing the company's CEO and approving major transactions, such as financings or a sale of the company. The board typically acts by majority vote, subject to any statutory, charter or contractual limitations. And all directors typically have an equal vote, regardless of the percentage of the company's equity that they own, though alternative director voting power can be outlined in the charter. When acting in their official capacity, all directors have a fiduciary duty to act in the best interests of the stockholders and the company, which may be in conflict with their own individual interests.

Who elects the board?

The board is elected by the stockholders of the company. Directors are elected by the holders of a majority of the company’s outstanding shares unless otherwise provided by the company’s charter, bylaws or by contract. As a result, in the absence of special provisions, the holders of a majority of the outstanding shares have the right to elect all directors. Accordingly, it is always critically important to understand which stockholders have the right to elect a majority of the board. Although directors cannot be "fired" in the sense of firing an employee, stockholders can remove directors and elect successor directors. In certain circumstances, however, the board itself may elect replacement directors removed by stockholders.

How many directors can be on the board?

Under Delaware law, there is no minimum number of directors. Other jurisdictions may have different requirements, so it is important to confirm statutory requirements. [1] Typically for most startups, the board is initially composed of the founders of the company. Although not required, if there are only one or two founders, it is not unusual for an additional person to be added to the initial board, typically an advisor or seed investor.

The board's role – at the beginning

In the early days, there is less of a need for formal board meetings as the founders are discussing the company's activities on an ongoing basis. If there is an advisor board member, such person is typically getting informal updates from the founders. At this stage, most actions that are required to be formally approved by the board are approved through a unanimous written consent signed by all board members (which can commonly be collected digitally).

In addition to making key decisions, one of the primary roles of the board is to act as a sounding board and provide advice and counsel to the CEO and senior management. This is particularly important for early-stage companies with first-time founders but remains true for mature companies with very experienced CEOs. In the absence of non-founder board members who can provide experienced perspectives and/or in the absence of formal board meetings, it is critical for founders of early-stage companies to obtain the same kind of advice that they would receive from an experienced board. In such situations, experienced legal and other advisors, although not board members, often provide assistance and advice regarding the decisions required of early-stage startups.

The board's role – during growth

The board typically evolves as the company matures. If there were multiple founders on the board from inception, in connection with a company's first institutional venture financing, it is common for founder participation on the board to be limited to two persons (and often that is conditioned on one of the two being the CEO of the company). This evolution of the board can be stressful for companies with multiple founders, as there can be a natural conflict as to who continues on the board (at least beyond the CEO). It is important for all founders to understand this natural evolution to help reduce the stress when changes happen. The same principle applies to other early non-founder board members. All board members need to understand that board composition changes over time; regardless of their level of contribution during their service on the board, most directors will eventually be replaced.

As additional venture capital rounds are completed, additional board seats are typically added for the lead investor in the new round. Such investors commonly negotiate provisions in the company’s charter and/or other financing documents that require investor approval of certain matters as well as provide the right of such investors to elect one or more directors by separate vote from the other shareholders. One or two seats are also typically added for independent directors over time. These seats are generally elected by a majority of the common and preferred, either voting together or separately.

Once a company raises outside financing, regular board meetings are generally scheduled. One of the CEO’s most important tasks is effectively managing board meetings.

_{[1] For California corporations, for example, the authorized board must be no less than two if there are two shareholders and three if there are three or more shareholders.}