Situation: A small tech company’s Board of Directors is made up primarily of founders and advisors. The CEO wants to know how other companies structure their Boards. Concerns include increasing accountability of management, obtaining an objective view of company operations so to counteract group-think, and accessing opportunities for strategic alignment. How do you structure a small company Board?
Advice from the CEOs:
- In a small company, the fewer the number of board members and owners, the better. There are two considerations: control of the destiny of the company and complexity of the transaction in case of an investment or buy-out opportunity.
- It is important to differentiate major from minor shareholders, including incentive-based owners.
- What are the advantages of a Board of Directors?
- Sounding Board – a group that can help management evaluate product and market opportunities.
- Accountability – Board meetings provide an opportunity to assure that leadership and management are focusing on the best opportunities for the company.
- Exit – knowledge of the industry, ties and introductions to potential acquirers.
- Given new Federal regulations, the proper role of a Board has changed. Key responsibilities of Boards include:
- Oversight of Corporate Governance.
- Fiduciary Responsibility – to the shareholders.
- Work with local or regional experts on Board role and structure. Experts can provide introductions to potential Board members that fit the company’s needs.
- Good Board members will want Directors and Officers Insurance coverage.
- Consider developing an Advisory Board, to compliment a stronger Boards of Directors.
- Look at the key talents that the company is missing internally.
- Ask friends, business partners and associates who they know who can add these talents.
- Before kicking off a formal Advisory Board, start with informal discussions. Consider a facilitated dinner to share ideas.
- One company has eight outside advisors who each receive 1/8 of a percent of the shares of the company for three years of service. The share offer required for service may be a function of the eventual forecasted exit value of the company.
Special thanks to the late Bill Rusher for his insight and contribution to this discussion.