Initial Board Composition

Start-ups often create a board of directors when they raise funds. The initial board composition is usually one or two investor representatives and one or two founders. This is a good start, but far from ideal.

Having board members that represent the investors is obviously a good idea. But remember, the board should represent all shareholders, not just investors. Typically, investors will own a minority stake in early stage companies, as little as 20% sometimes. The remainder is owned by the founders and other "common stock" shareholders, such as employees and advisors. Founders are normally good representatives for common shareholders, as they often own the majority of the common stock. Yet this is far from perfect. A founding CEO, for example, needs to wear two very different hats as a board member: his "management" hat and his "shareholder representative" hat. This is not always easy. Additionally, the interests of small shareholders are not always aligned with those of the founders.

So what to do? One approach that I have seen work very well is to add one or two "independent" directors to the board. Ideally, these members would bring industry specific expertise to the company, and receive some common stock options as compensation. Their interests should thus be aligned with those of the majority of the shareholders.