When is the Right Time to Establish a Board?

Starting a new business is an exciting endeavour filled with endless possibilities.

As entrepreneurs start on their journey, one important question often arises: when should a start-up business establish a board of directors? The decision to create a board is a pivotal one that can impact the company’s strategic direction, accountability, and long-term success.

In this Knowledge Base post, we explore the factors and considerations that can help you determine the optimum time for your start-up to establish a board of directors.

THE ROLE OF A BOARD

A board of directors plays a crucial role in guiding a company’s strategic decisions, overseeing its management, and protecting the interests of shareholders.

The primary responsibilities of a board of directors typically include the following:

• Strategic direction and setting company goals
• Hiring and evaluating the Chief Executive and (often) other top executives
• Approving key financial decisions, budgets, and major investments
• Ensuring compliance with legal and ethical standards
• Representing the interests of shareholders or stakeholders
• Providing industry expertise and connections
• Offering mentorship and guidance to the leadership team

Now, let’s search into the factors that can influence the timing of establishing a board for a start-up business.

1. BUSINESS STAGE AND GROWTH TRAJECTORY

The stage of your start-up plays a significant role in determining when to form a board. Start-ups typically progress through several stages, including ideation, seed, early-stage, growth, and expansion. The appropriate timing for a board may vary:

Early-stage: In the early stages, the focus is often on product development, market validation, and achieving initial revenue. A board may not be necessary at this point, as founders are still experimenting with the business model.

Growth stage: As your start-up begins to scale, attracting a board becomes more relevant. At this point, you may require guidance on scaling operations, managing finances, and strategic planning.

2. INVESTMENT NEEDS

The need for external funding can significantly impact the timing of establishing a board. If your start-up relies on external investments, investors may want a say in the company’s management and strategy.

Angel investors, venture capitalists, or institutional investors often require board seats as a condition of their investment.

• Angel and seed funding: At this early stage, you may not need a formal board but should establish a clear understanding of governance with your investors. An advisory board or informal advisors can be more suitable.
• Venture capital or institutional investment: When securing venture capital or institutional investments, a board is often required. In these cases, the board may be established at the point of funding.

3. COMPLEXITY

The complexity of your start-up’s operations can be a determinant in when to form a board.

A tech start-up with intricate technology and intellectual property may benefit from board expertise in intellectual property management, while a consumer goods start-up may have different priorities.

• Complex tech start-ups: Start-ups in technology or biotech industries may benefit from establishing a board earlier to navigate complex IP and regulatory issues.
• Simpler business models: Start-ups with straightforward business models may delay forming a board until they face growth challenges or need external funding.

4. LEVEL OF EXPERTISE AND EXPERIENCE

The founders’ backgrounds, skills, and experience also play a role in the decision to establish a board. If the founders lack experience in business management, corporate governance, or the industry, a board can offer valuable guidance and mentorship.

• Inexperienced founders: Founders with little business experience may benefit from forming a board sooner to compensate for their knowledge gaps.
• Experienced founders: If founders have prior successful entrepreneurial ventures and a solid business background, they may delay establishing a board until the company reaches a more advanced stage.

5. GOVERNANCE AND CORPORATE DECISION-MAKING

The governance and decision-making structure within the company is essential in determining the timing of forming a board. Some start-ups may choose to establish an advisory board or rely on informal advisors before creating a formal board of directors.

• Advisory board: An advisory board can provide guidance and expertise without the formal decision-making responsibilities of a board of directors. Start-ups may opt for an advisory board in the early stages.
• Formal board of directors: If the need for oversight and decision-making authority is clear, or if it is required by investors, a formal board of directors is the next step.

6. INDUSTRY-SPECIFIC CONSIDERATIONS

The industry in which your start-up operates can have unique considerations. For example, start-ups in highly regulated sectors, like healthcare, pharma, or financial services, may need to establish a board earlier to navigate regulatory requirements.

7. AVAILABILITY OF POTENTIAL BOARD MEMBERS

Establishing a board is not only about the right timing but also about finding the right people. Finding experienced, knowledgeable, and compatible board members can take time.

• Availability of suitable candidates: If you identify experienced and knowledgeable individuals who are willing to serve on your board, it may expedite the process.
• Recruitment challenges: If recruiting suitable board members takes time, you may need to wait until the right individuals are available.

8. STRATEGIC MILESTONES

Consider the strategic milestones and challenges that your start-up faces. A board can be especially valuable when addressing significant strategic decisions or facing critical challenges.

• Strategic inflection points: A board may be necessary when your start-up reaches critical strategic inflection points, such as international expansion, mergers and acquisitions, or entering new markets.

9. ALIGNMENT WITH VISION

Consider your long-term vision for the company. A board should align with your vision and goals, both in terms of growth and values.

• Long-term vision: Ensure that forming a board is in line with your vision for the company’s growth and direction.

10. LEGAL AND REGULATORY REQUIREMENTS

Lastly, be aware of any legal or regulatory requirements regarding boards of directors. In some jurisdictions or industries, specific regulations may dictate when and how a board must be established.

• Legal requirements: Comply with local legal requirements regarding the establishment of a board.