I often receive questions about why startups need a board of directors, what the board should do, who should be on the board, and how the startup founders can get the most from the board. Over the next few weeks, I’ll be rolling out a series of posts with my responses to these questions and my thoughts about the strategic and corporate governance of startups more generally.
Why Startups Have a Board of Directors
Startup boards provide governance, oversight, and strategic guidance. Forming a board is not optional for companies that choose to incorporate. In fact, in the incorporation process, the incorporator (generally one of the founders) submits the formation documents to the secretary of state in which the corporation will be organized and, in those documents, specifies who the original directors will be. The directors, then, approve the formation documents (including bylaws) and then approve the issuance of shares of the corporation to the founders (and any other initial shareholders). Technically, then, the initial board of directors must exist before the company can issue any equity, even to the founders.
Directors act as fiduciaries for all of the shareholders the corporation, ensuring that the actions that the company’s management takes are in the best interests of the shareholders. When a startup is first founded, the board will often consist of solely of the founders (or maybe the founders and one or two other supporters of the company), and so the founders will generally make all of the strategic decisions of the company . As the company grows and adds additional shareholders, either by granting equity to employees or by taking on investors, forming a broader and more effective board becomes essential. A well-functioning board can be a critical asset for the founders, helping them navigate complex decisions, avoid missteps, and build long-term value for the shareholders.
In general, the board’s core responsibilities include appointing and evaluating the CEO, approving major corporate actions (like financings, mergers, or the adoption of or changes to an equity incentive plan), and ensuring the company is being run in a way that aligns with the interests of shareholders. In early-stage startups, the board often serves as a close advisor and thought partner to the founding team, providing experience and perspective that complements the team’s operational focus.
While corporate governance may seem like a formality, a strong board can be a real competitive advantage—bringing credibility, connections, and accountability to the table. In future posts, I’m going to explore in more depth what startup boards do, how they operate, and how founders can get the most from their board as their startup scales. Stay tuned!