Startup Boards, 2nd Edition

Chapter 3Legal Characteristics

A board is a legal construct with a well-defined set of requirements and responsibilities that fall under the term “corporate governance.” The board's formal duties include the legal concepts of duty of care and duty of loyalty. Boards also have smaller working groups, including audit, compensation, and nominating committees. While startup boards should be agile, it's useful to understand the formal requirements.

As a startup grows, the number of stakeholders increases. In the beginning, a startup has a small team, often just the founders. A few early employees are added and given stock options. The company raises a small amount of money, adding a few angel investors and possibly a VC. The company releases its product, gaining customers and suppliers who become stakeholders in the startup. More employees are added, and, if it's a venture-backed company, the company raises a VC round. Soon, you'll have a lot of divergent interests among the stakeholders. The board is ultimately responsible for navigating any conflicts that arise.

It's essential to put a structure in place early to ensure the board and leadership team minimize conflicts of interest and understand how to navigate them. Good boards invite counsel to participate in meetings to help the company follow best practices. While entrepreneurs are rightfully concerned about racking up legal fees in such situations, Eric Jensen (Cooley, Partner) states, “Just as a VC is focused on building ...