Every entrepreneur knows a new company needs a board of directors — but they may not understand the nuts and bolts of how one works.
At a workshop hosted by Cure and Orrick, Herrington & Sutcliffe LLP, Stephen Thau, JD, answered common questions about putting in place a board of directors and anticipating how it will function as a startup grows. Thau co-chairs the Life Sciences Group at Orrick and is a partner in the firm's Technology Companies Group, providing strategic advice to new and established life science, medical device and other technology to help them navigate their milestones.
Here are Thau's 8 boardroom basics:
1. I’m starting a company. When should I start thinking about the board?
Right away. When you create the company, one of the first things the company does is appoint a board. You'll need to have a board set up initially, and then you want to anticipate growing the board and thinking about the types of people to add.
2. What does a board do?
A company’s board of directors sets strategy, allocates resources, determines the budget and hires the CEO, among other supervisory responsibilities.
3. Who should be on the board?
Typically, when you start a company, you start with a small board, usually the founder or founders. It's generally a lot easier to add people than to remove people from a board. I’ve had situations where a Nobel Prize winner or somebody with tremendous industry experience who adds cachet to the company wants to be on the board. That’s good. But in general, you want to be conservative on allocating board seats early on. The board will expand in a financing round because investors will want to be on the board.
4. How often do boards meet?
Boards usually meet on a quarterly basis, if not more often. It's not unusual for an early stage company that's just raised a seed or a Series A round to have bimonthly or even monthly board meetings. Typically, bylaws will provide for that.
A typical board meeting requires advance notice, usually 24 to 48 hours, especially for a meeting at which formal corporate actions can occur. These meetings also need a quorum of directors, which is usually a majority of the total number of people on the board. In the state of Delaware, boards can also act by written consent.
5. What happens at a board meeting?
Typically, the CEO will run the meeting. Investors will expect an update on the business, an update on people, organizational structure, any strategic matters that are coming up like fundraising, in-licensing technology, if there are current programs and developments, how the clinical trial is going. They might ask, should we devote resources to exploring developing this drug in another indication? Then there the administrative housekeeping aspects, like options. Options require formal board approval.
6. What materials should I circulate in advance of a board meeting?
Board presentations typically are prepared and circulated to the board ahead of time. Investors particularly appreciate that. Most times, I counsel CEOs to make sure to pre-wire any important topics with the board members in advance of the meeting. Surprise is never good. One of my rules of organizational behavior is to never call for a vote until you know the outcome of the vote. You want to try to do that as much as you can, because board presentations and minutes can be used in litigation.
7. Why are minutes of the board meeting important?
There needs to be a written record of what the board did, for a couple reasons. One is to preserve the formality of the corporate structure and the entity for limited liability purposes. Two, is to just have a clearly documented record of what the board decided.
The accountants can look at it, investors can look at it during due diligence. Three, board minutes also show that the board is exercising its fiduciary duty. If there is ever litigation around whether the board did something properly, one of the sources in that litigation is the board minutes. There's an art to drafting board minutes in a way to make them most useful for the company in the litigation context.
8. How do you compensate board members?
Board members come in different categories. Board members who are affiliated with a venture fund and are serving on the board because that's their job at the venture fund, typically don't get separate compensation from the company. If you have your CEO on the board, they are typically not getting separate compensation for being on the board. But if you have an independent director who is an industry person or an academic person or a finance person who is serving on the board and is not an employee and not affiliated with a fund, they will typically get compensation. Oftentimes it's equity, and depending on the maturity of the company, there may also be a cash component.