Directors – How Many and Who

You are starting a company.  Let’s assume you want to raise some $$ from outside investors and/or that you think you might want to grant equity interests to employees in the future.  Based on either of these assumptions, a corporation (not a LLC) is the right entity choice for you.  Likely it will be a corporation set up in Delaware (typically referred to a DE corp).

Any corporation requires shareholders and directors.  Shareholders elect directors and directors elect officers.  A big question that company founders often have is “how many directors do I need?”  A related question is “who makes a good director”.  Here are some basic nuts and bolts answers.

1.  When you set up the DE corp initially, it is common for all the founders, assuming near equal ownership, to be board members.  So let’s go with 3 founders and so 3 directors (same people) initially.

2.  After the company raises its first equity round, to me the ideal board composition is 2 founders (with the CEO founder definitely on the board), 1 investor rep and 1 independent.  Ideally the independent director is sourced by the founders, but agreed to by everyone.  See my earlier post here.  If the independent is not found for a while after the investment closes, that is fine.  Importantly, one of the founders will be exiting the board at this point.  Typically the CEO and tech founder remain on the board, but there is no hard and fast rule on the tech founder (there is on the CEO).

3.  After the company raises its second equity round and a new investor joins the mix, the ideal board composition for me is 1 or 2 founders (with the CEO founder definitely on the board), 2 investor reps and 1 or 2 independents.  So between 4 – 6 members.  An even number is fine – if votes are not unanimous at a startup it is a signal of big problems.  So, here again, you might have a founder exiting the board.

4.  After the company raises yet additional capital it is likely that the board will get to 7 members assuming another new investor leading the round.  I would highly encourage to cap the number of directors at 7 going forward.  It gets to be an unwieldy job for the CEO to manage all the board members actively and appropriately.  Smaller is often better.  In this configuration, for example, you could have only 6 board members with the founder CEO, 3 investor reps and 2 independents.  Add another founder and you are at 7.

5.  In terms of who, let’s focus on the independents.  In my experience, the best independents are those directors that have deep operational or sales experience in the company’s space.  If you get a solid level of engagement, an independent director can end up like a fabulous extra set of hands.  They can help solve problems, makes intros, etc.  In my experience, outside board members with deep technical expertise are less valuable assuming the inside tech team is good.   Pick independents based on what you “need” to round out skill sets.

Those are my nutshell rules of thumb.  Board politics deserve a separate post for another day.  But do note that the more board members, the more politics that come into play……unfortunately.

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