In the early stages of a startup, the founders usually own most of the shares. This means that the need for a board is not a priority. However, as a startup grows, investors might start to ask for more governance, which usually means appointing a more experienced advisor to the board. At this point, you might want to appoint an NED or Board Advisor, in order to have impartial advisors to balance out the investor’s interests.
Appointing a chairperson (who is really just a director, but who also arranges the board meetings and the agenda for each meeting, is another option. Having a strong board with expert advisors is sometimes seen as valuable (at least to investors) as they can help with a range of issues which are relevant to the company.
If you are bringing on new directors and advisors, you can create all the legal contracts you need to make it official on SeedLegals, including a Founders Service Agreement, Advisor Agreement, Appointment of Non-Executive Director (NED) and Consultancy Agreement, among others.
Here's a list of the various board roles which exist and their respective responsibilities:
Executive Directors are employees of the company, who are also directors. They are often the founders, and have the power to influence the strategy and decision-making of a business. Directors are not free to act alone. They are personally liable for any malpractice of the company and must abide by the following seven duties under the Companies Act 2006:
Act within powers
Promote the success of the company
Exercise independent judgment
Exercise reasonable care, skill and diligence
Avoid conflicts of interest (a “conflict situation”)
Not accept benefits from third parties
Declare interests in proposed or existing transactions or arrangements with the company
Non-Executive Directors (NEDs)
NEDs are not employees of the company (that would make them executive directors). They are meant to be impartial and, at least in public companies, have no interest or involvement in the company. As a result, they have the ability to look at any issues facing the founding team from a fresh perspective, prioritise which to tackle first, and make any decisions in the interest of the business rather than for personal gain.
Being impartial means your NED typically won't be an employee or manager of the company, although it is not uncommon for the NED to hold shares or share options in the company. As a start up, you want an advisor who is incentivised to help make the company a success, and giving them shares or share options is one way to do that.
So be aware of the trade-offs between the reasons for wanting an NED on your board, the value they bring, their duties and responsibilities, and how they're rewarded (if they are rewarded) for being a board member.
NEDs are usually experienced professionals who have a wealth of experience in the industry, gained over a number of years. They are valuable to the board because they often have useful contacts and connections that can help founders develop their business.
Finally, NEDs can bring credibility to your company, since having a well-respected business leader on the board brings comfort to investors and increases the value of your company in the eyes of stakeholders.
Similarly to Executive Directors, NEDs must act according to the Directors’ Duties.
Investor Directors are added as board members as part of their agreeing to invest in the company - i.e. they request a board seat as a condition of investing. They are also subject to the same duties under the Companies Act as Executive and Non-Executive Directors.
The lead investor(s) in a funding round will often request a board position in order to protect their investment. If the board only consists of a Founder and Investor Director, this can be a dangerous situation as the investor will make decisions which are in their own interests instead of in the interests of the company. To counterbalance this possibility, appointing an NED can provide your board with an impartial decision-maker who can help keep the Investor Director in check.
Another issue you might encounter if you have an Investor Director could be that they might try to negotiate high fees for being a director. This can be an issue if they do not contribute very much in the actual board meetings.
Nevertheless, paying the Investor Director a fee is common practice, especially if the investor does not receive much of a salary. They may ask, as a condition of investing in the funding round, to be paid a director fee of anywhere from £5,000 to £20,000 per year as a director fee. If you just raised £5M then that annual payment, painful as it is, is a small part of the overall investment. But if an SEIS or EIS fund invests £200K and then asks for a board seat and to be paid £10K per year, over 3 years that's a not insubstantial fraction of their investment going right back them... So try to negotiate the director fee down to, ideally, £5,000 per year, and limit it to a maximum of, say, 3 years.
The chairperson’s role is to ensure that the board is effective in its task of implementing the company’s direction and strategy. The board appoints the chairperson, who may work full-time or part-time, and is subject to the same duties under the Companies Act as any other director. The chairperson’s main functions are to:
represent the company and promote its goals and policies externally.
take the chair at general meetings and board meetings. This involves deciding which issues to tackle and in what order, ensuring that the information under discussion is accurate, making sure that the different Directors are included in the discussion, steering the conversation to a consensus and summing up any decisions taken.
manage the structure of the board
ensure good communication with shareholders and other stakeholders.
An Advisor can attend board meetings, but is not a director. Unlike a Consultant, an Advisor does not need to deliver a tangible product or solution; they are just there to share expert advice. They can be employed at an hourly rate to share their knowledge and perspective on different issues.
A Board Observer might be a minority shareholder in the company, or an Investor who is looking to avoid the liabilities and risks of being a Director. Observers are allowed to participate in board meetings and to receive all information provided to members of the board, but are not allowed to vote on any issues brought by the board. A Board Observer is not a Director and therefore cannot be subject to the Directors’ Duties.