When Clarence Bethea, the founder of Upsie, started adding board members this year, he chose ones who would add value to his burgeoning startup.
Now in its third year, the Minneapolis-based early-stage startup, which provides retail warranty products and competes with big box retailers, has raised $2.1 million from six venture capital firms and angel investors.
While raising capital remains crucial to the success of a startup, the addition of board members is a step that must be approached carefully. Simply adding advisors, mentors or even friends is a misstep, which can increase stress levels and cause friction.
The addition of a board moves a startup further along the path to profitability, but it is also about creating governance and structure around the company, as well as advising founders on how to scale a business and raise money at a larger level, Bethea says.
“Board members help the company move forward traditionally, like stakeholders do,” Bethea says. “They can add value, and you should be picking ones who can help move the company forward outside of a check.”
In January, three people from the venture capital firms that invested in Upsie joined the board, which also includes Bethea. When startups are in the seed or early-stage level, they need to add people to the board who are also investors and industry experts.
“Our board members all have had successful exits in startups,” he shares.
Deciding when to add board members is not scientific, and founders don’t have a roadmap to follow, such as after the sale of their first 1,000 items or obtaining their Series A funding. Launching a board too early can be problematic and unnecessary, as founders should be seeking funding or acquiring customers.
“Stay away from boards early on because you should concentrate on hustling,” Bethea says.
Many startups will add a board member as they complete a round of fundraising, says Thomas Wisniewski, a managing partner at Newark Venture Partners in Newark, N.J, a $50 million venture fund and accelerator which has made 46 investments in the past two years.
Companies should strongly consider adding board members once they raise over $1 million, says Henry Yoshida, CEO of Rocket Dollar, an Austin, Texas-based self-directed IRA and solo 401(k) provider, and founder of two other companies.
“At this point, the business has taken on stakeholders who have significant financial stakes in the company,” he says.
Companies typically seek out people from their investor pool to be on the board, but it needs to be a good fit, like in a marriage or friendship, explains Wisniewski.
“Some investors don’t want to be that involved, but others want to be rewarded with a title or be acknowledged for their influence or value,” he says.
An early board member should also be someone who has expertise in the startup’s industry, says Yoshida.
“I look for someone who has a skill that is very pertinent to determining the early success of a startup,” he says. “If it is a business-to-consumer company, I would look for someone who is strong in customer acquisition or, even better, has been successful in building, scaling and exiting a prior B2C business.”
Board members who don’t have startup experience are typically not a good fit, especially during the early stages, says Simon Mak, associate director and a professor of entrepreneurship at the Cox School of Business at Southern Methodist University in Dallas.
In addition to including the founder, a startup should strive to have a total of three board members during the early stages of Series A and B fundraising, and increase it to five after another seed round, says Wisniewski.
“Typically a seed investor can have one seat,” he shares. “The founder appoints two people and maintains control as the money goes up. In the next stage, one board member could be swapped out, or you can add two more people who are investors or strategic, for a total of five members.”
While having seven board members can be acceptable, it can be too unwieldy and harder to achieve a quorum, Wisniewski says.
“Anytime new money comes in, there is a reset to the board,” he says. “The best board members have the time, willingness and skills to help the startup and show up for board meetings.”
Founders need to be cautious when they add board members, since they can be crucial to the growth of a company. Allowing an investor to have a seat on the board too quickly can be problematic, says Yoshida.
“I see this a lot, and, although it is likely necessary at later stages, I believe an entrepreneur is better served with a ‘skillset-centered’ board member in the early stages, versus an investor board member,” he says.
Startup founders need to be conscious of only asking people who are beneficial to the business, says Bethea.
“Be careful of the hangers-on or having people around who are not helpful,” he says.
Advisors and mentors should not always be viewed as being potential board members, says Yoshida. Board members have a fiduciary responsibility and duty to act in the best interests of the overall company and its stakeholders, while an advisor or mentor usually focuses on key aspects of the business, such as entrepreneur coaching or pricing strategy.
Simply adding people to the board with noteworthy backgrounds, who are well known or have clout, can wind up being a bad choice because it can create inequities and strife.
“You need someone who fits your working style and does not have an agenda,” says Wisniewski.
Board terms tend to last two years with a vesting schedule commensurate with that time period, so making sure the person will be a good match with your team is vital, said Yoshida. In the early stages, “somewhere in the neighborhood of 0.25 percent to 1 percent is reasonable with no cash compensation,” he says.
Venture capital firms and other investors do place significance on the people who get a seat on the board.
“If you let investors structure your board too early and put seed-stage investors on it, it may detract from having later-stage potential investors even consider funding your company,” he says. “This is another common mistake I see amongst startup entrepreneurs."
Startup founders should wait until they are ready to add a board, says Grant Easterbrook, cofounder of Dream Forward 401(k), a New York-based low-cost 401(k) plan provider that was founded in 2015.
The company is waiting on the next round of fundraising for its valuation before it focuses on adding board members. In the meantime, the startup’s investors are already involved in major decisions, such as adding highly compensated employees.
“The pace of the startup world is different,” he says. “There is a lot of excitement in startups, and after the initial enthusiasm dies down, you have to decide whether it’s a good use of time at that point in your startup to get traction.”