What Does a Board of Directors Do Anyway?

If you watched enough decent 1980’s movies, you’ve undoubtedly seen your fair share of manufactured and overly dramatic scenes depicting a board of directors’ meeting. It typically comes into play to demonstrate the evil chairman of the board as he launches his evil plan to take over the company or pollute the drinking water of a group of adorable koalas, or something. Or, things are about to go terribly wrong and at the last minute someone bursts through the double doors into the huge room and delivers some impassioned speech to a bunch of old people sitting around a giant table even older than any of the people sitting around it.

That’s not how this works. That’s not how any of this works!

Here’s the thing - the real life working of a board of directors and board meetings are almost nothing like the movies. Maybe in ginormous, publicly traded companies, you might get some of that drama happening from time to time. But under normal circumstances, and if you’re a startup (which is probably how you found my site anyway) you will not be doing ANYTHING like what they show in the movies. 

So, what does a board do and what are you supposed to do at meetings? Let’s start simple and get more complex as we go along.

What does a board of directors do?

To put it in the most simplest of terms, a board of directors is responsible for determining the direction of the company. Under that simple definition there can be a lot of tasks involved in directing a company. The responsibilities of the board can range from approval of new product or service lines, coordinating and determining launch dates, and even evaluating the quality of the job of the officers who are tasked with the actual day to day operations of the company. 

The board is also responsible for guiding the company as it relates to its financing. All decisions regarding whether or not to seek financing, what type of financing, and the approval of the terms are all matters determined by the board. Want to take out a loan? That’s a board decision. Want to take a $2 million investment from a VC in exchange for 10% of the company? That’s a board decision.

Who sits on the board?

In most startups, the founders sit on the board of directors initially. Depending on the structure of responsibilities and equity split of the company, there are cases where when one founder owns a super majority of equity and the other co-founder is only really a “founder” in name, sometimes they don’t get a board seat. What is important to remember is that most companies utilize a somewhat standard set of bylaws when forming the company, and this standard bylaws setup gives each board member a single vote. This also usually sets the requirement that most decisions require a simple majority (i.e. 51%), while other more serious decisions require a super majority (i.e. 2/3 or greater). So, while the company may be divided unequally in equity distributions, if you have four or five co-founders who all have board seats, they all have equal say when sitting around that ‘table’.

As your company grows, you may find yourself sharing your board with more people than just your co-founders. Very often, early stage investors who put in relatively large sums of money require a board seat as part of their investment. They want to be in on the decision making process as the company is growing and developing in order to be certain their investment won’t disappear through a series of bad decisions by inexperienced business owners. You might also find an advisor sitting on your board if you choose to give them a board seat as part of their compensation for being an advisor, though this is much less common than investors having board seats. 

But with all of these people sitting around the ‘table’ (seriously, there’s totally not a table), how do we prevent them from making self-serving decisions? What’s to stop the minority shareholders from voting against decisions that benefit the majority shareholders more, or an investor voting against taking on a new investment that will dilute their ownership and cut into their eventual profit?

Enter fiduciary duty.

While most states have these requirements, for certain if we’re talking about a Delaware company, there’s an element of the law called fiduciary duty. While entire law school courses are taught about this topic, I’m going to try and simplify it for you here. Fiduciary duty basically mandates that every board member is required to act in the best interests of the company, at all times, when making decisions for the company. Fiduciary duties also extend further and into their outside lives. It prevents that investor from voting against an otherwise great idea of taking on a new investor, which would be perfect for the company, simply because it would personally harm that particular board member. It also stops board members from competing with the company or profiting off of information he knows exists. If they learn the company plans to pivot into a new space, they can’t take that knowledge to another company and invest in it or share information in order to personally profit. 

Failure to practice proper fiduciary duty can lead to shareholder lawsuits against the company. Even in a small, young startup, you have shareholders in the form of the founders, contractors who received stock for work, employees who may have exercised options, and of course the investors. None of them will be happy to find out board members are screwing them out of potential profits in order to line their own pockets or protect themselves.

Now what about those meetings?

OK, I said it a couple of times so far, but for real - there’s no table. Well, maybe when IBM is having a board meeting, there’s a big, fancy table. But for Startup, Inc., there’s no table. There’s usually no set schedule of bi-annual meetings, and to be perfectly honest, there probably aren’t any actual meetings. For many early stage startups, and for almost all pre-seed investment startups, the meetings happen frequently and often, and are never called board meetings. The average startup plays it pretty loosely and they simply talk over coffee or send messages via Slack, and when a decision is made they can sign a board resolution remotely which authorizes whatever decision they made. As the company grows in sophistication, things usually get a little more structured since investors will want to sit in on these meetings and won’t be privy to, or have time to follow along with the back and forth over email or text. They often want an actual scheduled meeting that takes place via phone or video conferencing in order to discuss the direction of the company. 

And what do you do at a meeting? Assuming we’re talking about a real meeting, you’ll generally have an agenda of key points to discuss that relate to whatever issues the company is facing, and important things that need to be decided in order to move forward and grow. While the bylaws will clearly state requirements to providing notice of a meeting, how it should be conducted, who runs the meeting, and other details, the overall tone of your company will dictate how strict or loose you keep things. Regardless of how your company chooses to run meetings, what’s really important is that you are doing things in a way everyone agrees to and aren’t taking actions in secret or without the knowledge and approval of the majority of directors. That’s usually never a good idea.

I tried to hit the major points of a board of directors, but like with most things involving business and the law, there are way more little details than is possible to cover in a blog post. But, I think this is a good start and should have answered the biggest and most pressing questions most people have about a board of directors. As always, if you have questions, feel free to reach out.

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