Startup Board 101: A guide for founders
This edition of Inside the Boardroom is a sneak preview of our Startup Board Explainer: a guide for founders about what it means to have a board and be a director, and how the board’s role evolves as you scale, to serve your startup best.
LUNA’s Startup Board Explainer goes through the 101 of:
Why you need a board;
The purpose of the board;
Where the board sits in your startup company’s structure;
Legal considerations to be conscious of as a director; and,
How the board’s role evolves as you scale.
Find 1 - 4 below, or download the full guide for founders here.
If you want to know more, and support yourself in the progression from founder to CEO, find out when our next Startup Board Course kicks off and apply to join us here.
STARTUP BOARD 101: A GUIDE FOR FOUNDERS
1. WHAT IS A BOARD AND WHY DO YOU NEED ONE?
Legislation
Legislation, namely the Corporations Act, plus your company documents (such as a company Constitution if you have one, and your Shareholders Agreement if you have one) will require you to have at least 1 director, which effectively constitutes your ‘board’.
2. PURPOSE OF THE BOARD
‘Boards of directors are responsible for the governance of their companies. The responsibilities of the board include:
setting the company’s strategic aims;
providing the leadership to put them into effect;
supervising the management of the business; and
reporting to shareholders on their stewardship.
The board’s actions are subject to laws, regulations and the shareholders. The shareholders’ role in governance is to appoint the directors and to satisfy themselves that an appropriate governance structure is in place.’ (1)
3. WHERE THE BOARD ‘SITS’ IN RELATION TO YOUR COMPANY AND INVESTORS (SHAREHOLDERS):
In summary:
The CEO is ordinarily also a director on the board, and in their role as CEO, the CEO effectively reports to the board. The board is responsible for ensuring the CEO is the right leader for the business;
The board stewards the company on behalf of and effectively reports to the shareholders of the company. As noted above, the directors are appointed by the shareholders, subject to any terms in your Constitution or Shareholders Agreement, for example; and,
If you are a CEO/Founder and a director and a shareholder, you will wear all of these hats, and they will have different implications at different times.
4. SOME OF THE LEGAL REQUIREMENTS TO BE CONSCIOUS OF AS A DIRECTOR
As a director, you have a Fiduciary Duty to the company
A relationship between a director and the company is fiduciary in nature, which means one party (the fiduciary – that’s you as director) is placed in a position of trust and confidence in relation to another party (that’s the company/shareholders), and acts on behalf of that party (or in their interests) in some way.
To enable this relationship, the law imposes a range of specific duties and obligations on directors, referred to as directors’ duties. Some of the key directors’ duties (2) are below, noting there are more than these too! As a director, you must do the below, and be able to substantiate this as well:
Act with reasonable care and diligence;
Act in good faith, in the best interests of the company, and for proper purpose;
Avoid conflicts of interest;
Not improperly using your position or information gained as a director; and,
Prevent insolvent trading.
Board and company administration is the responsibility of the directors
All the requirements of the company are ultimately the responsibility of the directors, such as monitoring company solvency (which is ensuring that the company has appropriate funds to pay its debts as and when they are due), tax and financial statement preparation and lodgements, and employee obligations, for example.
To enable the company and directors to meet these obligations and discharge their duties, the company needs to perform certain requirements at the board (and management) level. These can include:
Having board meetings at an appropriate cadence for your stage;
Developing an agenda and ‘Board Pack’ for directors for each meeting, with sufficient information within to support informed decision making;
Taking minutes of meetings; and,
Ensuring decisions that need to be made by the board are appropriately documented and voted upon.
This as a practice is typically referred to as ‘board hygiene’, and while the legal obligations and requirements for ‘board hygiene’ are always there from the day you incorporate as a company, board hygiene as a practice becomes more important and demanding as you scale.
5. HOW THE BOARD’S ROLE EVOLVES AS YOU SCALE
… To access this section and the full guide, download it here.
(1). Cadbury Report, UK, 1992: https://www.frc.org.uk/getattachment/9c19ea6f-bcc7-434c-b481-f2e29c1c271a/The-Financial-Aspects-of-Corporate-Governance-(the-Cadbury-Code).pdf
(2). Note that there are many other specific duties and responsibilities of Directors – including under work, health and safety laws and modern slavery laws. This is a high level summary only.
Whether you’re a founder or in the management team of a startup, if you want to know more about the ongoing management team <> board <> investor relationships and how they can efficiently and supportively work together over the lifecycle of your startup, we talk about all of this and more in our Startup Board Course - find out more here.
