Friday, July 29, 2011

Legal Insights for Entrepreneurs: Building Your Board of Directors

The following post is first in a several part series designed to help entrepreneurs navigate the sometimes turbulent waters of starting and managing new ventures. These tips come from Will Joyner, an attorney specializing in general business and corporate law with an interest in emerging growth and technology companies.

Our entrepreneur clients often ask for advice about the ideal composition of their Board of Directors. A Board of Directors (often called a “Board of Managers” in an LLC) has the ultimate authority for managing a company’s business; therefore, its members should be selected with care. While every case is different, there are a few basic principles that entrepreneurs should consider as they put together a Board of Directors for their start-up or early-stage company:

● Endeavor to maintain a Board with an odd number of directors: e.g., 1, 3, 5 or 7. This eliminates the possibility of the Board being deadlocked when voting on a key issue. Deadlock at the Board level can cripple a company, causing it to be mired in legal issues before it has a chance to succeed.

● Keep the Board as small and nimble as possible during the early stages of the company’s lifecycle. In some cases, this might mean a 1-person Board with the founder being the sole director. As the company grows, investors and other key stakeholders will likely seek representation on the Board; however, this should be a natural evolution and there is usually no need to rush this process.

● When outside investors require representation on the Board, one or more of your initial Board members may be asked to resign. It is usually advisable to make your initial Board members aware of this possibility up front, rather than waiting until their resignation from the Board is requested by investors.

● Think twice about placing your key employees on the Board. If you decide later that the employment of a key employee should be terminated (e.g., for lack of performance), it usually complicates the process if that key employee is also a Board member.

● Be careful not to confuse the role of an informal Advisory Board with the primary governance role of the Board of Directors. Having affiliations with experienced business and community leaders can be a great resource for an entrepreneur, and can also lend credibility to a new venture. However, it is usually best for these individuals to serve on an informal Advisory Board without any formal governance or fiduciary responsibilities.

submitted by Will Joyner
Kilpatrick Townsend & Stockton LLP

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