Is the Board of Directors a Friend or Foe of Founders?

Author: Pascal Hänggi

As an #entrepreneur and experienced Founder of a #Startup, this is my perspective on the topic if #BoardofDirectors is a Friend or Foe of Founders.

Starting your own company while still being at the University comes along with many hurdles to overcome. Even before the Startup is founded, the team already encounters a first challenge in setting up the Board of Directors (#BoD). Upon reading with interest a recent article in @NZZ Magazine from Max Meister („Schweizer Startups brauchen bessere Verwaltungsräte“ 04.11.2023), it evoked two questions:

1. As an inexperienced founder, how do you find a BoD before the biotech company even legally exists?
2. Who should ideally be part of the BoD at this early stage?

First off, I do agree with Max Meister that a qualified BoD is a key factor for a Startup to achieve sustainable success. Especially in these turbulent times, the financial situation and liquidity should be monitored closely by an experienced Board.

Retention of Founders

However, it frequently occurs that founders approach investors of the FFF (friends, family, and fools) group to participate in the BoD. At first glance they seem very promising as members of the BoD. They are usually supportive and in favor of the founders. This is tempting for a young founding team, as it circumvents key concerns associated with non-FFF investors, such as losing control of their own company or even being replaced by more senior C-Level executives.

FFF investors may have limited experience

FFF investors are not necessarily experienced investors, they may have limited risk understanding, and a personal relationship to founders may lead to decision-making bias. This is a key issue of a BoD during challenging times, as the BoD is required to have independent control of the #management team and take measures to guarantee continuity of the business (i.e.., sufficient liquidity).

Higher liability for the BoD requires complete transparency

Since the 1^st of January 2023, the time for Startups and the BoD has become more challenging with stricter adaptations of the Swiss OR (#Obligationenrecht). In the case of liquidity issues, members of the BoD have greater liability. This strongly emphasizes the importance of access by the Board to all information, and complete transparency of the management team. However, access to important information is of limited use if the BoD members do not spend sufficient efforts in its detailed analysis.

It takes two to tango

There is no simple formula to define the ideal BoD members for every given business development stage. Nonetheless, it is key for every Startup to have experienced members in their BoD from day one, as liquidity problems can occur at any time. The BoD does not all need to be high-net-worth individuals, but they should be dedicated and motivated to take responsibility for the company. The founders on the other side need to guarantee an open information flow. Otherwise, the best BoD members cannot help to enable sustainable success.

Separation of powers with a sparring partner in the BoD

In my opinion, it is crucial for a Startup to have an experienced and dedicated BoD. Founders should invest as much time and effort in finding suitable members for the BoD as these elected members will then devote back to the company. Only with an independent BoD can the necessary #separation of powers be achieved. Ideally, members or the Chairman of the BoD will act as a sparring partner for a young #CEO: providing empowerment while remaining critical and independent, so that young founders can ultimately grow in sync with the company.