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Building a Startup? Here is Why you Need to Assemble a Board of Directors.

The "Startups without Boarders" trend is a growing but ominous one. The effects of which we are seeing (partly) play out in the case of failed crypto firm, FTX.

The spectacular demise of FTX, the once-storied, Bahamas-based cryptocurrency exchange co-founded by Sam Bankman-Fried, has been a source of endlessly shocking revelations.

Putting the main accusation of fraud aside, it is wild to think of a multibillion-dollar firm being operated as it is reported to have been. If the many news pieces are to be believed, Sam and his cohorts essentially operated their firm, one with millions of customers and billions of assets, out of a penthouse.

According to the current CEO, John J. Ray III, the firm didn't quite have an accounting department to track the inflows and outflows of cash. There seem to have been a practice of commingling of funds, the likes of which folks would have never thought imaginable just a few years ago.

What struck me as odd

For me, what really jumped out was the fact that the firm didn't seem to have a board of directors or any comparable version of one. Now, I know what you are thinking: " wait a minute, I know a bunch of startups that have no board of directors and they seem to be doing just fine”. I get that. I would, however, take “doing just fine” at face value.

The when and the why

I myself oversee a startup that does not have a board of directors. Although we do have a robust accounting infrastructure and a brilliant outside accounting firm. My rule of thumb is that if you started your company with your own money, and took no outside funds, then sure, maybe a board of directors would not be needed. In other cases, I was always under the impression that one was legally required. At least a CPA, right? Maybe I am getting too old and my views on corporate governance are just antiquated.

However, the "Startups without boarders" trend is one that I am seeing grow and has been- over the last 10 years. With the passing of the JOBS Act in 2012 and the subsequent proliferation of equity crowdfunding operations, there are now entrepreneurs out there that have raised millions of dollars of investor capital with very little oversight. Here, I am not even talking about fraud. That, to me, is the worst-case scenario. I am talking about just the adherence to sound business practices and the prioritization of fiduciary by those that are running said outfit.

In my humble opinion

As an entrepreneur, especially a first-time startup-er, it is critical that you plan out and assemble an uneven number of board members to help be the unassailable guardians of investor interests your firm and investors deserve.

There are many resources out there one can consult to help you along the process of putting together a dynamic board of directors. The central point I look to get across here is that you need one.

You need one to help ensure that best practices are developed and followed. And I would also suggest that as a small startup, the #1 and #2 folks you should approach to be on your board (if possible) should be your top investor and your CPA. And those folks can point you in the direction of other individuals with the experience and talent to help you grow your firm.



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