Start-up and Scale-up Boards: Equity, Risk and What Founders Need
Start-up boards appeal to a lot of senior executives. The pace is fast, the ideas are fresh and the chance to help build something from the ground up feels very different from life in a large organisation. For a CFO who has spent years in listed or corporate settings, it can be a welcome change.
But start-up and scale-up boards are not smaller versions of corporate boards. The risks are different, the pay is often different and the relationship with the founder shapes almost everything. Many executives say yes to a seat before they understand what they are signing up for.
This guide covers what founders need from a director, how equity and fees tend to work, the risks to weigh and how to check an opportunity before you commit.
Why executives are drawn to start-up boards
The reasons are usually good ones. Some executives want to give back and help younger founders avoid mistakes they have seen. Some want exposure to a new sector, such as technology, health or clean energy. Others see a start-up board as a way into a non-executive career while they are still working full time.
There is also the chance of a financial upside if the company does well. That can be real, but it should not be the main reason. Most start-ups do not deliver a large return, and the ones that do can take many years.
Be clear about your own reasons before you look at any opportunity. They will shape which boards suit you.
What founders need from a director
Founders do not usually need a full corporate governance framework. They need practical help that fits the stage they are at. From my years in executive recruitment, the directors founders valued most were the ones who made the business stronger without slowing it down.
Governance lite. Simple, sensible structures: a regular board rhythm, clear minutes, basic delegations and a cash flow forecast the board actually reads. Enough to keep the company safe, not so much that it strangles it.
Financial discipline. Many founders are strong on product and weak on finance. A director who can read the numbers, ask about runway and spot problems early is very valuable.
Capital raising experience. Scale-ups spend a lot of time raising money. Directors who understand investor expectations, term sheets and due diligence can help a great deal.
Scaling know-how. Hiring senior people, building systems, entering new markets and preparing for a larger investor or buyer.
Networks. Introductions to customers, investors, advisers and future executives.
A sounding board. Founders often carry a lot alone. A director they trust can help them think clearly under pressure.
Equity versus fees
Pay on start-up boards varies widely. Some directors receive a cash fee. Many receive equity or options instead, or a mix of both. Some serve for no pay at all.
Equity can be attractive, but it carries its own questions:
What class of shares or options are offered, and on what terms?
When do they vest, and what happens if you leave early?
How might future capital raises dilute your holding?
What are the tax implications for you?
These questions are technical. Take advice from an accountant and a lawyer on the tax treatment and the terms before you accept equity. Do not assume the founder’s lawyer has looked after your interests.
It also helps to think about equity as uncertain. Treat it as a possible bonus, not as your fee.
The risks to weigh
Start-up boards carry risks that corporate executives are not always used to.
Insolvency risk. Many start-ups operate close to the edge on cash. Directors in both Australia and New Zealand have duties around trading while insolvent, and those duties apply whether the company is large or small. You need to watch cash closely and take advice early if things look tight.
Time. A small board often expects more hands-on help than a corporate board. Calls between meetings, help with a raise, interviews for key hires. It adds up.
Liability and insurance. Check whether the company holds directors and officers insurance and whether you will have a deed of indemnity. Some early-stage companies do not.
Founder conflict. If the founder does not want to be challenged, the board can become difficult fast. Disagreements about direction, spending or the founder’s own role are common as a company grows.
Reputation. If the company fails badly, your name is attached to it.
None of this is a reason to say no. It is a reason to go in with clear eyes.
Advisory board or formal directorship?
Many start-ups offer advisory roles as well as board seats. They are not the same thing.
An adviser gives advice but does not usually carry the legal duties of a director. A director is formally appointed, carries those duties and shares responsibility for the company’s decisions.
An advisory role can be a good way to test the relationship before you commit to more. Our guide to advisory boards versus non-executive directorships sets out the main differences.
Be careful with advisory roles that drift into acting like a director. If you are making decisions, directing staff or being presented to investors as part of the board, get advice about where you stand.
Doing your due diligence
Before you join any start-up board, ask the questions you would ask of any company, plus a few more.
How much cash does the company have, and how long will it last?
When is the next capital raise planned, and who is likely to invest?
Who else is on the board, and how do they work together?
What is the cap table, and who controls the company?
Are the books up to date, and who prepares them?
Is there D&O insurance, and what does it cover?
What does the founder want from you, specifically?
What happens if you disagree with the founder on something important?
Our guide to board role due diligence covers the wider checks in more detail.
Worked example: two conversations with the same founder
This is an illustrative example, not a client story.
Conversation one. A former CFO meets a founder who is excited to have her on the board. They talk about the product and the market. She is offered options and says yes that week. Three months later, she finds the company has less cash than she thought and the founder does not want a cash flow forecast at board meetings.
Conversation two. The same CFO, same founder. This time she asks for the latest accounts, the cap table and the cash runway before agreeing. She asks what the founder expects from her in the first year. She suggests starting as an adviser for six months. By the end of that period, both sides know whether the fit is right, and she joins the board with a clear role.
Setting expectations early
Many start-up board problems come from mismatched expectations, not bad intentions. The founder hoped for a door-opener with investors. The director expected to attend six meetings a year. Neither said so out loud.
Before you are appointed, agree a few basics in writing, even if it is just an email:
How often the board will meet, and what papers you will receive
What help the founder expects from you between meetings
What you are, and are not, able to commit in time and contacts
How long the first term will run, and when you will both review the fit
How pay, equity or expenses will work
This is not about being difficult. Founders who have not run a board before often welcome the clarity. It also gives you both a graceful way to part if the fit does not work, which protects the relationship and your reputation.
Common mistakes
Joining for the equity. It may never be worth anything.
Underestimating the time. A small board can need more of you than a large one.
Skipping due diligence because the company is small. Small companies can have large problems.
Not checking insurance. Ask before you are appointed, not after.
Taking too many seats at once. Start-up boards are demanding. Our piece on how many boards is too many covers how to judge your capacity.
Questions to ask yourself
Why do I want this seat, and would I still want it without the equity?
Do I have the time this board is likely to need?
Do I trust the founder, and do they want to be challenged?
Have I seen the numbers and the cap table?
Have I taken advice on the equity terms and my duties?
How it fits your wider board career
A start-up board can be a useful part of a portfolio. It shows you can work in a fast, uncertain setting and add value without big-company resources. For some executives, it is the step before their first paid board role on a larger company.
On a board resume, describe it clearly. Give the stage, the sector, what the company was doing and the specific ways you helped, such as a capital raise, a key hire or a new governance framework.
If you want a board profile that shows start-up and corporate experience in the right light, see how I approach board resume writing.
If you are a senior executive weighing a start-up or scale-up board seat, book a complimentary Clarity Session and we will look at how it fits your wider board plans.
