When Sir Terence Matthews, the founder of Mitel and Newbridge Networks, came to McInnes Cooper’s Halifax office last year for a Manning Innovation Awards reception, I noticed he took the time to ask each startup he met one question.

“Do you have a board of directors?” he asked repeatedly throughout the evening.

This giant of Canadian entrepreneurship was driving home an important point to the founders in attendance. The wisdom and determination of good directors can to help drive the business forward and avoid the pitfalls that could sink your start-up. But there are a few key things to remember when you set out to structure and appoint your board.

Legally, you need at least one director to incorporate so every company has a board right from the beginning. Even if you have more than one director  directors’ meetings are often not held at all or are very informal until you raise capital. The advent of outside investors, especially venture capital funds, often brings on the need for a more formalized and structured board.

Most founders want to control the board. So the makeup may be several members representing the founders, one from the investor(s) and one or two independents. It’s best to keep the numbers small at first, because you’ll likely raise further rounds of funding, which means more investors will want to join the board later.

And with each round of funding, it’s a good idea to be prepared for some tough negotiations on the makeup of the board. With each round, the founders will be asked to cede more and more control over the management of the company. 

Investors that don’t get board seats will likely ask to name observers. That sounds innocuous as observers don’t vote, but they are still another voice at the board meetings. Make sure you’re comfortable with the individuals who sit as observers.

As the board grows, your goal should be to maintain a tight nucleus of effective people who work well together. What often happens is the original directors, people who joined because they were chums of the founder, become the less effective members and may have to be eased out.

Quite often, the best board members are those named from outside after the company grows so the CEO gets to know people in the industry and attracts great directors.

Of course the board members – as Sir Terence pointed out – bring a lot of expertise that can help the company. But bear in mind that highly experienced and wise individuals don’t have to sit on the board of directors to guide the company. They could just as easily be on an advisory board.

The odds of having an unwieldy board can be mitigated by appointing a strong chairman. The need for a strong leader increases as the board grows and the issues it faces become more complex.

The members of the board may have to be remunerated but pay them with options rather than money because the company will have to preserve its cash. Give the chairman options on up to 1 percent of the company and each director up to half a percent.

These people must all share a vision of the company and knowledge of the industry. When the board members are all working together and understand their role, they can enrich the company beyond words.

The Canadian Startup Lawyer blog by Rob Cowan, Partner at McInnes Cooper, appears monthly on Rob’s blogging site, StartupLawyer.ca, and Entrevestor.