Three heads are better than one.

By Mark Henricks

Andy Cagnetta ran his business without a board of directors until he took on new investors in 2004. “I thought it was important then that we have a board of directors,” says the 40-year-old CEO of Transworld Business Brokers LLC in Fort Lauderdale, Florida. “Now that I’m not the only shareholder, it is important that [others] have input and I am seen as being fair to minority shareholders.”

Today, the decisions Cagnetta makes for his 55-person, $8 million business brokerage are overseen by a three-person executive board: himself, his attorney and a member elected by the 12 other investors, 10 of whom are company employees. The employees appreciate having input, and the added expertise helps Cagnetta run the company, which last year doubled revenue over 2004. “It’s turned out very well,” he says.

All small businesses should have a board of directors, according to Fred Wainwright, executive director of the Center for Private Equity and Entrepreneurship at Dart-mouth College’s Tuck School of Business in Hanover, New Hampshire. “I consider it essential,” Wainwright stresses. “This is the group that works with the CEO in resolving key strategic issues and identifying opportunities. For any entrepreneur to go it alone is a challenge.”

Most startups can be guided by a three-person board, says Wainwright. “As the company grows and starts getting funding, that number can go to five and perhaps even seven,” he explains. “It’s only large corporate boards that go into the double digits.” To avoid deadlocks, the number should always be odd.

Look for directors who complement your skills. “An entrepreneur who has very deep experience with software programming is well-served by board members who have significant accounting, finance or operations experience,” Wainwright says.

Avoid directors who clash with your personal style. “Especially for a small company, there are a lot of ups and downs and tense situations,” Wainwright says. “It’s critical to have good chemistry and good working relations with people who are making important decisions on behalf of the company.” Resist the temptation to include an investor, even one offering a large sum of money, unless the investor’s ability to work with you and other board members is confirmed, Wainwright warns.

Include at least one outside director. “The whole purpose of the board is to bring a combination of perspectives,” Wainwright says. “A board [that has] only insiders creates insular thinking that may not be good for the company in the long run.”

Personal referrals are a popular and effective way to initially identify candidates. “The referral network is essential,” says Wainwright, who suggests business owners not approach potential candidates without an introduction from a mutual acquaintance.
Once you’ve identified a candidate, do your due diligence, including checking the person’s background and references. Interview a candidate extensively before bringing him or her onboard. Spend time in social and in-formal settings to test chemistry in a variety of relationships.

Don’t make the offer until you’re satisfied that the relationship is likely to work. When you do make your pitch, stress the company’s rosy prospects and the potential director’s role in bringing those to fruition.

Small-company directors rarely receive cash compensation, according to Wainwright. Equity ownership, ranging from 0.25 percent to 1 percent per director, is more common. Directors and officers insurance is too expensive for most small companies, Wainwright says, and compensation can make up for that. Also stress to candidates that you have good corporate governance systems to minimize the likelihood of transgressions.

Even when picking the first director for a young company, keep an eye on the exit. Long-term strategy is the bailiwick of boards, Wainwright says, so it’s a good idea to have at least one director with experience in mergers, acquisitions and joint ventures from the beginning.

Mark Henricks writes on business and technology for leading publications and is author of Not Just a Living.