My experience with technology company boards has been mixed. I’ve sat on founding boards and boards after Series A financing from institutional and corporate VCs, and public company boards. Many of the dot-com boards were thrown together overnight: at one point, I sat on eleven boards, which is of course ridiculous. Start-up board of directors are often assembled based on relationships and the size of the angel investment board members are willing to make.
I must confess – at least in my experience – not every board is organized as a perfectly professional, legal entity committed to the perfect letter of its operating agreement or unwavering dedication to the protection of shareholder rights. Many start-up boards reflect the objectives and personality of the founder(s): start-up boards are often comprised of the founding CEO, his or her buddies and an angel investor or two. Boards mature when the real money arrives (from major disciplined angel investors, private equity venture capitalists or corporate VCs).
Board of Directors Vary – A Lot
My experiences are admittedly anecdotal but still instructive (pay attention to the italics). One bizarre board assignment is worth discussing. Over the years, directors came and went, sometimes inexplicably. I learned about issues with other board members from the CEO who told me (and I presume others) what directors said or did that displeased him. Board members were also encouraged to write checks into the company and were treated according to the size of the checks. ”Disloyalty” was punished. Criticism was seldom well-received. Board meetings were ad hoc and generally without pre-published agendas. They were, however, incredibly entertaining, like a reality TV show.
My experience with another board was more stable (and less entertaining), though many of the directors were not that experienced in the technology business in which the company operated. There were also way too many board members for a company of its revenue size. The CEO worked hard to communicate with directors but sometimes used a divide-and-conquer strategy to manage board expectations and to sell the strategic objectives of his largest VC investors.
Another board seat I occupied was a target: the CEO blamed the board for all of his failures (while patting himself on the back for every success). Yes, there are insecure founders who need excuses for just about everything. Directors are easy targets – until they resign and tell all.
I’ve sat on some boards where my contributions were limited, if measurable at all, primarily due to my lack of domain expertise. These companies made a mistake inviting me onto their boards and I made a mistake accepting. I was invited off some of these boards after only a couple of years (for lack of mutual interest and competence).
I’ve also sat on boards that were well-organized and purposeful: the CEOs knew what they needed from their directors and recruited and managed them accordingly. They assigned tasks to directors who were expected to execute on behalf of the shareholders. The best boards are collaborative and objective. I’ve had the good fortune to sit on some of these boards in the technology products and services spaces.
I’ve learned some things from all this sitting, though not all of the lessons are fun or friendly. First, CEOs and lead angel or institutional investors often don’t want objective advice, especially if the advice suggests that major changes should be made to the company’s strategy and tactics. While we could debate the merits of stubbornness, many founders and their founding investors are often way too “sure” of their strategies and therefore unwilling to listen to contrarians. Remember, those with the most gold make the rules. I’ve also learned that CEOs are often blind to real competition and market trajectories. The conviction and “passion” that enabled them to start the company also often prevents them from pivoting. Third, board politics can be brutal especially when board members have personal relationships with management and – worse – investors. Many board members are “drive-by directors,” who read company quarterly reports on the way to the board meeting, if they read them at all. You can easily spot the ones who prepare and those they don’t: remember the advice about suffering fools well?
Many boards meet only four times a year. Compensation is usually in equity – preferred shares, stock options, etc. that vest over time – not cash, so board members have no immediate incentive to work that hard. They sometimes have little real experience with the business itself. They’re often there because they’ve invested some money, because they represent another investor, or because they’re friends with the CEO or one of the investors. Some board members are elected solely because of their relationships. Start-ups (and all companies) need warm introductions everywhere, and the best board members open lots of doors. If a board member has operational experience, he or she can also help the CEO improve operations. If he or she is a domain “pundit,” then strategic advice can be leveraged.
Recruitment & Management Guidance
What to do?
- Make sure your company’s operating agreement speaks directly and purposely to board responsibilities, board election processes and board composition. This is standard fare in OAs, but read it carefully. As the founder-entrepreneur, you want some flexibility, but your investors will want protection from worst board practices. Tilt toward investor-friendly language and guidelines.
- Do a requirements analysis: what skills and competencies do you need? Recruit and staff accordingly – even within investor constraints (which will be formidable). Use the skills and competencies argument to assuage investor pressure about who should sit on your board.
- Keep the number of board members initially to 3; expand as necessary and required (when you receive institutional and corporate money). 5 is obviously more manageable than 7: the larger the board the more intra-board problems. That said, investors are routinely granted board seats in exchange for investments, but pay special attention to the tie-breaker, the fifth, seventh or ninth seat, which should be a true “independent” director. You should not cede control of the tie-breaking board seat to their investors. If you do, you may lose control of your company.
- Boards are inherently political: plan for it – but don’t fuel it. Humans cannot avoid tension and conflict especially when vested interests clash, like when the founding directors clash with the Series A directors. Personalities are extremely important to board management (and politics). While many of us resist “EQ”-based performance calculi, believe me when I tell you that personalities that blend are far better than those that clash. Interview proposed investor directors. If you find an obvious problem, address it immediately.
- Communicate openly, consistently, simultaneously and frequently with your directors. Do not divide-and-conquer. It will backfire. Provide whatever materials board members request – including, obviously, all financial records. A best practice – if you’re large enough – is to have your CFO report to the board every quarter on the financial status of the company.
- Task your directors! Ask them to sit on various committees (again, assuming you’re large enough) and ask committee chairpersons to help with specific projects, even if the “projects” only consist of making phone calls, sending emails or texting. Directors can be a great source of talent as well, which you will need as your company grows.
- Be organized! Schedule board of directors meetings way in advance; call, as required, impromptu board meetings. Agendas (and all supporting materials) should be shared at least a week in advance of board meetings. Open data rooms for directors to browse board meeting materials, company documents and financial statements.
- Listen to your board: directors are there to watch and help. Ask them to check your thinking, your organizational structure, your go-to-market strategy, your competitive intelligence and your team – among other operational and strategic initiatives about which you need objective eyes. Pitch them; practice with them. Many directors have sat in your seat and therefore have a good understanding of your role, challenges and opportunities.
- Pay close attention to your timeline. Start-ups need different skills and levels of engagement than early or later stage companies. Watch your company. When you transition from one status to another, rethink your board requirements. An infusion of cash will always require you to rethink your board, but you should proactively anticipate board requirements in response to market shifts, competitor pivots, cash burn and staff challenges which will occur on a regular basis.
- Remember your board has a fiduciary responsibility to the shareholders – not you.
What About Advisory Boards?
Advisory Boards – “Farm Teams” – can be pro forma or specifically tasked with projects. They tend to be PR vehicles intended to raise a company’s profile through a network of professionals that might help the company with warm introductions and informal advice. I’ve sat on lots of these boards and they generally do very little real work: they tend to be window dressing that demonstrates the CEO and the company can attract an Advisory Board of credible professionals and, ideally, some very credible ones. Sometimes celebrities are invited onto Advisory Boards (if not the Board of Directors). All of that said, you should leverage Advisory Boards by filling them with big brands, celebrities (if possible), pundits, financiers, prominent attorneys and even an academic or two – all for the purpose of raising the profile of the company. You might even recruit an Advisory Board member or two onto the Board of Directors as your corporate status changes.