Great founders consciously create a board with the right balance and diversity of character and capability.
Most founders in my experience don’t want a board until they are forced to which is usually when they accept third-party money. Entrepreneurs often see boards as a waste of time, a hassle, and a route to losing control and/or being judged.
It’s true that a poorly led board can destroy value. But it doesn’t have to be that way. If you choose your board skillfully and engage them actively, a well-led board will add significant value to your company as you scale up. And when you run into trouble they will help guide you through the tough times.
From my perspective, you should get a board sooner rather than later. Why? Because the entrepreneurial landscape is dominated by companies that have crashed and burned, and most fail due to self-inflicted wounds. With the right people around you including board members you are more likely to survive and go on to thrive.
Successful founders treat their board like their executive team in the sense they take great care to curate its composition and how they run it. Exceptional board members like exceptional executives can create significant company value.
Shareholders appoint the board and so as the founder you are likely to have some or all control over who joins the board.
Board composition should be dynamic
Boards should evolve depending on the company’s stage of growth and needs. At the early stage, I am a fan of a three-person board, the founder and two people you trust and respect or two founders and one other.
For early-stage companies that take on investment and where investors demand a board seat (NB not always the case) the ideal board composition is either 2 founders, 2 investor directors and one independent director (i.e. 5 in total) or 2 founders, one investor director and one independent director (i.e 4 in total).
A board of five is an optimal number. Odd better than even because of the reduced (but unlikely) likelihood of stalemate on decisions. Seven can start to get a bit unwieldy. I would try to avoid having observers on top because they are still in the room and will have an effect on the board chemistry.
As you raise capital through the various stages of investment (i.e. Series A onwards) your board potentially may be overrun with investors. Where possible you want to make sure that as new venture capitalists come on board the earlier investors agree to come off the board and they get comfort by the appointment of a lead investor board member.
A board overly dominated by investors is a mistake in my experience. Over-represented investor boards may tend to make decisions based on self-interest rather than that of all the shareholders. And board meetings are more likely to become like simple reporting exercises and therefore of little value. Where a founder does not control the company, independent directors should control the board.
But to be clear, the right investor director can be extremely valuable.
Choosing your investor director is a key part of the investment decision
I compare accepting external funding to a marriage in the sense it’s comparatively easy to seal the deal but it’s really hard to extricate yourself from the relationship if things go sour. You can’t necessarily control who goes on the board throughout the life cycle of the venture capitalist’s involvement but you will have good leverage initially.
Obviously, it makes sense for the investors to have someone on the board who the founders get on with but you must do the due diligence on the individual who is likely to be the board representative. As well as getting a good investor, you want to get a productive board member. When evaluating an investor director, you should consider:
● Character: Their character and how they are likely to get on with the other board members. You are going to spend some intense times with each other and so there needs to be sufficient chemistry, trust and respect. You should reference them thoroughly by speaking to other CEOs whose boards they have sat on or currently sit on.
● Bandwidth: The venture capital model is to deploy their capital across many companies, which often results in investor directors being spread very thinly across the portfolio. You should find out how many boards they are already on. They will sometimes need them to be around for quick decisions and you want them to have the time to think and reflect about your company’s challenges and opportunities.
● Depth of Talent: As your investor director is likely to change at some stage, it is worth digging into the depth of talent within the venture capital firm to see who might be the replacement director. Sadly, I have seen replacement investor directors be worse than neutral particularly when you are no longer the golden child of the portfolio.
● Competence: Investor directors have the advantage of sitting on multiple boards which gives them lots of great insight into your marketplace and the ability to see patterns of what good looks in multiple areas such as leadership. A good investor director should also be able to help source strong c-suite candidates, advise on finance and fundraising, and optimise the exit valuation.
Why is it so important to have independent directors on the board
Independent board members are directors who do not have a material relationship with the company – financial or otherwise. So investors, founders and management are excluded.
Less bias, more diversity, better decisions: An independent board member does not represent any of the special interests – founders and investors – which in theory makes them unbiased and able to offer independent thinking. You can never be totally unbiased as a human but having an independent board member is one way to mitigate bias. But to get the full benefit from an independent director you want to prioritise diversity e.g. gender, race, experiences, and thinking. Why should you care? Apart from being the right thing to do, having more diverse opinions in the room results in better decision-making and ultimately better results for the company.
Interestingly Paul Gompers, a Harvard professor, concludes from his research that when VCs have a strong affinity and homogeneity the probability of success decreases by 17%.
Embrace diversity and reap the benefits.
Best interests of the company: An independent board member is able to make decisions in the interests of the company and all of its shareholders because they are not acting for any special interest groups.
VCs have their own bosses – their LPs or investors – who they need to make returns for. So you might have an investor who is pushing for an exit. They need to show a return to their investors to help them raise their next fund. But the timing is wrong for the company as the economy is faltering, exit valuations are down yet the growth potential for the company is significant.
Or you have a founder who comes up with a crazy idea which makes little sense. The founder wants to pivot the whole company around this new idea. This is where the independent director comes in to provide calm judgement not necessarily to block the idea but to make sure a proper discussion is had where viewpoints from all the stakeholders are considered.
Solve conflict: Particularly when the independent board member has the trust of the founder and the investors they are able to act as a mediator when conflict arises. Also in a situation where some board members may be disqualified from making some decisions like accepting an insider term sheet which favours investors over other shareholders, they can make an independent decision taking into account all shareholders’ interests.
Expertise: Founders have the luxury of choosing an independent board member to fit the needs of the company. Figure out the major challenges facing the company and whether you have the right people in the management team to tackle those challenges. If not, which independent directors can augment that team to solve those issues?
In terms of value-add that independent board members can give you, here are five common personas:
● CEO Whisperer – someone who can coach and mentor the CEO because they have either been a CEO themselves and/or have experience in executive coaching and mentoring
● Customer Knowledge – a board member who has worked or is working within your target customer base and is able to improve existing relationships, identify and develop new customers
● Sector Heavyweight – they have deep experience working within a particular sector and can open doors, and lend credibility
● Specialism – they bring functional expertise such as sales, marketing, finance, legal or tech
● Stage Transition Experience – directors with experience of 1-2 stages ahead of where you are currently at NB at IPO you will have someone who has been there
Trust: You need to trust all board members but even if you fully trust your investor director you are less likely to be totally honest with them. You will be less comfortable revealing your fears and weaknesses to an investor director because you don’t want to adversely affect any future fund raise. Whereas the independent board director offers less of a threat and less judgement leading to more open discussions.
Every Founder deserves a well-performing board
A well-chosen and well-run board is another critical resource to help founders succeed. Founders don’t always give the board the time and attention it needs to be a useful resource. In my opinion, that’s not only a missed opportunity but also means you are less likely to succeed.
Your board will need to evolve as your company grows. You will need to continually think about the balance between founders, investors and independent directors as the company goes through the fundraising stages.
Look at what the company needs before the person – better to go for the person who will gel well with the other board members rather than the high-profile individual.
A well-led board of directors with a diverse mix of hard-working members will add material value to your company, a poorly led board will destroy value. And a mediocre one is just a huge waste of time.
If you want help in curating and managing your board contact me at firstname.lastname@example.org and check out my founder coaching.