group of skydivers moving in tandem to represent good startup boards

How to Build Better Startup Boards

by kirkcoburn
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Twitter’s deal with Elon Musk has me thinking a lot about corporate boards and why the Twitter board was forced to accept Musk’s buyout offer. It’s not really apropos of startups and how those boards work, but I do think that the situation warrants a discussion about startup boards and what makes them tick. The only real takeaway is that you should be damn careful where you incorporate.

I am digressing here, but this is a critical point. Any corporation must, by law, have a board of directors. It’s true that you only need one director. That one person can be the founder. But to get any traction in growing your company (translation: any decent amount of outside investment, and we’ll talk more on this in a minute), you need a functioning board.

Why Do I Need a Board of Directors?

Aside from being bound by law to form a board of directors, a company needs the experience and expertise that a broad range of directors provides. There are definitely some tricks to building good startup boards, so gather around and pay attention.

 Lots of entrepreneurs tend to be lone rangers. Either you’re a mad genius with a beautiful mind out in the garage, or you’ve left a corporate gig because, frankly, it’s pretty damn hard to innovate in a bureaucratic environment. Either way, sharing is not necessarily your strong suit. So you have a visceral reaction against giving anyone else any control over your company. I hate to tell you this, but with large infusions of cash comes a demand to have a say in how it’s spent.

What Does a Board Do in Startups?

This is a great time to recognize the fact that while you have the technical skills to turn cow farts into jet fuel, other people have equally important business-building skills. 

Your board’s role is primarily to advise in the early stages. But as you grow, their input expands to cover the general direction of the company. They also provide counsel for major decisions like hiring, firing, and financing. Oh, and they also have a lot to say about salary and other compensation, including yours. 

Mature startup boards leave the day-to-day management and decision-making up to the executive team while they focus on corporate governance: making sure that what you’re doing does fall within the confines of the law and is maximizing shareholder value (key point that I will come back to later).

When Should I Start?

Put yourself on the board when you incorporate. Somebody has to issue stock, find financing, approve fundraising, and buy coffee pods. But this is your job. As the entrepreneur, you need to to innovate while simultaneously handling the business part of the business. The board is there to provide guidance, advice, recruit team members, etc.

When you are ready to put people on your board, consult with a trusted advisor who has experience in board setup and development. PLEASE!

Who Do I Put on the Board?

This is a decision that is really made for you. There is an unwritten hierarchy and protocol for building out startup boards, starting with you as the founder and CEO. Additionally, an angel investor (someone that has experience and wrote a sizable check) make up the ideal starter board. Where startup boards are concerned, smaller is better. It limits the number of egos in the room.

You’re basically putting together a management team. So the smart thing to do is identify the gaps in expertise and work to fill those in. Building productive startup boards is really all about leveraging your contacts to expand your network, thereby continuing to grow your company. You need financial gurus, sales and marketing pros, and production experts who will work well together to create those well-running startup boards.

Brad Feld of the Foundry Group has some pretty good advice about the board cocktail mix: avoid putting a lot of VCs on the board who do nothing but meddle in the everyday running of the business. Balance it out with people who bring a fresh perspective to the table; also, find people who have better things to do than second-guess your every move.

How Your Board Is Structured

As I said earlier, there is a hierarchy to how a board builds out. After the core team, the first man on deck is the investor who led your first round of fundraising. He’s got the most skin in the game at this point, so he gets a seat at the table. Typically, this process repeats itself through the rounds of raising capital. Still, after the second round, it’s also common to add an “independent” seat. As you raise external funding, many times the board is made up of investors and the founders. While you do not want to be at odds, this can happen. While an independent board member means someone that does not have any conflicts of interest, the founder should ensure it is someone that likes your vision and leadership; otherwise….

Here’s something critical for you to remember as the board grows. While each investor on the board is there to watch over their investment, this is a team sport. No one member’s interests should trump another’s. Every member’s fiduciary responsibility is to maximize value for all the shareholders. Because competing interest happens…and from my experience, it is difficult to manage.

What Makes a Good Board Member

It’s a tired old trope, but your board is only as good as the people you put on it. The question is, where do you look for those magical people, the ones who will work together in perfect harmony and stay out of your business? I’m not going on and on about what to look for. 

I’d rather take a page out of Jack and Suzy Welch’s playbook and focus on the toxic board personalities from a classic article in Business Week, Boards That Are Not Bored.

  • The Do-Nothing—enough said
  • The White Flag—will walk over hot coals to avoid conflict
  • The Cabalist—driven by their own agenda
  • The Meddler—see VCs, above
  • The Pontificator—truly loves the sound of his own voice

Easy, right? So let’s flesh this out with some traits that you should look for in potential board members. First, encourage diversity in professional experience. A board full of tech geeks or gamers will have total tunnel vision.

Who Are the Right People?

Growing group of skydivers to represent adding a new member to startup boards

Before you pick a new board member, ask the investor for a list of candidates, and then vet those prospects. Look for members who not only bring expertise and a broad network but who also are good mentors for a fledgling company. Do the candidates have prior board or founder experience with startups in your industry? Do they understand their role as board members, from the fiduciary aspects to the ability to make hard decisions? Those that do not have startup board experience can be very dangerous especially if they are from large companies (they have never been part of a startup and do not understand the pain to build a going concern).

Big Names Aren’t Always Better for Startup Boards

It’s a coup to get a Marc Andreeson or a Elon Musk on your board. But if you manage to snag one big name, leave it at that.  

The trainwreck that was Theranos is Exhibit A for this sort of gross mismanagement. It was a board full of political and military rock stars. There was only one lonely financial guy (the CEO from Wells Fargo, really??) and one epidemiologist. Of course, investors lined up when George Shultz led the parade, and of course, Shultz shut down his grandson (the one he got a job for at Theranos) when the kid told Gramps that the Empress had no clothes.

‘A powerful board full of ignorant egos is bad for business’ is the moral of the story here, and nobody on that board has faced any consequences for the company’s spectacular downfall.

Skepticism Is a Highly Desirable Trait in Your Board

I could argue the weaknesses in the Theranos debacle all day long. But instead, have this pearl of wisdom: your board members should be skeptical. Their job is to question, to discuss, to poke and probe and pull apart until you think they’d all look good on a rotisserie. But that’s what makes you better and, in turn, makes your product the best one in the market. A big-name board might lure some investors into the fold. But your dream team should have people who understand the technology and the market so they can push you to keep getting better.

And here’s a big tip—the VCs and investors you really want aren’t taken in by Bennifer or whomever on your board. That’s why they’re the investors you want on your side.

The Good Board

I promised myself I wouldn’t do this, but a great board of directors is like a great charcuterie. Everybody has a special talent they bring (even the VC members should be more than a pretty face), and things can get a little salty at times. But overall, everyone on the board knows their role and fills it well. Because of this, you, as the founder, are free to innovate with the confidence that a competent board provides.

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