This is part 2 of a 4-part series I’m writing on navigating your board of directors, and this section is focused on the people; who should be on your board and how you should interact with them. If you missed Part 1, the Framework, read it here as it will provide some groundwork for this section.
Special shoutout to my friend Ari Newman, Managing Partner at Massive who served as an editor, contributor, and sounding board for this series.
Type and Number of Board Members
Board members tend to fall into four categories: founder board members, investor board members, independent board members, and at later stages, sometimes non-founder and hired CEO board members.
Founder Board Members: This is hopefully an obvious classification, but these are the individuals who started the company and are probably sitting in executive operating roles. The company should strive to keep at least one founder on the board for as long as possible, even and especially if that founder is no longer in an executive or operating role inside the company anymore. The company’s lifeblood tends to be the founders’ values, vision, and personality quirks – without that lifeblood, companies can lose their way.
Non-Founder CEO Board Member: When a founder is no longer in the CEO role, which isn’t typical in early stages but is common in later stages, ideally you’ll want to expand the board to include both the founder and the CEO. On occasion, you’ll have a COO or a CFO who wants a seat on the board as well, but try to say no to these as long as possible. They can attend board meetings (which we’ll talk about in the 4th blog post series), but do not make the mistake of expanding the formal board for too many executives. Executives need only one seat, and ideally, you have a balance between founders/execs, investors, and independents.
The Investor Board Members: When raising capital, you should expect to add at least one, if not two investors to your board. Most typically, this looks like the investor(s) who have led the current or last round and will come as part of the negotiation of closing the deal. Great, engaged investors on your board are worth their weight in gold, literally, because their experience, networks, insights, and pattern-matching abilities will be a faster accelerant than their cash ever could be. When it comes to raising capital, a common mistake I see is founders will optimize for valuation, but my POV is that you’d be optimizing for the wrong thing. Companies build true enterprise value (what the business is worth at exit) via strong execution, not what the cap table says right after a round. Strong execution can be significantly influenced by the right board members while exit values can and do move independently of individual round values. Thus, you should take a lower valuation with a high-quality investor any day compared to a higher valuation with a lower-quality investor. In fact, when fundraising, consider using that as your primary, you’re looking for a board member, the investment just comes along with it. Remember though, when raising from a venture capital firm, it’s the firm making the investment, not the person, and so the firm will have the right to change out the board member for someone else. There’s nothing you can really do about this, just make sure you know all the partners and that the firm is a high-quality firm.
One downside to investor board members is that they are often busy, sitting on many boards in addition to their regular day job of making new investments, managing a broader portfolio of companies, fundraising, LP management, managing direct reports, etc. It can be hard to get the attention you might want. And for more junior partners sitting on your board, duty of loyalty might be an issue; it takes a mature board member to identify conflicts between what’s good for their fund versus what’s good for the company and act appropriately because these decisions are often during heated and trying times. You can solve this later problem with a great independent on your board who’s not afraid to pull that investor aside for a gentle reminder.
The Independent Board Member: An independent board member is someone who doesn’t have any material interest in the company other than whatever equity compensation you might give them for this service. For instance, founders have material interests: their founder shares, their income, it’s usually their baby/idea, and it’s how they spend all their day, if not every waking moment. Investors have a material interest as well: their capital invested in the company and thus their ownership, plus partners and LPs they need to answer to, not to mention their own ego in making the investment in the first place. But an independent is just that, an outsider who can serve as the balance between common and preferred shareholders or between two founders disagreeing. I’ll go into traits for your independent board member shortly.
The Board Chair: In early-stage companies, this isn’t a thing. It doesn’t usually become a thing until much later in the company’s life, and really the only time I’ve seen it is when a founder is no longer the CEO. Then the founder often (but not always) becomes the Chair. The Chair’s role is a more active role than the other board members, he/she can call meetings without the CEO, and they usually meet more often with the CEO and other leadership, and can often be the communication layer between all board members outside of board meetings.
The Number of Board Members: It’s never really too early to form your board; a good place to start is 3 individuals, and most often I see this as 2 founders and 1 independent (if the company hasn’t raised any money) or 2 founders and an investor (if the company has raised capital). Three board members is a manageable number and the voice in the room is still dominated by the founders, but the third person in the room helps keep things honest and on track. Many founders are gun-shy about creating their first board, and I understand why; the startup community is littered with bad stories. However, if you have the right people on your board, it can be one of your biggest accelerants and strengths. Don’t avoid creating a board because of war stories, but rather use war stories as a way to avoid common mistakes, find the right people, and manage it the right way. Building great companies is a process of constantly failing forward, making mistakes, and learning from them. Stack the deck in your favor by having 10x the experience (read: mistakes) and network versus going it alone.
In Series A and beyond, it’s not uncommon to move to five board members, especially if you have raised capital, but try hard to keep the balance between the investors and the founders even, with one independent offset. This looks like two founders, two investors, and one independent. It’s somewhat unusual, but not unheard of, to go to seven board members in a private company setting, however, it’s a lot of people to manage and I wouldn’t recommend this. It’s also not uncommon to have seven or more people on a nonprofit board, I’ve seen upwards of 20, but their role tends to be different and we won’t cover that here.
A note on board observers: They’ve been in almost every board room that I’ve been a part of, and in some cases, I’ve been the board director who steps down into the board observer role when the next round of investors come in. Board observers can be a significant value add, as long as there’s a stated and agreed upon way they will interact. They should be respectful that they are ‘observers’, which means to observe, they don’t get a vote, and they shouldn’t ever dominate the room, but they can be influential and their opinions should be wielded respectfully to their role in the boardroom. One way I’ve handled this in the past when an expectation isn’t explicitly set beforehand is to simply ask. During a break, I’ll ask the board members if it’s okay that I weigh in if I have a strong opinion, or if I should wait and pull people aside individually. The simple act of asking paves the way to a healthy dynamic.
“Hiring” Your Board
As a founder, you get the opportunity to create two teams around you that will help your business dominate, your executive team, and your board of directors. When building your board, put the same care and effort as you do in building your executive team, and that means you should think about it like hiring. While hiring isn’t the exact right analogy because board members are hard to fire, think about how much time you put into vetting candidates for hiring and making them successful – you’ll want to put at least that much effort in here, if not more.
I mentioned above that the investor board member who led your round might not end up on your board because the seat goes to the firm, which can change out the board member at any time. So before you take their money, make sure you’ve met with all the partners and ideally the junior partners as well, as one of those could take the seat in the future. Your default should be that the whole firm is great; optimize for a great firm over a great valuation.
Hiring your First Independent Board Member: Run a process for this, just as you would any executive hire as this might be the single most important hire you ever make. Here’s a light process:
- Write a job description, listing out what qualifications and experience you’re looking for. I’ll give some guidance on what to look for below.
- Agree on the description with your other board members, specifically your investor board members. This is an important step to help mitigate the likelihood of the independent seat ‘really’ becoming another investor seat, because it will keep your investors’ recommendations honest, and conversely it will keep you from bringing on your best friend from college. Include in this description your expectations of how the board member will be involved and make sure the candidates read and understand it. This will be helpful later.
- Make a list of candidates based on your job description. This is an excellent time to use a search firm!
- Spend time getting to know them. Make sure they’re aligned with you, your vision of the company, and your chemistry, and figure out in what ways they will contribute to the company in the informal ways we discussed in the first post. A good measure is if they would be your first phone call when sh*t is hitting the fan. Filter the candidates through your stated values.
- Check references, especially with other founders.
- Dig on their ‘off list’ references – notice I made this a wholly separate item. Do not skip this step.
- Nominate your top candidate to the rest of your board, and have them interview and/or approve.
- Close them with the proper documentation from your lawyers and vesting compensation.
What to look for in your independent board member, or any board member:
The best independent board member is another entrepreneur who’s currently CEO in his/her business and is about 2 stages away from your business (relative to revenue, employee count, and maybe fundraising). This person will have fresh and relevant guidance, they’ll have incredible empathy with what you’re going through, and if they’re a multi-time founder who’s had successful exits for their investors, then they’ll command the respect of the other investors in the room especially when the room is in disagreement. This person can pull other board members aside and have awkward conversations more easily, and this person can most certainly have more difficult conversations with you, the CEO, and you generally know it’s coming from a good place. Being a CEO is a lonely job, having another CEO in the room will be immensely helpful both inside and outside the board room. As an aside, if the investor you’re working with was also a founder/CEO, you’re winning double.
Here’s a good checklist that I like to give founders when they’re hunting for a board member. Remember you’re unlikely to get all of these, but the more checkboxes, the better:
- Entrepreneur/founder, ideally currently operating
- Has executive experience running companies (in any C role), and their current company is 1-2 stages later than yours
- Has tangential relevance to your business needs such as a network, knows your market well, knows your target customer base well, knows the manufacturing process well (if applicable), has led through X kind of market (where X is bull or bear or whatever type of market you’ll be facing in the next 18 months), has led through Y kind of issue (where Y issue is whatever issue you’re facing right now)
- Has raised venture capital
- Has a successful exit (or more than 1)
- Can and does think and speak independently from the other investors in the room
- Has the respect of the investors in the room
- They have raw intelligence, pattern matching, curiosity, courage, and creativity
- They have empathy and are candid and good at difficult conversations, both with you and with other board members
- They are not ego driven, they would rather find the right answer than *be* right
- They have enough time they can dedicate a few hours a month to you and your business
- Is someone you’d hire in a heartbeat if they would only say yes
- Is someone you’d call first when the sh*t is hitting the fan in the company; someone that can and will help you handle the most difficult situations in your company
- Is diverse, in race/gender/age/thinking. This is hard but important!
- Is in alignment with your company’s stated values. If you haven’t done the values exercise yet, drop everything and do it. It will help make your life incredibly easier later on.
What to avoid in a board member: As you’re building your list of candidates, it will be natural for you to ask your investors for recommendations. Just be careful that their recommendations aren’t really just “VC representatives”. If it’s a person who comes highly recommended by the VC, that person and the VC have a great relationship – which means the VC has their ear. This can, in essence, extend the investor board seat to include the independent seat (essentially giving them 2 votes instead of 1) because the independent is more likely to side with the VC. You want a true independent seat, one where that person is respected by the investors for his/her own opinion and won’t be easily swayed due to the strength of the relationship between them. This is where a good job description comes in handy because you can point to it when a VC introduces you to someone that might be more in alignment with them than with you. That isn’t to say you should categorically dismiss all VC recommendations, just make sure they’re a true independent.
If you have friends in mind to add to your list, a word of caution; hiring someone who will just line up behind the founder/CEO, or will just ‘go easy on you’ doesn’t actually enhance the collaboration or board dynamic either. The seat then becomes effectively another co-founder seat, which turns into the same problem as the VC representative seat. You’re looking for a balance for the most effective and productive board.
You also want to avoid people that are in it just for the networking opportunities or the compensation. Just like hiring an executive in your company, you want someone that’s going to help you build and grow this company, whose heart is in the right place, and whose motivations are in alignment with yours.
Board Experience: If this is your first board, then I’d try to find someone with board experience so you aren’t in a blind-leading-the-blind scenario. However, if someone else on your board has board experience, then I am a big believer in recruiting people without board experience. This is how we get diversity at the top, and there are endless studies on how diversity at the top leads to more profitable business and better exits. These individuals will often be more engaged because it’s their first one, they want to learn and will try hard to be good at it, which means you win. There are good resources for finding diverse talent for your board, including The Boardlist and Him for Her to name a couple.
Board Member Compensation: Brad Feld wrote a great post on compensating board members a while ago and it still holds true, so without replicating his wisdom here, just go read his post. The high level is that at the early stages of a business, where cash is extremely tight, compensate your independents with equity, not cash, put vesting on it, and don’t compensate founders or investor board members with additional equity as their existing stake should be motivating enough. Beware of any investor that asks for additional equity for sitting on your board. Do however reimburse everyone for travel expenses.
Onboard your board:
Just like onboarding an executive, you’ll want to onboard your board. I encourage founders to build a light process or a checklist around this, to make sure it’s done well. The better you onboard your board, the more likely you’ll have alignment with them over the long haul.
Spend a day with each board member, not as a group. You’re trying to build a solid relationship here, and that’s hard to do as a group. I get that it’s time-consuming, but this is an investment of time and if done well, will prevent hours of frustration later on. As part of that day, you want to:
- Give them a simple one-page outlining core values and the expectations of each board member. Walk through this document with them, and make it a living document that evolves with their feedback and your learning. of expectations, highlighted above, and talk through it. Here’s a lightweight example.
- Walk them through your vision/mission for the company.
- Walk them through your short and long-term goals for the company and have them poke holes.
- Talk them through what concerns you have, your fears not only about yourself, but your exec team, and the weaknesses of the business. Yes – I get this is hard and requires trust to do it. But do it from a place of “I need you to help me make sure these things don’t happen”.
- Have them spend time with each of your executive team leaders.
- With each exec team leader, have them do a deep dive into each functional area of the business. For instance, spend 90 minutes with your sales lead, understanding how leads are generated, what the sales process looks like, etc. Spend 90 minutes with the product, getting a walk-through of how it works, both for the customer and on the back end. This deep dive will rapidly accelerate the board members’ understanding of the strengths and weaknesses of the business and can help you see any blind spots you may have. For your investor board members, you likely did this already as part of due diligence, but then you were trying to sell them. Now that they’re sold, you want and need them to be on your side, help you figure out your blind spots, and help generate resources (like mentors) who can help you with lower-quality areas of your business.
- Have them spend time with your co-founder(s).
- Get to know him/her – in theory, you’ve done this well already as part of the search process.
- Spend time discussing the format of the board meetings and documents. Ask what best practices they’ve seen on boards, and how they’d like to see the meetings organized, and walk them through how you were planning on doing it. This is a jujitsu move. You might learn something new, and you can also use it as an opportunity to get buy-in on how you’re going to run your meetings. When they’re bought into the format, they’ll be more value-add and attentive, and if it’s not going well, they’ll feel ownership over it and will help you fix it rather than blame you for it.
- Be organized! We’ll talk about the board documents in the next post but it is worth mentioning here. Set the calendar a year out (everyone is busy!) and ensure the dates work. Set up a shared folder structure, perhaps even a board distribution list.
- Give them some swag, assuming you have some. It’s such a simple gift, and board members make amazing billboards for your company.
Build deep trust with your board – an ongoing process:
In order to have a collaborative board, you must build deep trust with your board, and this will happen in the thousands of little interactions you have with the group and the individuals over time. It also takes a leap of faith, because it’s work you can’t measure, and you can only see it in the shadows of how people act and treat you. It’s work that starts with you, work you do even if you don’t feel like it’s being reciprocated – you develop trust because you are trustworthy, you don’t wait for someone else to be honorable. But it is work that you can feel and that your board members will feel, and will be the solid foundation for everything else you do in and out of the board room. Here are some ways to build trust with them:
- Start by being trustworthy. If you don’t mislead, lie, hide, obfuscate – if you overcommunicate, show vulnerability in the right way, ask for help, follow-up, admit mistakes, do what you say you’re going to do, and listen listen listen, especially when you want to shout… you will build trust. You cannot expect people to trust you if you aren’t trustworthy, and it starts with YOU.
- Spend time with each board member in between board meetings 1:1. Right now I’m on two boards where I have calls with the founders once a month for 30 min. Sometimes we have nothing to talk about, and we cancel. Other times we go for hours as I help them work through something they’re struggling with. Don’t use this time as delivering metrics, use this time to talk about something you’re spending energy on, and let your board help you noodle on it. If you find yourself regularly canceling the 1:1, consider that you’re either not leveraging your board, or you need different board members, but it’s probably the former.
- Report on all the metrics of the business transparently and consistently, and over time, no matter how ugly. More on this in Part 3 – board documents.
- Talk about the hard stuff, be vulnerable, but position it from a place of confidence. Here’s an example – I had a talk with a founder a while ago that was panicking because his CTO quit and walked out. He told me he didn’t know what he was going to do, the CEO was disengaged from the product development, didn’t know where any of the code was, didn’t know how to find a new CTO, didn’t know how to lead an engineering team, didn’t know the CTO was unhappy, on and on he went. He spend an hour freaking out on the phone with me, and while I had a lot of empathy for him, he left me with little confidence that he could handle this challenge (and more broadly, thinking that he might not be able to handle any other person on his team leaving). He could have told me all those things, but from a place of confidence –> “I made some mistakes, I was too disengaged from product development, I’ve never been connected to how he runs his engineering team, I haven’t checked in on him, in general, to see how he’s doing… and I can see that now, the lesson was painful, and I won’t make those mistakes again. What I need help from you now is finding a new CTO or a firm to help me place one, and I’d love to talk to other CEOs that worked with their CTO better than I did so I can get some best practices”. I believe you should always tell your board members the hard stuff, but position it from confidence and ask them to help you solve the problems. Do NOT hide, or even gloss over, the hard problems, that erode trust faster than nearly anything else you can do. But learn how to position them constructively.
- Never surprise your board, get in front of issues before they become issues, and be authentic and vulnerable with your board. Your board is there to help you run the company, and inside a company, there are always things that are working and things that are broken, at the same time. Nothing is ever running perfectly, and if you think it is, then you’re disconnected from what’s going on day to day. Help your board understand what’s working so they can celebrate with you, and what’s not working so they can help you brainstorm how to fix it. I would lean on over-disclosing, rather than under-disclosing. Okay, as I re-read this point, it’s the same bullet point as above, but rather than try to fix it, I’m going to leave it because I think it’s that critical to building a collaborative board.
- Share issues with context – this is something that Tim Miller said he does on his boards, and I love it so much I’m adopting it. When you share an issue with your board, give them the context of why you’re bringing it up. It’s either a) decided and it’s just an FYI, b) here’s what I think we should do but I’d like to hear your feedback or c) I’m at ground zero and need help thinking about it.
- Remember that collaboration doesn’t mean 100% agreeable all the time, nor does it mean that people go along with you all the time. In fact, disagreement can be very powerful and help you get to the best answer, not just your answer. Actively encourage debate at the board. If everyone is in agreement, stop the room and ask people to argue with the other side, or do a premortem. Just remember that you’re arguing against sides of a topic, you’re not arguing with a person. That will help you keep the disagreements constructive. And remember that people asking questions is helpful too, it means they’re engaged and trying to understand, or they’re skeptical – and their skepticism can and will help you avoid blind spots. Many founders think questions mean distrust or criticism, and if you take this orientation, you will lose. Embrace all lines of questioning and disagreement as constructive and you will build trust.
- Be calm in the eye of any storm. Recently, we had a board meeting where the founder was spending too much time fundraising and not enough time on his business. The result was the burn was too high, the metrics of the business were on the decline, and his solution was to keep raising capital to throw money at the business. The rest of the board wanted him to radically cut burn and focus on improving the metrics and health of the business before spending any more time with investors. The founder held his ground, but when he realized that all other voices in the room were on the same page, he sat there and listened with open ears and a closed mouth. Every person in the room was reinforcing the message. I know he must have felt mildly attacked, but in the end, he said he heard the concerns and wanted time to think about it. After digesting it for a few days, he made a decision to follow the board’s guidance (which likely saved the company’s life). It was a hard conversation, not one any founder wants to hear, but this founder navigated it with grace and maturity. When rooms get heated, and they will, the biggest mistake I see founders make is they get defensive, argumentative, or worse, antagonistic. The best way to build trust with your board is when you hear something that raises your blood pressure, take a deep breath and just listen to them. Ask questions. Get curious. Don’t react, but thank them for their input and ask for permission to digest before responding. In my situation – the board was impressed with how the founder handled himself, and it built more confidence that the founder could handle all difficult conversations in the future. Additionally, it *can* make the board more likely to follow a CEO’s preference when facts are fuzzy and a decision isn’t obvious.
If you do all of these things, you’ll head off more problems than you can imagine, and your board will feel like a secret weapon instead of a boat anchor!