Books can and probably have been written on this subject; this isn’t one of them. And a disclaimer: I am not, have not been and never will be a lawyer. I have never even played one of TV. I did attend Harvard Law School however, in utero, as my mother was pregnant while getting her law degree there. So consult your attorney when forming your corporate entity, almost always a C-Corp based in Delaware if you expect to raise outside capital, but often starting as an S-Corp or LLC. There are plenty of sites that will explain the different types of corporate entities better than I can.
This post is about the makeup of Boards, managing them, and how to choose outside directors.
Typically once you take in outside money you end up with a Board composed of insiders, the founder(s) and the investor(s). In three of four of my companies we had co-founders, so that put two of us on the Board. After your first VC round, called Series A, you may well end up with two investors* and two founders on the Board. At some point your investors may say it’s time for an outside director. You need to be very cautious about this move. First of all, I was taught by my VC investors to keep Boards as small as possible, but no smaller. On the other hand, with two investors and two founders on the Board, you may need a tie breaking vote on what should be a rare occasion.
Outside Board members can bring more than tie breaking votes, however. They can bring great credibility. At Course Technology we had the former president of Dartmouth as our outside director – a good move for a company selling to the higher education market.
But you need to carefully spec out what you are looking for in an outside director: is it credibility, specialized expertise, ability to raise money, or all of the above? If the current Board members can’t agree on the criteria for an outside Board member then postpone that search until agreement can be reached.
The best way to manage a Board of Directors is to deliver predictability. That’s what Bill Kaiser of Greylock told me investors want most in their companies’ executives. Deliver what you promise. Err on the side of under promising and over delivering. But be careful there. Too much of that and you will be rightfully accused of “lowballing” – setting artificially low goals you know you can easily beat. VCs are like most managers, they don’t like surprises. So give them simple, measurable and aggressive projections and meet them.
The other key to managing a Board is to get them to work for you. How? By helping recruit key talent, including using their networks and interviewing candidates. By helping you raise money through their contacts. By helping you find the best professional service firms. By sharing their wisdom to help you solve a problem specific to you company.
But keep in mind, investors do not like to get involved in operational details, if they did they’d be operating executives, not investors. Only bring high level strategic issues or very serious problems or major opportunities to them – don’t waste their time on decisions the management team should make.
Keep in mind that while VCs often like to say that they and you – the entrepreneur – are on the same side of the table, that’s not exactly true. To a VC you are one of a portfolio of companies; your portfolio – unless you are Jack Dorsey or the late Steve Jobs – consists of exactly one company, yours. A VC might sit on as many as nine or more Boards; likely you sit one one – your own.
I’ve had the privilege of having a number of corporate VCs invest – capital that comes in from non-professional investors- including Apple, MIT, and Silicon Valley Bank. Outside investors rarely expect and are almost never given Board seats. However, you can offer them “observation rights” – the right to observe, but not participate in, Board meetings. This keeps them informed without increasing the size of the Board or complicating its makeup.
Finally a technique I learned way back when I was in the non-profit world from Watertown Library Director Sigrid Reddy, who reported to a Board of Trustees. If she had a critical issue to bring to them, she made a personal call to brief each Trustee well ahead of the meeting to feel them out about their position. She also talked to her Trustees from time to time when there wasn’t a critical issue pending, just to help build the relationship and keep lines of communication open
*investors like to “syndicate” – meaning they bring in other investors to help share the risk, even if they lead the round by setting the valuation and the amount to be raised. Thus a Series A round could have two or more investors. If you are going the angel route, even more investors are likely, though they would not get Board seats.