Boards of Directors

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.




Strategic Advisory Boards

I started my first strategic advisory board (SAB) in 1989 at my first VC-back company, Course Technology, Inc., an educational publishing company. I formed SABs at the three VC-backed companies that followed: Mainspring, Throughline and Mobile-Mind.

There are multiple objectives for an SAB:

  1. To gain varying perspectives on your business strategy from experts in your market
  2. To add credibility to the image of the company through the stature and reputation of your advisors
  3. To have your SAB members introduce you to important contacts
  4. To have your SAB members vouch for you during VC due diligence
  5. To have fun

The last – to have fun – may seem quite out of place. But in talking with every strategic advisor I’ve ever had – from Sir Tim Berners-Lee, inventor of the Web; to Brad Feld, one of the most successful VCs in the country (and one of the most responsive and generous in sharing his deep knowledge of the start up world); to eminent professors, including Lynda Applegate of HBS, Mary Cronin of BC , and Bill Graves of UNC-  they all agreed that getting to know each other during our twice a year in person SAB meetings was great fun and the prime reason they joined the SAB and stayed as members.

When I was at Mobile-Mind I was asked by one of our investors to put together a presentation about SABs that he could share with his portfolio companies, which I was glad to do. My apologies in advance for the all bullet point, very dated and boring look of this PowerPoint presentation, but its many points are still valid. It got a slight up date with the help of Alex Karys, a fellow TechStars mentor, before i presented it at TechStars several years ago . No changes since.Advisory Boards 7.31.13.ppt

One amusing story about SABs, and why you might want to name yours “Group” or “Panel”, instead of “Board”: one day at Mainspring Roger Heinen, the Chairman of the Mainspring SAB, came into our office laughing heartily and waving a sheet of paper in one hand. It turns out we had been hiring staff from a local consulting company, they had gone to our web site, and erroneously concluded that Roger was Chairman of our Board of Directors, and therefore directed their law firm to send Mr. Heinen a nasty letter threatening us with legal action if we didn’t immediate cease and desist from hiring away their employees. After passing this legal missive around we all had a good laugh before carefully filing it in the corporate circular file.

Deliver bad news quickly, good news slowly

No executive likes to hear bad news, whether it’s a failure to meet revenue projections, a very significant slip in a product ship schedule, or a key team member leaving for a competitor.

But delivering bad news to one’s “superiors”, to the CEO or from the CEO to the Board, is much harder in startups, where optimism reigns king and gallons of corporate Kool Aid are consumed daily.

Having served on the boards of four VC-backed companies and two non-profit boards, I can tell you that the Board wants to hear bad news immediately. Why? That gives them the best chance, and most time, to help you recover from it. Trying to keep the bad news from your Board will only severely erode your credibility and trust with them if they find out the news from some other channel, which is all too likely.  You’ll do the same damage to your reputation if by the time they are informed the problem has mushroomed from serious to critical.

Obviously you don’t want to go to your Board every time an engineer finds a bug. But I remember being told my Bill Kaiser of Greylock, that what VCs want most from entrepreneurs is predictability. So when unpredictable things happen, like not meeting revenue targets, severe schedule slippage or loss of an important executive to a competitor, your Board will probably want to know about it – immediately – not a month later at the Board meeting. So if you’ve gotten bad news that’s worthy of Board level attention and a Board meeting is not imminent, pick up your cell phone and start calling. Be prepared not to just deliver the bad news, but to explain why the incident happened, and what you plan to do about it. If you don’t have the answers to those questions, don’t fake it, ask for their help. Don’t be defensive, don’t be verbose, and listen to whatever advice you are given.

Conversely, go slowly with good news. Make sure it’s thoroughly vetted and you can be confident about communicating it. As Wayne Oler once told me, “Don’t tell me what you are going to do, tell me what you have done.” So good news is not that the VP of Engineering just told you he’s going to beat the ship schedule by two weeks. Good news is that he actually did, that the product is in the hands of your customers AND that they are happy with it.

A good way to start the next Board meeting.

Finally this principle needs to be inculcated throughout your startup – it’s not just for the CEO, executives or founders, everyone needs to learn that bad news is not like wine – it does not get better with age. The sooner others know about it, the sooner they can help fix the problem.

And it goes for everyone in the organization, that just delivering bad – or good news – is necessary, but not sufficient. The reasons behind the news, and at least tentative plans on how to handle it should be communicated as well.