First time entrepreneurs seldom give enough thought to their Board of Directors, many don’t have one until forced to after raising a series A round of investment. That’s what prompted my first post about BoDs. Before we get into how to manage a BoD let’s just spend a minute on the makeup of a BoD. Experienced founders know that the BoD has hiring and firing power over the CEO – the CEO reports to the BoD. That being said, Series A investors will take as many as one or two Board seats if there are two vcs investing. Generally they will allow two founders. Because no one wants paralysis of the venture through a 50/50 split of the BoD its in everyone’s interest to add a fifth independent Board seat. That should be it until you raise a Series B and C at which time you may need to add another investor and/or outside Board member. But I was taught to keep Boards small; the smaller the Bod, the easier it is to manage, which is the job of the CEO.
What is the value added of your Board? That depends on the added value of your investors whom you have chosen. The Forbes article buy Chaka Booker, Your Board Of Directors: Managing Their Gift And Their Curse, provides a good answer:
Board members generally have a depth of experience that has exposed them to a range of problems in a variety of contexts. As a result, their minds move quickly. They understand patterns. They ask questions you don’t have answers to and provide suggestions you hadn’t considered. They have an uncanny ability to poke holes in your thinking and mend holes in your strategy. This is their gift.
Here are Chaka Booker’s tips on managing your BoD, with my annotations based on experience serving on half a dozen boards:
Boards don’t focus on execution.
The role of the board is strategic, not operational. Typically they are freer to explore strategic alternatives because they are freed from the weight of execution. You need to be open to these ideas, even if they generate stretch goals. Keep in mind you and the BoD are typically on the same side of the table: how do we best create value in our venture?
Boards don’t need details. Until they need them.
That means that while you may only present the absolute minimum amount of detail to support your business case, be prepared to have all the details that went into your decision in the appendices to your BoD presentation.
I learned to brief each member of the BoD before the Board meeting from Sigrid Reddy, who was the Director of the Watertown Free Public Library where I was assistant director. She either met personally or had a phone call with every member of her Board of Trustees (the non-profit equivalent of a BoD for a public library) to preview any potentially controversial topics and find out where each member stood on them. There should be no surprises at your BoD meeting if you have done your pre-meeting prep properly.
As I’ve written elsewhere, founders need to get their Board members to work for them, either en toto or as individuals. This means you know the experience and expertise of each BoD member as well as how likely they are to help, if asked. Too few founders realize that their BoD is a valuable resource that they should manage just like other resources – capital and human – under the CEO’s purview.
But don’t just rely on a conversation, make sure you send a brief memo along with the list of agenda items to each Board member well in advance of the meeting. Don’t make assumptions that they understand all the issues or even that they are going to back you if the issue comes to a vote. Test your assumption in that f2f meeting or phone call.
Keep in mind that your directors are usually extremely busy people, so get them in the habit of dedicating a block of time with you before your BoD meeting. Also don’t assume Board meetings are simply a formal necessity whose function is to rubber stamp your decisions. You should welcome being challenged on your assumptions by BoD members. And you should work to generate a spirit of camaraderie amongst the directors. Helping the BoD function as a team rather than a group of individuals will turn them from spectators to active participants in your venture – again, at the strategic level. The only operational functions the Board should play are to interview high level candidates – at your request – and to help in raising capital through their connections.
If you have zero experience building and managing a BoD I suggest you mine your contacts for a CEO who has that experience and is willing to share it with you. There really is no work experience that can substitute for the important task of building and managing your Board.
Finally keep in mind that being a director these days probably carries more risk than back in the last century when I was founding companies. You may need to invest in D & O (Directors and Officers) insurance if you have a key Board member who won’t serve without it. Directors have a fiduciary responsibility to shareholders, so if your venture goes sideways they bear some exposure to litigation from shareholders. D & O insurance is expensive, so try to avoid it unless you have so much capital from your seed or first round that it’s a very manageable expense.
To those of you who haven’t raised vc money, keep in mind that your lead investor will also be a Board member, so your due diligence on them and their firm is doubly important.