Lesson from a FinTech Mentor IIITags: board, governance, mentoring
This post was already published with StartupBootCamp blog on Wednesday, 25 March 2015.
“Always build a smart board” – Lessons for Startups on building a strong leadership structure
I come across a significant number of startups that do not have a board of directors. I invariably ask why and get a range of reasons from “We are too early” to “I do not see the value” to “I do not want to lose control” to “I do not have the time”. None of these reasons hold water in my opinion. I strongly believe every startup needs and should have a board, as early as possible.
Startups without a board usually have not received institutional money and are at a friends and family round, seed or even series A round.
Most times the founder(s) will tell me the stage their company is in is too early for a board. I usually ask the founder(s) if they believe they are also too early to receive experienced advice, too early to benefit from existing networking and relationships or too early to build a culture of accountability.
Other times the founder(s)state – sometimes even implicitly – they do not need nor want to cede control to a board. This view is shortsighted and shows little understanding of what a board is supposed to be: a group of individuals with fiduciary duty and who work for the company.
As long as you build a smart board smartly of course! In fact, material control provisions often rest at the shareholder level, not the board level.
Some of the startups I meet have a weak board and through little foresight end up with the wrong number or wrong types of board members at the wrong moment. This mistake can often have far reaching implications for startups as they mature.
To make things simple. Here are a few tips to build a smart board for your startup over time:
- Never build an even numbered board, always odd, as in 3, 5, 7. Much better from a voting perspective.
- If your startup is pre-institutional money, build a 3 person board comprised of 1 member from the founding team (the CEO) and 2 independents who you trust, are respected and have subject matter expertise. If the executive team is comprised of more than one founder you can always give that other founder an observer seat with a voice in the board debates, but no vote. This in my view forces the founders to be aligned, to communicate well and work as a team. Additionally I cannot stress enough how positively impressed an investor will be if he sees a startup with a 3 person board prior to his investment.
- If your startup is post institutional money but still relatively small – Series A round for example – you may get away with keeping your 3 person board. The breakdown should then be 1 founder/CEO, 1 independent and 1 investor. Do not give the investor the right to choose the independent on his own. Either keep that right or even better in a collaborative gesture share the right with the investor. As long as the profile is clearly defined there is nothing to fear in sharing the nomination.
- Once your startup grows or goes through more than one institutional funding round, you enter a more complex world and will have to graduate to a 5 person or even a 7 person board. You will have to balance the need to keep an independent voice on the board with the investor stack requiring its due and a board vote. This can be sometimes tricky. My strong preference for a 5 person board is 1 founder/CEO, 3 independents and 1 investor. I know this construct is always very difficult to achieve. Yet, it is the best as IMHO, the more independent voices the better value for the company. Still, because of investor demands (Series A and Series B investors for example) you may end up with 1 founder/CEO, 2 independents and 2 investors.
- Until you reach a 7 person board, you do not need a Chairman. I know this is a controversial view and that some are attracted to the title, but frankly, with 3 or 5 board members, the person who should set the agenda in a collaborative fashion is the CEO. Once you reach a 7 person board the communication and board interactions complexities grow exponentially and you will need a Chairman. The Chairman should not be the CEO nor an investor, he/she should be an independent with great chemistry with the CEO and the investors.
- Once you have maxed out on a 3, 5 or 7 person board, you may think of granting observer rights to other founders, investors. This way you get the best of both worlds by adding voices to the conversation and avoiding board member bloat.
- Be clear as to what the independent profile should be, over communicate with your investor(s), do your home work while checking candidates, choose wisely to ensure maximum chemistry with existing board members.
And here are a few common errors startups make that you should avoid at all costs:
- As a CEO do not try to control or run a board tightly. Take care in choosing your investor(s) and independent(s) and the rest will flow smoothly as the board will end up taking care of itself nicely enough.
- Avoid ending up with many founders as board members or close friends as independents. What you gain is just the appearance of control. What you loose is a board that can add value, that has an independent voice and that is opened to the outside world, or that fosters accountability.
- Even if as CEO you should not attempt to control the board, you do need to communicate effectively. No communication is a death sentence. Send board packages in advance, communicate before and after the meetings.
- Do not view the board as a closed entity. It should be a living and breathing organism. Many CEOs make the mistake of never or infrequently inviting executive team members. Constant interaction between board members and the head of sales, the head of engineering, the head of business development or marketing are key to the good functioning of the board. Espouse this vision and formalize recurrent interactions and presentations to the board.
Happy board sailings.