Updated: Dec 21, 2019
Startups are sexy. If that sounds true to you, that is a sure fire sign that you ́ve never been involved in one. The sooner a startup founder accepts that building a business is not just about building product, the better it is for all stakeholders involved.
Sooner or later a board isn’t optional and learning to appreciate the value of corporate governance is a critical path for any successful business. This is true whether you have raised finance from investors or if you have successfully bootstrapped your way so far.
Possibly the main difference between these paths is that a bootstrapped startup gets to have much more say on who joins their board, whereas a startup accepting venture or angel investment will very likely be required to make room for a board member. Either way, the benefit of an experienced and motivated board cannot be discounted and measures ideated for large corporates or regulated companies, namely the inclusion of independent directors and the composition of committees within the board function, make for sound advice as any business goes through its growth pains.
Key to know is that all directors owe their fiduciary duties to the company as a whole and not the interest of the entity that elected them (eg. your venture capital investor). Directors have a duty of care, good faith, scrupulous honesty, and loyalty to the company and its shareholders.
Essentially the role of the board in a company ́s startup phase is:
Hire and fire the CEO
monitor key resources, DON ́T RUN OUT OF CASH !!!
implement quality corporate governance
strategic planning and monitoring of performance
risk management and ensuring the company is compliant to laws
Be a company ambassador
(Additional: in case of Exit/liquidation, the board manages the situation, not management)
The right members can give you great access and connections aside from being a support system and accountability partners. Even without that, they can provide intelligent business advice. Often they can help you see what you are overlooking and propel your results to far greater heights.
A simple model for board members to follow is:
N.I.F.O. nose in, fingers out
Board members should know the business well enough to be able to sniff the key risks and opportunities but avoid getting their hands dirty through micro management. A good board member addresses conflicts and troubling situations early.
A good relationship with the CEO requires trust and confidence to exist, but this should not preclude the board member from verifying through critical questioning, analysis and by being alert to innate biases and conflicts of interest of the CEO.
Especially in the case when they are also founders, CEOs tend to have acute financial and emotional stake in the business. This will cause them to hide or spin news delivered to the board as they strive to build a business that matches their target lifestyle and persona.
CEOs will tell you that being a CEO is a lonely ride. Thus they seek honest feedback from their board, problem solving and a focus on solutions. A director may be the only person the CEO can turn to who is engaged and understanding of the situation he or she is facing as all others involved in the business are either seeking a promotion or compensation of some kind.
“Hard things are hard because there are no easy answers or recipes. They are hard because your emotions are at odds with your logic. They are hard because you don’t know the answer and you cannot ask for help without showing weakness.”
― Ben Horowitz, The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers
The case for independent directors : governance and expertise
With the undercurrents that are at play between founder board members and investor appointed directors, a prudent and valuable option available is that of selecting independent board members. The key value drivers for such appointments are namely that they are not aligned with any class of shareholders, and they can provide deep expertise in critical areas affecting the business, namely governance, finance, risk or business development.
When building your board make sure that you have a diversity of backgrounds, thinking, culture and experience. This could be having an expert in operations, an expert in capital raising efforts, or an expert in marketing to name a few. Identify not only age and gender bias, but also psychological traits of your board.
In my experience the best board members are those that have significant operational experience. Individuals that may have dealt with the challenges you may have ahead of you that could provide solid strategic perspective.
The case for advisory boards
These are not mandatory positions. Yet, every startup can benefit from assembling their own board of advisors. Particularly when you are going out fundraising, potential investors will expect that you already have some form of corporate structure around an advisory board or board of directors. In your pitch deck one of the slides will be allocated to describe the people that are involved with your company in this regard.
Why Do I Want an Advisory Board?
If you hope to be a real contender you need great advisors in your corner. If you want to be a top performer and to reach your peak performance you MUST have them.
These individuals can lend instant credibility to your brand and venture. It provides valuable social proof, which not only matters for gaining users and revenue growth, but for fundraising too.
Board advisors have restricted information rights and do not have voting rights granted to them. From a legal perspective, they should not get too involved in decision making as they may be deemed as “shadow directors” of the company and liable to similar legal consequences as fiduciary directors.
Startup founders need to be awake to the reality of building a business and having great mentors along the way is a damn good way to proceed. The arsenal of tools resides in both officially appointed board members as well as observers who may come and go to fulfill advisory functions on an as needed basis.
Investors in startups need to be acute advocates of proper governance, and if the founder has not already seen to instilling a culture of governance, this should be an early first act in the investor - founder relationship.
Sound governance is not as exciting as culture or product-market fit, but it's what remains when all else is trying to get away as fast as it can from your company when the inevitable trouble arises.
Nothing can prepare a founder to be ready to run a business! Hhving a trusted set of shoulders to lean on is one of the few comforting thoughts a founder can afford to have.