Board of Directors

Updated: Jul 18, 2020 at 12:31am
Created: Jul 12, 2020 at 11:36pm

Board of directors

Typically, when a company starts, the board is most likely to be comprised of the founder(s). As you take on external investments, investors will ask for a board seat. It should ultimately become a good representation of the ownership of the company as the company matures throughout its lifecycle. If you look at public company boards, that's how things are mostly setup.

Wrong board members can really kill companies. Sometimes you won't have control over who gets to sit on the board (the investor have the right to assign someone from the firm, so the board members can change within the same seat), so you'll need to anticipate some changes throughout the course of the company.

There are usually 3 parties involved in the board composition:

  • Company: Common/founder shares
  • Investors: Mostly preferred shares, but sometimes also common shares
  • Independent: Operators, executives, and experts that needs to be recruited by you

Then there are "board observers" who may not have voting rights, but may sit in board meetings and have access to board materials. These are usually investors, who have smaller ownership, or for some reason, have stepped down from the board of directors, as the stage of the company has evolved or the board dynamic created the need for the change.

Early-stage board members

In the early-days, it'll be mostly just founders and investors. This might sound founder-friendly, but as long as you have high integrity and actually care about your reputation and being fair, it's considered okay to have founders-controlling board of directors. This means 3 (2 company + 1 investor), or 5 (3 company + 2 investors) setup. The company will be able to have a control over the board of directors.

Of course, preferred-share investors will have protective provisions on their rights, so investors are still protected in many ways.

Some companies will choose not to raise external capital, or sometimes would do common shares for investors, which can be a bit different, but the overall board composition should follow a philosophy and principles, not based on dictatorship and self-interest — that is if you truly are commiting to building a great company.

Growth-stage board members

Probably sometime in series-B and after, you'll start to think about (or the investor nudges you towards) having independent board members who are more neutral. I'd suggest keeping in neutral composition at max.

If you have 2 company + 3 investors, then you already have lost control of the board and it's investor-favored, so if possible, work with a trusted board member to change 1 investor seat to an independent board member seat. Ideally you want to avoid this situation in the first place — to be actually be helpful to the shareholders, as the market data suggests founders being fired usually ends up in worse outcomes (for shareholders) than not. There have been a few exceptions, but they are indeed exceptions.

Remember that investors are not operators. They may have been one in the past so may have more empathy, but the power of incentives and alignment of interests are simply not entirely the same with the founders/company. They are in a betting / portfolio business, whereas you are committed in a single business with your life. An owner of 10 sports teams will have some different perspective than a coach and players of a single team. You want and need the team to win no matter what. There are no backup wins in your life.

So either maintain company > investor composition, or if there comes a time where independent board member is needed, you should be the one recruiting them, not through investors, as senior-enough independent board member coming from board's network will likely to be aligned to their interest/relationship/loyalty more than to you.

Continue to build your network of operators that the company can get help from, and out of those, augment your board with someone who has taken company to (much) further stages than you have. So the board composition may become 5 (2 company + 2 investor + 1 indedepent) or *3 (1 company + 1 investor + 1 independent.

Managing board relationships

  • Having a regular sync-up calls is key to [[Expectation management]], building relationships, giving heads up, getting advice, and asking for quick help/requests. It's harder to ask for help and quick asks if the candence is too wide.
  • Recommendation is to have bi-weekly sync-up calls earlier in the relationship, to really get to know each other better, what they value, how one decides, what one optimizes for, and their tendencies. You can space out the sync-ups as the relationship gets more stable and predictable.
  • No surprise rule: Always give heads up. Always share the news before other channels get to them. Always seek their buy-ins. If you do this, expectations will be managed well, people will trust you more, and feel more comfortable/less anxious on your management.
  • Try to build relationships that go beyond just company-board relationship. The board can have multiple-roles while working with the founders. A board member, an investor, and a friend/partner. Try to build relationships across all of these dimensions to build a robust and lasting partnership. Not all investors like doing this, so be appreciative of the people who do.

Setting board goals

  • Some founders prefer having a single goal to commit to the board and internally. My recommendation is to set a minimum success goal and commit to it with the board.
  • Minimum success goal (MSG) is a goal that is reasonable, yet still considered a meaningful success that the company can demonstrate its high-performance, communicate externally, and achieve with high-probability.
  • Internally, set an [[OKR]] goal that's stretched beyond the MSG, so that you are building the capacity to do more, and still get to the MSG with a buffer. For instance, when preparing sales capacity, the goal can be 70-80% of the sales capacity. Usually MSG can be 0.7-0.8 of the OKR goal, so internally, the resources and efforts are aiming for the 100% (1.0 of OKR).

Preparing board meeting materials

In the early-stages, it's likely that the CEO will create almost all of the board deck, perhaps with help from your co-founders. As you start to hire "real" VPs, you should be able to delegate the departmental updates to the VPs.

Make sure to send the board materials 24-48 hours in advance at a minimum. Ask the board to read & digest the content and prepare questions. You also need to have pre-board calls with your board members, ideally one-by-one, so that you can give them a rough summary/heads up, and also get pre-approvals on any items that needs decisions on. [[Expectation management]] is key to board relationship. It's so important that there should be a separate article on it.

Although board of directors will have more access to information than most outside people, there's still a ton of information asymmetry as well as sentiment disconnect. So you need to bridge those gaps to make sure the board of directors are informed with the right "weights" on the items and also spend energy and time on the strategic things that really matter to the company.

I'd recommend having at least once-a-month sync-up calls with board members, and sometimes bi-weekly calls are okay. If your board has bloated to a point of having more than 5 members, you may need to start grouping them for some of these pre-board calls (such as grouping board observers together, members by the share class they represent).

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