Don’t have time to read? Here’s a quick but comprehensive summary of “Startup Boards: Getting the Most Out of Your Board of Directors” by Brad Feld and Mahendra Ramsinghani, released on December 31, 2013.
Who should read this book: Entrepreneurs who are looking to set up a board of directors, including entrepreneurs who plan to raise funding soon. It’s also useful for people serving on startup boards.
Elevator pitch: Startup Boards is a primer on setting up and running a board, from the early days through funding and acquisition.
Authors: Brad Feld is a cofounder of TechStars and the managing director of Foundry Group. Mahendra Ramsinghani is the managing director of First Step Fund (Detroit) and author of The Business of Venture Capital.
Why. Investors may require you to have a board, but you’ll also want to set one up so you can get advice and direction. A board’s goal is to promote the interests of all the shareholders, which is accomplished by holding the team accountable and promoting transparency.
What. Boards are typically composed of founders and investors, as well as “independent directors” (often other CEOs). They meet regularly to discuss progress and help startups with issues and challenges. Sometimes, “board observers” (junior partners or cofounders) will join the meetings as well. Your lawyer can be a valuable board observer and should only require minimal payment.
Boards help establish company procedures, set goals and milestones, and assess executive performance. You’ll provide your board with regular financial statements and projections, and you may need their approval before certain major actions (like spending a large amount of money). Boards will be particularly involved in deciding on funding, acquisitions, IPOs, and going out of business.
Boards have a chair or lead director, who keeps everyone on track, encourages communication among members, and gives the CEO feedback. The CEO may take on this role, but some investors prefer a non-CEO chair.
Culture is as important for your board as it is for your company, and the ideal culture for a board is one of trust and transparency. Board members should share opinions openly, but not be afraid to admit when they don’t have expertise on a particular issue.
As boards get larger, you should create committees for auditing, compensation, and nominating (recruiting new directors). Over time, the board’s role transitions from active to more of a monitoring role.
How. It’s best to create boards early, even before you raise funding. Invest the time in meeting potential board members face to face, checking their references, and letting other board members talk to them. Remember that you’ll have to sell them on your startup, as well.
Offer new board members an orientation package so they understand the company’s structure, history, and board policies. Get to know your board members, including how they think they can contribute, how often they want you to communicate with them, and what progress they expect from you.
You shouldn’t pay investors or cofounders for serving on your board, but you can offer equity to independent directors and reimburse everyone’s travel expenses for meetings.
To make the most of your board members, create a document with contacts, companies, and VC firms you want to meet, and ask them to fill in who they know and can introduce you to.
Who. Look for board members who are coaches and mentors – they push you to reach your potential, but understand that it’s ultimately your job to do. Board members should be familiar with startups and your industry in particular, have an entrepreneurial mentality, and have a unique point of view or expertise to contribute (like customer development or team building). Board members should be your supporters, opening up their network to you and not speaking negatively of you in public.
Challenges. Board members are supposed to act in the interest of shareholders, but they often have their own personal interests as investors (e.g., wanting to see an exit in less than 10 years). You want people who can rise above that and do what’s right.
If your board member’s VC firm invests in a competitor, talk to them about possibly leaving the board. In particular, insist that they aren’t on the boards of both companies. Beware of VC partners who know they’re about to get fired and VC firms that are going out of business. And recognize that once you have a board, you open yourself up to being fired for poor or dishonest performance.
How. Board meetings take one to four hours and include a short update on the company, a deep discussion of a few issues, and an executive session without the CEO. The deep discussion is the heart of the meeting, and you should come into it with specific questions. At the end, the lead director reports back to the CEO about the closed session. All activity should be captured in the meeting minutes.
At least two days beforehand, send out a package to board members with company updates and finances, as well as an agenda for the board meeting.
Take care of the board’s culture: beware of members who like to hear themselves talk. Also be aware when emotions are driving people’s opinions, and when groupthink kicks in.
Boards can create many legal conflicts; for example, you could get sued for acting against shareholder interest. To avoid that, make sure major decisions are documented and understand the procedures for approving motions. Independent directors can be very helpful in ensuring objective and unbiased decisions.
When. Board meetings should happen monthly for startups and can transition to quarterly as you grow.
It’s also a good idea to serve on one board yourself: it will help you understand the board members’ perspective, learn, and build relationships.
An advisory “board” is a group of advisors who may not necessarily meet together; instead, the CEO requests to meet with them individually when challenges arise. You should look for advisors who think long-term and creatively, have time to spare for you, and are willing to invest a bit in the company. As with regular boards, many of the same principles apply; just remember that your advisory board should complement (rather than duplicate) the board’s activities.
For entrepreneurs starting out, the idea of running a board can be intimidating. But after you’ve read Startup Boards, you’ll feel much better equipped to take it on. Feld and Ramsinghani go over the basics – who’s on your board, what a meeting looks like – but also dive into the details of things like how to approve motions and whether to serve food. In the end, it still comes down to execution – you may know you want a culture of trust and transparency, but how do you make that happen? That part is up to you.