Orinola Gbadebo-Smith
Ori is an investor turned entrepreneur with experience across M&A, PE, VC and startup operations. He most recently founded a VC-backed startup.
Depending on your perspective, type, and motivation, the idea of building a board of directors either excites or intimidates you, complete with all associated imagery of aged oak rooms, brief-case wielding titans, and expensive cigars.
This article, by Toptal Finance Expert Orinola Gbadebo-Smith, sets out to debunk a few myths. It sheds light on boards as a construct, their workings, dealings, and nuances, and explores some battle-tested strategies for recruiting, building, and managing effective boards.
Depending on your perspective, type, and motivation, the idea of building a board of directors either excites or intimidates you, complete with all associated imagery of aged oak rooms, brief-case wielding titans, and expensive cigars.
This article, by Toptal Finance Expert Orinola Gbadebo-Smith, sets out to debunk a few myths. It sheds light on boards as a construct, their workings, dealings, and nuances, and explores some battle-tested strategies for recruiting, building, and managing effective boards.
Ori is an investor turned entrepreneur with experience across M&A, PE, VC and startup operations. He most recently founded a VC-backed startup.
Depending on your perspective, type, ambitions, and reasons for starting your company, the idea of establishing a board of directors (“board”) may either excite or intimidate you. And depending on whether you are a first-time founder or veteran, you may be one of the many with a slightly elevated view of what boardrooms look like.
To the question about personality types, if you are a king—an entrepreneurial persona coined by Noam Wasserstein of Harvard Business School which characterizes an entrepreneur that is principally motivated by control and independence—the idea of voluntarily establishing a group of wise-men responsible for managing, governing, and potentially firing you may seem ludicrous. If you are on the rich side of the spectrum, however, whose psychology is driven more by the opportunity for extreme financial gain than by the need for control, then you probably don’t need much convincing of the value of a board.
Given the lack of tangible, referenceable information on startup-stage boards out there, this article seeks to shed light on boards as a construct, their workings and nuances, and strategies for building effective ones. It will begin with board basics and legal definitions before transitioning into a practical guide of do’s and don’ts of building effective boards.
My own control biases aside for the moment, boards truly do represent some of the most effective arrows in every entrepreneur’s quiver, capable of dramatically accelerating growth and business success, even in the immediate term.
A board is a group of individuals elected to represent the interests of the broader shareholder-base of any type of legally established business entity. These range from traditional limited liability, for-profit, and nonprofit organizations to agencies, government parastatals, and limited partnerships. A board’s strict mandate is termed corporate governance, defined as the rules, processes, and procedures required to guide the way corporates behave/operate, all the while balancing the interests of all stakeholders (i.e., shareholders, management, employees, customers, suppliers, financiers, government, community, and others).
Beyond the definition detailed above, corporate governance is guided by four legal principles:
As mentioned, the primary responsibility of a board is to serve as fiduciaries for the broader shareholder-base of a given company. Boards around the world perform this duty by focusing on three main control levers for exerting influence upon their companies:
And while the above three reflect the more technical of every board’s responsibilities, they also have softer duties equally critical to the success of their organization. These include:
Worthy of a quick aside is the unique relationship between founder-CEOs and boards. As you may have picked up, once established, the CEO—even if a founder-CEO—functionally works for the board. This is especially true once outside external/institutional capital is brought in. In such circumstances and irrespective of pre-money share allocations, the founder-CEO may lose control by: (1) either being diluted down to a minority shareholder (usually after multiple rounds of financing), or (2) through protective, restrictive, or other special control provisions agreed to and detailed in the company’s shareholder agreement.
Given this reality, it would be wise for every entrepreneur to truly wrestle with whether they lie on the rich vs. king side of the spectrum and raise capital or expand their board accordingly. If you lean heavily toward control, bootstrap your company and keep your board lean or to an advisory board, thus avoiding the ideological warfare that will inevitably come with the alternative.
By law, when a company is incorporated, it is statutorily required to establish a board of directors even if with just one director. This initial director is usually the founder/founders, but early boards do sometimes include initial angels or invested friends and family—a highly inadvisable practice that will be revisited later in this piece. Over time, the composition of most early boards change, either at the election of the founder(s) or upon the infusion of external capital, and come to include external investors, independent directors, board observers, and potentially even your legal counsel.
At founding, the state laws of the incorporation jurisdiction and the company’s charter documents represent the totality of the company’s governing guidelines, defining how the said company and board should conduct itself. Founding charter documents include:
Upon the company’s first external financing round, the startup’s articles of Incorporation and bylaws are typically amended. This is done because, (1) the new investors typically receive preferred stock as opposed to common, the issuance of which requires an amendment; and (2) because the new investors will want their new economic and control rights legally reflected. As such, two more governing documents are typically added:
Sample Governance Section of A Shareholder Rights Agreement
Most outside investors who invest quantums that they consider meaningful will insist on receiving a board seat or at least a board observer seat (to be discussed shortly) who will serve as stewards of their capital. So oftentimes, institutional investors with minority stakes in startups will negotiate disproportionate influence at the board level via the SHA. In lieu, it is worth every entrepreneur taking the time to understand each of the above four legal documents and the range of direct and indirect avenues of control that investors might exert to establish control.
A veteran board can bring 50-100x more experience to a room than a first-time founder. – Steve Blank (serial entrepreneur, Stanford professor, and author of The Startup Owner’s Manual)
Fred Wilson, a partner at Union Square Ventures, stated that “a perfect startup board should be comprised of the startup’s CEO (which may or may not be its founder), one financial investor (e.g., an experienced/influential Angel or VC), and two to three fellow CEOs (peers) who have built or are in the throes of building successful companies of scale.” Brad Feld, serial entrepreneur, author, and venture capitalist, takes this a step further in recommending in his book, Startup Boards, that every startup board should also include at least one independent director and, where possible, the company’s legal counsel.
Boards evolve and change over time, as do their functions, requirements, and roles. In lieu, building an effective board is best approached as one would in building an effective management team: First, decide how many seats you need, want, or are appropriate for your company’s stage. Most veteran directors recommend no more than five-person boards for young companies.
Next, identify the skill gaps or skill requirements your young company is/will most be in need of over the next 18 months to two years and solve for those. Third, map these skills to each prospective board seat and then to one’s extended pool of potential directors (extend this pool to the furthest reaches of your network’s network).
And finally, dimension each of your shortlisted directors’ personality traits and characteristics and ensure that they are not only in sync with your company’s values but also complementary to your other potential board members. If I may, I suggest beginning with the following:
Typical Skill Gaps or Skill Requirements for Early-stage Companies:
Beyond the technical skill requirements you would love to build your board around, you must also pay special attention to, as you would if you were diligencing a new management hire, the personality traits and character attributes of each potential board member. In this regard, I recommend seeking individuals with the following:
For early-stage companies, little literature or go-to practice exists on the matter of board compensation, which often varies by venture-stage and renown of the personalities that agree to sit on it. Board members belonging to institutional funds (VCs) typically do not get compensated for their time. Independent board members with little economic interest in the company, however, often (but not always) do. Usually, early-stage companies, should they choose to compensate their directors, almost universally do so with non-qualified incentive stock options in the company, derived from the existing management equity pool. Grants to early-stage board members typically range from 0.5% to 2% of equity, rising and falling in lockstep with the maturity of the company at hand or profile of board member in question.
Other Quick Tips:
Resist the temptation to stack your early board with folks you can control. Trust me, I understand. I’ve been there! It was you who was on the ramen diet for two years; you who sacrificed the friends, the family, the significant other, to get the venture to investment-ready. So, I totally understand your attempt at backdoor control. But trust me (and Katherine), so does everyone else. Your VC will negotiate all your lemmings away before investing a dime; and in the long run, it is a decision that ends up working against you emotionally.
At all times, solve for balance (not control), and leverage independents. As was best said by Scott Weiss of Andreessen Horowitz, “neither founders nor VCs should control any given board; always seek balance and give your company its best chance at survival.” A great rule by the same is that “with every VC, financial investor, or any other individual with a vested interest, add one independent director who will maintain perspective even as founders and VCs pursue their agendas.
Be wary of granting board observer seats as concessions for not granting full board seats. Though they may seem harmless, board observers regularly contribute to and influence board discussions. In time, they actually often turn into full board members, so though they have fewer legal rights than full board members, there is often very little functional difference between the two, especially where smaller boards are concerned.
Be careful with big names, and pay attention to subconscious power alignments. It is fine to appoint high-profile individuals to your board, but do so carefully. Often, the lesser known or younger board personalities will subconsciously suck up to more powerful counterparts, sometimes out of hero-worship but also to further their agendas.
Take the time to pick a strong chairperson. A board’s chair is its leader and tends to be one of the more important leverage points for founders/early CEOs. Your chairperson provides leadership to the company’s board members, acts as the liaison between the board and the executive team, orchestrates meetings, coaches the CEO, teases out insights from the other directors, and encourages variety of opinion while avoiding conflict. Put your ego aside if you aren’t the right person for the job and solve for the best persona for your startup’s chair.
Avoid even-numbered boards (deadlocks are painful), avoid giving veto power as much as possible (everything slows down) and include a provision somewhere that, as CEO, a six-month remedy/improvement plan must be enacted before you can be terminated by your board (for obvious reasons).
Do your homework. Diligence each prospect methodologically. Just as you would scrutinize, diligence, and reference check every important management hire and teammate, extend the same discipline to your board selection process. This discipline becomes especially important for high profile personalities (fight the halo effect).
In the land of the blind, the one-eyed man is king. – Desiderius Erasmus (first editor of the Bible’s New Testament)
The entrepreneur’s journey is many things—tumultuous; psychologically, emotionally and economically trying; and characterized by periods of dizzying ambition and also crushed dreams. What is also unique to this journey, however, is that it is one almost entirely shrouded in uncertainty. You are iterating toward a new product not yet known to your audience, attempting to create new markets that may never come to exist, or navigating a fundraising terrain full of people who harbor almost as many doubts as you do about your prospects. In this land of the blind, please take my advice: Let your one eye be a carefully curated, five-person board of veterans who have each been there before and can bring capital and relationships to the table as well as the emotional fortitude required to help you navigate your way out of the turbulent early waters. Happy building!
All legally incorporated for-profit businesses must establish a board of at least one individual at founding. It is recommended, though not required, that this board be expanded to include outside directors capable of governing the company's actions as it navigates toward success.
Though not mandatory, most startups grant their board members between 0.5% and 2.0% worth of non-qualified incentive stock options for one to two years of service on the boards.
A CEO can, and usually does, sit on the board of the company that they run. The CEO is the authority when it comes to the day-to-day execution of the board-approved strategy. As such, it is advisable that they maintain close proximity to the rest of the board that they report to.
Located in New York, NY, United States
Member since July 24, 2017
Ori is an investor turned entrepreneur with experience across M&A, PE, VC and startup operations. He most recently founded a VC-backed startup.
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