September 29, 2019
Four Ways to Build Out an Effective Board of Directors
Most startups don’t need a board of directors. If you’re a public company, in most countries, by law, you need to have one. Whether or not they are effective is a different point. The purpose of a board is to provide governance, supervise the activities of the company, and represent the shareholders. Boards can be called boards of governors, advisors, regents trustees, etc. and most do the same things. In some cases, they may also do fundraising.
There are different types of board members: internal, those who are typically employees, major shareholders or union representatives; the other type are external, those who are not active in the day-to-day operations of the company and don’t deal with that level of detail. The tend to bring an outsider’s perspective to issues and disputes and can more effectively address concerns due to their external experience.
So when is the right time to build out a board of directors for a startup? It all really depends on what you need. Do you need advisors in certain industries to assist in establishing contacts and advice for growth strategies? Are you looking for investment? Many investors like a seat (or two) on the board to control the ongoings of their investments, so you may be forced to develop a board from the onset. You may be gearing up to go IPO and need your bylaws and board in place in order to start that process.
Four Tips for Building a Strong Board of Directors
The best way to start is to just get out a piece of paper and start naming names. Do some research on each one. What boards are they already on? Who are they already invested in? Do they have any conflicts you need to be aware of before approaching them? Do they have any of the following experience (because you’ll want this mix on your board):
- Previous and Current Board Experience
- Evaluation Capabilities – experience dealing with valuation and term sheets
- Financial Governance – ability to understand your P&L
- Fundraising – connections to investment
- Human Resources – connections to people
- Legal – understanding regulatory and legal compliance issues
- Marketing – understanding your market
- Planning & Strategy
- Programs and Services
As you start your list, keep the following tips in mind.
#1: Seek Diversity.
When developing your list, also evaluate the range of skillsets, types of experience and perspectives that will provide you with the best strategies for the growth and success of your company. A good example of a bad board selection would be Theranos, which had no board directors with biotechnology or medical expertise – a serious red flag in a market with huge regulatory processes. The makeup of the board facilitated one of the greatest frauds in Silicon Valley. Look for directors with experience and perspective that will give you insight into your stakeholders (customer segments, funders, regulators, etc.) as well as your product/service development.
#2: Boards Are Not Management.
A board oversees governance and strategy, gives feedback and assists management, rather giving instructions, mandates and standard operating procedures to management. A caveat on this one: sometimes founders can get in over their head in areas where they have no expertise and your board may have more experience in that area. For example, managing your finances should have a clear and easy to follow standard operating procedure with, for example, rules as to what is and what is not reimbursable as “entertainment” when sales people are out with clients.
#3: Set Clear Expectations.
When approaching potential board members, be clear about what you expect from each member (and it may vary widely): insight, support, introductions, regulatory assistance, funding, credibility, etc. An experienced board member will look to add value, and it will be easier for a prospective board member to see if they can meaningfully help you grow your company. The also need to understand the time commitment involved and your long term vision and exit strategy (if you have one).
#4: Recruit From Many Sources.
Don’t look at just the “usual suspects”: current board members of similar companies. In fact, my preference is to focus on symbiotic companies as I consider a board member already in my industry to be in conflict since he is already on the board of a potential competitor. Look for brand similarities or industry sector similarities. Look for a mix of experienced board members, but don’t let lack of board experience deter you either. Fresh board members bring energy and new insights to the table.
Identifying and Approaching Potential Board Members
Use your network. They know and can suggest the right people and can make introductions for you. You might also look at your existing partners or suppliers since they already work with you and have a vested interest in your success.
Plan your approach similarly to how you would pitch to a potential investor. Personalize it to describe the key segments from the list above that you think they could help you accomplish. Some large companies pay them a stipend or stock options. Other companies hire a search firm (costly and not always the best way to identify the right people).
Even is your startup is only a few people, what you are building may be of significant consequence to very important people, so go big or go home. Major investors, CEOs, famous celebrities – you never know who would be interested and they all bring their reputations, connections, and experience to the table. Don’t be shy. The worst thing they can say is “no”.
Once you’ve found the right people and they’ve accepted to be part of your venture, it’s a good time to get all the paperwork in order, have your first board meeting and send out a press release. The right board of directors can really guide a founder to accomplish their vision and change the world.