You’re a startup founder. You’ve spent days, weeks, and months building out your minimum viable product. You’ve pitched countless venture capital investors (VCs), and now secured your Series A round of funding. Should you set up a formal board of directors?
The board of directors (the ‘Board’) is by far the most integral part of a startup’s internal management structure. A startup’s strategic direction is almost entirely dependent on the decisions of the Board — this includes fundraising, acquisitions, IPOs, hiring and firing of C-suite executives, budgets, new product lines, etc.
It’s often said that startups should think about setting up a Board only once they’ve raised their first round of funding. However, the benefits of forming a Board earlier in the lifecycle of a startup, irrespective of raising funds, are undeniable. Among the many potential reasons for a startup’s failure are those which are self-inflicted. Disagreements between the founding team, overconfidence, and lack of expertise — these issues can all be avoided with a strong and supportive Board.
Startup Board Formation
First, before we get into the details, let’s take a look at a few basic principles that every founder should know when it comes to establishing a Board.
- Legal — It’s a legal requirement in most jurisdictions for private companies to have at least one director (i.e. it can just be the founder). Public companies, however, usually have more than one director (depending on the jurisdiction) on their Board. The Board is subject to fiduciary duties, which, in a general sense, obligate them to act in the best interest of the company.
- What — It’s the Board’s responsibility to ensure that the interests of the shareholders are being considered in the strategic management and overall direction of the startup. At the early-stage, the interest of the Board and shareholders are aligned as the shareholders are the founder(s) and VC investors.
- Who — The composition of a Board (discussed below) can vary depending on the stage of a company. However, the typical startup board is comprised of the founder(s), a VC (as the lead investor of a funding round), and independent board members.
- When — Startup boards are usually formed at the initial round of venture capital funding (if not earlier), and upon which, the size and composition of the Board are a negotiating point in the term sheet phase.
- How — The frequency of board meetings can range from monthly to quarterly, but startup board members may also hold more frequent ‘informal’ meetings to address unforeseen circumstances (which there will be plenty by virtue of being an early-stage company).
- Remuneration— The remuneration of board members will depend on the circumstances. For example, VCs taking a board seat in their portfolio companies are not remunerated. However, independent board members may be remunerated in the form of a small equity stake.
Who Should Be On Your Startup Board?
1 — CEO
The CEO is likely to be a founder-CEO, who is responsible for the day-to-day operations of the company as well as the allocation of resources.
2 — Chairman
The Chairman moderates board meetings to ensure that board members engage in productive, balanced, and fair discussions about issues critical to the startup. Often it’s the founder-CEO that acts as Chairman, however, some VCs require these roles to be distinctly separate.
3 — Directors
There are three general categories of directors, each of which plays different management roles, though all are expected to bring valuable expertise to the table. Each category of director has skin the game by virtue of either legal obligations, equity stakes, remuneration, or reputation (or a combination), and therefore, there exists a mutual alignment of focus toward growth and value creation.
- Executive Directors — they are employed by the startup and have management responsibilities for running the company’s daily business (e.g. the CEO, CFO, CTO, and COO). Often, and almost always, the founder(s) are also the executive directors.
- Non-Executive Directors — they are usually not employed by the startup but bring a wealth of knowledge and experience to challenge, question, and also monitor the CEO and senior management.
- Independent Directors — they represent the true division between senior management and governance and provide an external perspective without having any direct ties to the startup.
“The startup journey can be a lonely one for the CEO. It’s filled with ups and downs, unexpected stresses, and an endless number of decisions. Surrounding yourself with the best minds both on your team and on your board is an important part of this journey.” — Brad Feld
Types of Board Members You Want On Your Board
The types of board members best suited to a startup, along with the skills and expertise they bring, are constantly evolving and will vary with the growth trajectory of a startup. For example — a board member who has product development expertise may be of greater value to an early-stage startup in contrast to a board member who has domain expertise in the audit and regulatory space. Usually, the evolution of a startup board trend from focusing on product development and financing to sales and growth.
The following table sets out essential skills which board members should possess at different stages of a startup’s lifecycle.
However, there are some characteristics that effective startup board members possess regardless of a startup’s growth stage. Scott Weiss, General Partner at Andreessen Horowitz, has identified the following characteristics.
- Experience / Domain Expertise — Look for someone who has been there and done that, who will not only help you navigate the rough startup terrain, but also bring strong network connections in the market you wish to capture. VC board members are helpful, however, you don’t want to rely on them as your only source of operational experience. Rather, aim to seek out board members with true operational experience in your market.
- Sharp Opinion — Consistent and constructive discussions are at the heart of an effective board. Having a board member who is quiet and fears speaking their mind is of little use. To use a phrase popularized by Ray Dalio, effective board members are ‘radically transparent’ and are not afraid to explore uncomfortable topics for the purposes of better decision-making.
- Responsive — Startups move at a rapid rate and you need responsive board members who are committed to returning your calls, text, and emails in a short timeframe. Things will undoubtedly come up — lawsuits, financing issues, recruitment of employees, etc. The best board members help you put out any fires, help you understand where you went wrong, and assist you with planning your next steps.
- Adds Real Value — Board members are not just there to attend meetings. Effective board members add real tangible value to startups in the form of introductions to potential customers and partners, interviewing key candidates, coaching senior management, speaking at sales events, assisting with securing financing, and everything else in between.
Who’s In Control?
Board Composition After VC Funding
From inception, startups necessitate the attraction of outside resources to achieve high growth rates, which establishes the need for external funding through venture capital investment. But, here’s the dilemma—a startup’s need for external resources drives a wedge between the startup’s value and founder control. There is, therefore, a trade-off between raising more funds for growth and giving up decision-making control.
The majority control of a startup board exists on a continuum between ‘founder-controlled’ and ‘investor-controlled’ with ‘shared control’ living somewhere in the middle. As a startup moves upwards in its growth trajectory, majority control moves from ‘founder-controlled’ to ‘share-control’ to ‘investor-controlled’. This is not something that founders often want to hear. However, this is the nature of venture-backed companies, simply because VC investors build their voting power and gain additional board seats with each round of investment.
Evolution of the Startup Board
As a startup raises each round of funding, the Board begins to go through an evolution, particularly in the context of the number of members and the transfer of decision-making power. It should be noted that until an IPO or an exit generally, all external investors will hold preferred shares in the startup, which grant rights such as the nomination of board members and liquidation preference (i.e. they get their money ahead of holders of common shares).
- Seed Stage (3 person Board) — comprising of 1 Seed investor (maybe an angel or micro-venture capital investor), 2 co-founders.
- Series A (5 person Board)— comprising of 1 Seed investor, 1 Series A VC investor, 2 co-founders, and 1 independent director.
- Series B (5 person Board)— comprising of 1 Series A VC investor, 1 Series B VC investor, 2 co-founders, and 1 independent director.
- Series C (5 to 7 person Board) — comprising of 1 Series A VC investor, 1 Series B VC investor, 1 Series C VC investor, 1 to 2 co-founders, 1 to 2 independent directors.
- Series D (7 person Board) — comprising of 3 VC investors, 1 to 2 co-founders, 1 to 2 independent directors.
Startup Boards Trends
To better understand the current trends across startup boards, here’s a snapshot of data presented in the KPMG Startup Board Report 2019.
- 64% of startups do not have ‘professional’ board members
- Startup boards typically have 4 board members
- 25% of startups have an independent director
- 65% of startups do not have a formal process for recruiting board members
- 92% of startups have board members who are investors
- 50% of startups remunerate their board members with cash or equity
Effective Startup Board Meetings
Startups at the seed stage, or sometimes even at the Series A, are often not concerned with running formal board meetings. However, once VCs and independent directors are in the picture, running effective board meetings becomes a necessity. Having a simple yet consistent structure for running startup board meetings should be the starting point for all founder-CEOs.
“The art of a good board meeting requires the CEO to bring out the critical issues, stimulate a productive discussion in a non-threatening fashion, and get consensus in a timely manner,” — Thomas Porter (Co-Founder at EDF Ventures)
The Board Deck Approach
Sequoia Capital, the prominent Silicon Valley venture capital firm, has long been a proponent of using ‘board decks’ to maximize the value founders get from board meetings whilst minimizing the time spent on preparation, with the likes of Dropbox, TuneIn, and Thumbtack using the following structure.
The Board Triangle Approach
Jon Callaghan, the Managing Partner at True Ventures, has proposed using the Board Triangle as an interaction model for startup founder-CEOs during board meetings. Using the ‘points’ (i.e. Strategy, Leadership & Reporting) of the Board Triangle, founder-CEOs can manage the topics of discussion as well as the allocation of time in respect to those topics. It should be noted that the ‘Board Triangle’ is a high-level model, and focuses largely on non-administrative matters (which also play a part in startup board meetings).
- Reporting — Directors are required to stay informed, whether that be in relation to financial performance (e.g. unit economics, cash flow, etc.), product development or the status of financing. However, it’s a waste to spend time ‘reporting’ to your startup board during the actual meeting. Rather, startup founder-CEOs should make as much of the reporting happen outside of the meeting by making all information and materials available in the board pack a few days before the meeting.
- Strategy — Use your startup board and their insights to flesh out strategic issues. This is the purpose of the board. Founder-CEOs should approach the meeting with the intention of clarifying 1–3 strategic issues, with 1–2 of those strategic issues being the central issues. Some topics of discussion may include competition, pricing, product differentiation, distribution or partnerships, etc.
- Leadership — Your startup board is an excellent resource for your professional development. As a founder-CEO, you should seek to optimize your results by working collaboratively with your greater team and making them part of the process. Bring your senior team members to board meetings to share their expertise and insights (e.g. Head of Engineering to discuss product issues, CFO to communicate cash flow projections, or VP of Sales to outline the pipeline for the next quarter).
A Hybrid Approach — How You Should Run Startup Board Meetings
Startups are too dynamic to have all aspects of their business set in stone, let alone the structure of their board meetings. In saying that, founder-CEOs can’t approach board meetings as a check-box exercise with no preparation either. There must be a balance.
The following sets out a hybrid model, taking inspiration from the ‘Board Deck’ and the ‘Board Triangle’ approaches, which serve as a malleable template for startup founder-CEOs.
1 — Well Before the Meeting
Don’t scramble at the last minute to pull together materials for your board deck/pack. Plan for the meeting well in advance (this is a no brainer), and consider having a brief individual call (15–20 minutes) with each independent and non-executive director to determine if further additions need to be made to the board agenda. Keep the Board Triangle in mind when developing your board agenda and board deck/pack to ensure all three ‘points’ are considered.
2 — Before the Meeting
The board pack should be sent out to members 3 to 7 days before the board meeting so that members have enough time to digest the information. The meeting can be used to discuss key matters rather than presenting the contents of the board pack. This will decrease the time you spend on ‘reporting’ during the meeting. Remember, it is the directors’ job to ensure they are across the materials before the meeting.
3 — Start of the Meeting
Your meeting agenda should set out an approximate allocation of time for each of the following: (1) Reporting (e.g. calibration and company building); (2) Strategy (e.g. working sessions and deep dives); and (3) Leadership (e.g. big picture, summary and closed session). For completeness, place the Board Triangle on a whiteboard or PowerPoint slides (or share on-screen on Zoom for virtual meetings) to ensure it is top-of-mind of all attendees. Remember, the meetings should be malleable to allow for changes in the focus of discussion depending on the circumstances. The discussion should be moving between reporting, strategy, and leadership.
3 — During the Meeting
Begin the meeting with the ‘Big Picture’ — here, the founder-CEO provides an update to the Board regarding highlights, lowlights, challenges, as well as flagging the 1–3 strategic issues to be clarified.
- Calibration should follow, where the founder-CEO may choose to bring the CFO, Head of Engineering, VP of Sales, or CTO to speak to the key metrics relating to the startup. Remember, board members have already received the relevant data in the board packs, don’t repeat yourself. Speak about the plans you seek to implement in improving growth. This can include concepts such as revenue or sales metrics, product engagement metrics, financial performance, lead generation targets, or customer experience (e.g. Net Promoter Scores).
- Company Building should have an overlap with ‘calibration’ as outlining key metrics should lead to a ‘next steps’ action plan. Ideally, company building should focus on three main components: (1) Product roadmap — which highlights the vision and direction of your startup’s product offering over time; (2) Forward-looking organizational chart — what is the composition of the existing team and what expertise needs to be recruited; and (3) Business development/operations — who is the startup partnering with, which new partnerships need to be established, and what operational improvements need to be made.
- Working Sessions involve a 30-minute deep dive into (at least) 2 out of the 3 strategic issues initially flagged by the founder-CEO. The allocation of time to strategic issues will depend on the circumstances, so work with your Board to figure which issues should be prioritized. This is where the Board can add the most value by applying their expertise, connections, and industry know-how.
- Summary / Closed Session should be used as an opportunity for founder-CEOs to have an unfiltered discussion with board members as well as wrapping up any administrative points. Being a founder-CEO can be a lonely experience, therefore this time should be used to express your frustrations and concerns through authentic dialogue with your Board. Sadly, this process is often overlooked despite being an incredible opportunity for personal and professional development as a leader.
4— After the Meeting
Immediately after the meeting, take some time to reflect on what was discussed and clarify whether all objectives set out at the beginning of the meeting have been addressed. It’s also a good exercise to determine whether an appropriate amount of time was spent on each ‘point’ of the Board Triangle — did you spend too much time reporting, did you allow your team members to provide their insights, did the Board flesh out the strategic issues you’re struggling with?
Startups are dynamic and constantly pivoting and evolving, which is exemplified by Mark Zuckerberg’s ‘Move Fast and Break Things’ motto — so, founder-CEOs would benefit greatly from taking a principles-based approach to forming their Board and running their board meetings. The approaches set out in this article are key principles that startups should keep top-of-mind, and founders should work with their teams to determine what works best for them.
Disclaimer — nothing in this post constitutes or is intended to constitute legal or financial advice.