A well chosen board: collective wisdom that will will take you places.
Do You Really Need a Board?
Legally, every company is required to have a board of directors. It could be just one person (i.e. you), but building a well-functioning board is an opportunity to increase your startup’s chances for success. The board is responsible for authorizing major decisions like senior executive hiring and compensation, issuing debt and equity (including stock, options) and approving budgets/strategic plans, major expenditures and significant transactions.
Many founders I’ve met are focused on their percentage ownership in the company as the primary measure of control, with 51% often the magic number. But the reality is that very few decisions require a shareholder vote – generally, raising money or selling the company. As noted above, far more decisions (including those that require a shareholder vote) require board approval, making your board at least as, if not more, important to controlling the fate of the company.
A good board helps you refine your strategy, improves your decision-making and adds stability to your company. It should also help you recruit senior managers, secure customers and partners and raise capital. Board members can and should make introductions to relevant parties and sometimes help you close the deal. Having the right people on your board also increases your credibility with these parties, allowing you to punch above your weight. You can use positions to attract highly-experienced talent that would otherwise not be interested, available or affordable.
How Do You Build the Board?
The ideal size and composition of your board can and will change over time depending on the stage of the company. As a general rule of thumb, smaller is better and an odd number is often preferable so there is no potential for a tie vote that is the same as a “no” vote (in practice, this is quite rare, however). Given the importance, be very thoughtful about who you add to your board. Each board member should add some unique value or perspective and be able to work effectively with the other board members and the senior management team.
Initially, just you and/or your co-founder is probably sufficient to make sure you can move quickly and get your company set up the way you want. The CEO should definitely be on the board and lead the meetings. If the founder is not the CEO, it may be appropriate for him or her to have a seat as well, but beyond that I don’t recommend having anyone else from the management team on the board. They will pretty much always vote with the CEO and don’t bring much fresh perspective. The remainder will be made up of investors and independent “outside” directors.
Often, your board will expand or change each time you raise a round of financing. Investors should hold seats that are roughly proportional with their ownership of the company. For example, if an investor (or group/series of investors) owns 20% of your company, then one seat on a five-person board is appropriate. In order to maintain this relationship, early investors may need to give up their seats to later investors. Smart investors bring a lot of value to your board given that they have broad experience with similar companies and business models as well as relationships with industry players and potential follow-on investors. That said, the marginal value of adding additional investors to your board goes down quickly and investor-dominated boards are not ideal.
Your outside directors are a tremendous opportunity to add talent and guidance to the company. Given the math below, it makes sense for the early outsiders to be people you know and trust so that you can rely on them to not only help guide the company but to be aligned with your vision should there be critical early decisions to be made. That said, resist the urge to appoint them based solely on the reliability of their vote and instead pick people who bring real industry knowledge and contacts to the table. As the company grows, you will likely add outsiders who lack a personal connection, but if you choose individuals with wisdom and integrity, you can be assured they will act in the best interests of the company and its shareholders (including you). This may not always be in your best interests as a manager, but this needs to be OK as your goal should be to maximize the value of your equity not to protect your compensation or perks.
See below for the ideal board based on each stage:
Resist the urge to expand your board beyond seven people until you are much larger or publicly-traded as it makes scheduling and decision-making more difficult. One way to accomplish this goal is by appointing “Board Observers” who have the right to attend meetings and receive information but don’t have a formal board seat/vote and/or by allowing people (e.g. the larger management team) to attend meetings by invitation.
How Do You Compensate BoD Members?
In an early-stage company, it is generally not necessary to compensate management, founder or investor board members. Each of these individuals typically already earn cash compensation based on their management roles and own a meaningful equity stake in the company. Some companies provide a small stipend to their outside directors (often paid on a per-meeting basis) but the primary compensation is usually via participation in the management equity plan. For an early-stage company, each independent director might receive 0.5-2.0% of the company, which gets diluted over time. The company should reimburse the directors for their out-of-pocket expenses incurred while attending meetings or otherwise discharging their responsibilities.
The bottom line is that a good board makes you more effective and increases your company’s probability of success. A bad board not only does the opposite but can make your life miserable. Be thoughtful about how you assemble your board and seek the advice of experienced mentors and advisors to ensure you do it right.
Now that you’ve built your ideal board, stay tuned for next month’s article on how to manage it…
Photo courtesy of Christopher Michel.
Make sure you fill those crucial initial spots with a great team that will take you places.
Congratulations to the Houston Astros, 2017 World Series Champions, and to the city of Houston who can use the win after a rough summer of devastating storms. How did the worst team in baseball in 2013 with only 51 wins turn it around so quickly and reach the pinnacle of their sport? They committed themselves to building the best possible team using all means available. The Astros beat the Los Angeles Dodgers, another great team that also had a great season. Both teams won over 100 games and survived a tough run through the playoffs. Also, both teams made major in-season moves that just may have been crucial to getting them to the World Series.
Assembling the best team
Like every other major sport, it’s now conventional wisdom that to win a championship, you do everything you can to put the best team on the field. The Astros traded for Justin Verlander, who went a combined 9-1 in the remainder of the regular season and playoffs and was key to all three of their playoff series wins. The Dodgers picked up Yu Darvish who helped solidify their rotation and get them to the World Series. Last year, it was Aroldis Chapman joining the Cubs and Andrew Miller joining the Indians. In 2015, it was Johnny Cueto and Ben Zobrist for the Royals and Yoenis Cespedes for the Mets.
This lesson applies just as well to startups and to companies as a whole. The best team wins, and the question to ask is: are you doing everything you can to put the best possible team on the field?
I spent 13 years as a venture capitalist and during that time we had a saying. If the three most important factors in real estate investing are “location, location, location”, we often said the three most important factors in VC investing are “management, management, management.” We would take an “A” management team with a “B” idea over the reverse every time. Why? Because we had confidence the “A” team would be able to handle all the twists and turns required to successfully navigate the startup minefield and eventually find the “A” idea. While the “B” team might just get stuck and fail to execute.
As a founder and entrepreneur, I had the same experience regarding the importance of having the right team. No matter how novel the idea, there were always multiple other companies chasing the same goal. With the proliferation of startups, accelerators, incubators, seed funds, crowdfunding, etc, this is likely more true today than ever. There is no doubt that timing matters. Market size matters. Business model matters. But all else being equal, the better team has a much greater chance at winning. I’ve seen it personally from both sides. Bet the jockey, not the horse.
The relentless pursue of opportunity
Of course, as a startup you don’t have unlimited funds to pay seasoned leaders to join your team. So, you need to be creative and grab talent whenever and however you can. Probably the best definition of entrepreneurship I ever heard was from legendary Harvard Business School Professor Howard Stevenson, who defined it as “the relentless pursuit of opportunity beyond resources controlled.”
I joined Burkland Associates about a year ago and one thing that has surprised me so far is how many founders I’ve met who spend their time building Excel models, creating pitch decks and even doing journal entries and reviewing expense reports instead of leading their companies. At a stage where assembling a great team is crucial, a great founder focuses on setting the vision, charting the course, motivating the team and assembling the resources to be successful. Recruit a team of experts – full time or part time, employees or consultants – to help you execute.
Justin Verlander and Yu Darvish may only take the ball every fifth day. They may not even be around 2-3 years from now, but this year, they made all the difference. The lesson to learn from this is: who can you add to your team to give you the cover you need to put you over the top?
Think about it.
Renting a CFO can help you have a strategic partner to realize your vision (photo courtesy of Silicon Valley entrepreneur and photographer Christopher Michel).
Startups are hard. Most fail. Even ones with great ideas. So, how do you maximize your odds of success? Hire the best team you can afford. Including a Strategic Chief Financial Officer with the skills, experience and vision to be your business partner and trusted advisor. Muhammad Ali had Angelo Dundee. King Henry VIII had Thomas Cromwell. Luke Skywalker had Obi-Wan Kenobe. Who’s got your back? It could be your part-time CFO.
Can’t you get away with just an accountant? In a word, “no”. Accountants are important and help you figure out what’s happened in the past and report the same to your internal and external stakeholders. But you are an early-stage company. You need to drive the bus by looking ahead through the windshield, not behind in the rear-view mirror. Smarter finance is forward looking – it helps you chart the best course.
Shouldn’t you be doing this yourself as the CEO? Again, “no”. Best case, you are actually capable of filling this role. But this isn’t the best use of your precious time. You need to drive the company’s product and sales, build the team and be the company’s face to the outside world. Time spent in finance is time spent away from your highest and best purpose. Worst case, you screw it up.
But can you afford and attract a top-quality CFO? Yes! Because you don’t need this resource full-time and can pay only for what you need. We live in an on-demand world. Don’t buy servers – rent time from AWS. Don’t buy a car – book an Uber. Don’t buy a vacation home – go on Airbnb. And don’t hire a full-time CFO (yet) – rent one from a reputable On-demand CFO firm. You probably only need 0.5-2.0 days per week, can find A-list talent with expertise in your field and be up and running in days. And when you’re ready to make a change, it’s simple to move on or upgrade to a full-time resource.
Here are 5 key things you get from a part-time Strategic CFO:
Rent the CFO cover you need. No-brainer.