Initial Board Composition

Start-ups often create a board of directors when they raise funds. The initial board composition is usually one or two investor representatives and one or two founders. This is a good start, but far from ideal.

Having board members that represent the investors is obviously a good idea. But remember, the board should represent all shareholders, not just investors. Typically, investors will own a minority stake in early stage companies, as little as 20% sometimes. The remainder is owned by the founders and other "common stock" shareholders, such as employees and advisors. Founders are normally good representatives for common shareholders, as they often own the majority of the common stock. Yet this is far from perfect. A founding CEO, for example, needs to wear two very different hats as a board member: his "management" hat and his "shareholder representative" hat. This is not always easy. Additionally, the interests of small shareholders are not always aligned with those of the founders.

So what to do? One approach that I have seen work very well is to add one or two "independent" directors to the board. Ideally, these members would bring industry specific expertise to the company, and receive some common stock options as compensation. Their interests should thus be aligned with those of the majority of the shareholders.

First things First: the role of the board

Before discussing the value of an outside board member, I should describe the role of the entire board. My focus, as I mentioned before, is in private (typically early stage) companies.

A board's role is to oversee and support the CEO. Not the "company", not the "management team", just the CEO. Everyone in an organization should "report" to someone. And the CEO reports to the board. BTW: the board is also accountable: to the shareholders.

These two roles that the board plays, to oversee and to support, are quite different. The first one simply means that the board must make sure that the CEO is doing a "good job". If he isn't, just as with any employee, the board must either make sure the situation is corrected, or find a new CEO.

The second role is a lot more interesting, for board members as well as for CEOs. Board members must be useful. In what ways depends on the specifics of the company, particularly on what the CEO needs and wants, but they often include such things as helping recruit executives, making introductions to strategic partners or investors, and providing feedback on the company's strategy.

In very early stage companies, board members can often be useful with more "mundane" things, such as helping find an attorney for the company, setting up a benefits program or even finding and assembling furniture! In short, whatever needs to be done...

While the oversight & support role are equally important, CEOs often perceive their boards mostly as an oversight body that should be dealt with using the least amount of time, while board members often prefer to focus mostly on the (more fun) role of supporting the CEO, and don't pay enough attention to their oversight responsibilities.

Yet a good board that has a healthy relationship with a CEO will likely have a very significant impact on a company.

How important is it?

A good outside board member... It hit me a few days ago. Independent board members have played key roles in most of the companies that I have been involved with. Not only that, but, looking back, I realize that the lack of one really hurt one of the companies...

Yet, getting a value added, very active, outside board member doesn't seem to be top of mind for most company founders - particularl in the early days. Should it be? I believe so. I will use this blog to explore this further...