You might think I am crazy. But no, I really do. Unfortunately, many founders have never experienced a good board meeting. A board meeting where not only the management team but also all the investors and non-executive board directors come prepared. Where the bulk of the time is spent discussing big, strategic questions the startup faces. Where the board members debate alternative priorities and action plans that the company can move forward with. Where all the board members truly care about the company and place the interests of the company first.
I have attended board meetings for almost 20 years now in the USA, Israel, Western Europe and in the Baltic states, in all possible capacities — as a member of a startup management team, as an independent director and, most recently, representing Change Ventures fund as a partner. I have seen the good, the bad and the ugly. I believe boards can be hugely valuable to startup founders already from seed stage, but most founders don’t use this management tool correctly and, regrettably, many investors don’t help them to do so either.
Having been thinking to write about this for a while now, it was a pleasant surprise to see Mark Suster, partner at Upfront Ventures from Los Angeles, kick-off a series of excellent blog posts on the topic recently. I highly advise to read those and will refer to and borrow materials from them to make my points here.
One point of clarification regarding terminology: I am using the US terms for a board here. In many European jurisdictions there are Management boards and Supervisory boards, and in that parlance, I am referring to the latter. For me, a “Management board” would be better termed an “executive team”.
So, why do you need a board in the first place?
A board’s role is to be a supervisory body that represents the shareholders, that discusses, debates, and ultimately approves strategic (not operational) decisions that the company makes. What is strategic will change over a company’s lifetime, but generally this includes broad product and market focus, go-to-market strategy, a budget and operating plan, fundraising decisions and executive compensation and senior level hiring and firing. Mark Suster’s post here outlines the legal background in more detail.
A board is a corporate governance structure which will definitely be put in place at some point by investors as a condition for closing a funding round. My suggestion to founders is to form a board as early as seed stage. This way, founders can give themselves time to learn how to successfully manage a board, well before the heavyweight investors come in to play. For bootstrapped startups there is obviously no pressure to form a board, although even then it would be advisable to formalize the process at some point and bring in external members to provide outside perspectives.
Why so early? Because having a board establishes and trains good management discipline. The day-to-day grind of an early stage startup is relentless. A board meeting marks a regular and fixed point in time to step out of the weeds and rise up to 30,000 feet to review the progress of the business and to think about the big priorities and strategy for the future. Which markets to prioritize? When to raise capital and from where? Whether to enter a strategic partnership and on what terms?
Preparation prevents going down the rabbit hole
Unfortunately, many founders and their boards get into the trap of spending the whole meeting dissecting past performance, digging into all sorts of details and not debating the future. The first reason for this is because many founders fail to send the materials for the board meeting at least two days ahead of time. The materials should include the operating metrics and conclusions the executive team has drawn from those metrics and any other data they have gathered that is relevant for the board. The non-executive board members should have read these materials and posed any questions they have ahead of the board meeting by email or on a call so that the bulk of understanding about the past is done prior to walking into the board meeting.
Founders, if you send the materials late the night before, you can’t expect the board to be prepared! Of course, there might be times when you really can’t, but that should be the exception. If you do send the board materials in a timely fashion, you can defer questions in the board meeting from members who clearly have not read the materials and offer to discuss it after the meeting. Founders sometimes forget that being a board member is not easy either — it is like jumping on and off a moving train every so often. You quickly need to get up to speed, provide useful input or feedback, before jumping off the train again. The board chairman/woman should also be managing this process by setting the agenda and actively tracking time to ensure that the meeting does not go down the rabbit hole.
Board members that don’t read the materials that were sent in time, are doing a disservice to the company by attending unprepared. Mark Suster advocates calls between the CEO and every board member before each meeting. This is great practice after the Series A round when the board meetings might become less frequent and the executive team grows larger, giving the CEO a chance to partially step out of operational decisions to spend more time on strategy.
Sadly, many board meetings end up being long discussions about operational details and some board members can waste time micro-managing the decisions of the executive team. Those are the board meetings that I have hated the most.
Get the right people in the room
A big part of the problem is getting the right people on the board in the right configuration in the first place. I have reproduced Mark Suster’s excellent slide here on the composition of the board by funding stage. It is important to note that at the seed stage, the founders should have the majority of the seats. One or more investors might have veto rights on certain decisions, such as budget, major expenditures and capital raising, which is a reasonable way for them to defend their rights as minority shareholders.
As more investors join and the board gets bigger, independent directors should be recruited to keep the investors from having clear dominance too early. A good independent can provide a great mediator function and should add value to the business — often the best are other entrepreneurs. Both independents and investor board members should remember to fulfill their fiduciary duty of putting the company’s interest first.
How do I know if someone will be a good board member? Most importantly, founders should do reference checks on potential board members by talking to founders on boards where that potential member has served. You would not hire any team member without checking references, so why do that for the board? The best reference calls would be to founders whose startup journey has been full of challenges. What you want to know is how the board member acted when the shit hit the fan. Did they invest extra time to understand, engage and help? Were they constructive or destructive in their manner? And what was the added value they provided outside the board meeting, whether in terms of advice or contacts? The best board members will be constructive members of the board team, talk when they can add value and shut up when they can’t. Also, they should ideally provide some added expertise, knowledge and personal network that the founders can tap into both inside and out of the board meeting.
The best founders think of the board as another team in the company — the highest level team, above the executive team. Not only do you want to recruit the best possible team members, but also ensure that they have good chemistry and ability to work together. Board members should be encouraged to spend time together (Mark Suster suggests board dinners) and to connect one-on-one outside the board meetings.
How about dealing with bad news? Every board member’s nightmare scenario is walking into the meeting where the executive team drops a bombshell. They missed the quarter’s target by 40%. Or a co-founder quit. Or a key next round investor turned down the opportunity. And so on. To come back to the train analogy, this is when you jump on what you think is a fast-moving train and suddenly are told it is coming to a grinding halt. Much better for the CEO to call the board members before the meeting, tell the news, include any relevant data in the board pack and table an agenda point to discuss what to do about it. Worst case, send a heads up email. This gives time for board members to think about the situation and to be more constructive in the meeting, leaving less chance of a destructive venting and blame game session.
Boards done right work in favor of the founders
Some founders will object that they don’t want to give up control so early. And will point to examples like Facebook and WeWork where founders maintain dominance of the board well into late stage funding rounds. Firstly, as said earlier, founders should not be giving up board control until later rounds. Second, the corporate governance of some of these companies is definitely not the best example to follow. There are plenty of examples of those companies making poor decisions, partly driven by bad board dynamics. Third, if you take venture capital to accelerate the growth of your startup then, through veto rights at a minimum, you have already given up some control as part of that deal. Better to do boards right and make it work for you.
At Change Ventures, we back ambitious Baltic founders building world-class businesses. For some of our investments we take board seats and we strive to live up to the principles outlined above. We tell founders to call us on it if we don’t. The bottom line for us is that we want to be one of the first people a founder turns to for advice or help. Sometimes during the board meeting, but many times between the board meetings. But we feel strongly that a board should be seen by founders as a useful management tool to leverage in their quest to build a big business. And we should all learn to enjoy them more.