Building Your Board
Many entrepreneurs, especially first-time entrepreneurs, struggle with decisions around building their board of directors. Typically, they have a vague and uneasy fear of losing control, an authentic desire to professionalize their operating governance and capabilities, and a contractual forcing requirement in their term sheet to add a board seat(s). On top of all that they’ve heard several horror stories of “Boards Gone Wild” and are not sure how to proceed.
Craig and I have served on dozens of boards over the years. Through all of the many companies’ life cycles, we’ve developed a set of recommendations to assist our portfolio CEOs in thinking about and making useful decisions for setting up and effectively utilizing their board.
Note: For the purposes of this discussion, I focus on early-stage companies (through Series B) because, as companies scale, board requirements need to scale as well.
Size Matters
Generally speaking, the smaller the board the better. Speed is one of the most important advantages that start-ups possess and that includes decision-making. Logistics alone for setting calls and in-person meetings can bring decision-making to a grinding halt — managing the logistics for a 5 or 6-person board gets complicated. Additionally, the actual management of the board can be incredibly time-consuming. By management, I mean having all the pre-calls and updates before the actual board meeting. For any important decisions — personnel, deals, product, etc. — you should pre-brief and ensure you have alignment with a majority of the board. Size matters so keep it small.
“NMA” — No More Assholes
This mantra is a good one to live by all the time, but it is especially important for a board of directors. Of course, board members have a fiduciary responsibility to look out for the shareholders they represent, but that doesn’t mean they have to be assholes in the way they operate. I’ve seen a recalcitrant board member completely derail a board’s ability to be effective. Attitude matters a lot, so ensure you have professional chemistry and a good working relationship with whoever is going to be serving on your board. Some of the most important decisions for your Company will be decided in the board room — make sure it is a rational and respectful place. You’ll want someone who thinks about moving forward once a decision is made and doesn’t sit around thinking of ways to “get you back” if you voted against them. It is relatively easy to get full background information on any prospective individual board member — just talk to all the companies where they’ve operated as a board member for at least a couple of years. And I don’t mean just the Founders they provide you for references — find the Founders of the companies they invested in, but went out of business. The true character of the individual comes out during the tough times, not when everything is going well. You want somebody on your board that those other founders say they’d want in their foxhole again.
Operators Only
There are SO MANY VCs now — according to PitchBook, there are over 1,800 VC firms in the US alone. Hopefully you are in the position of choosing between several options. When you are figuring out WHO (we feel that the individual is much more important than the firm) will be representing on the board we recommend that you ALWAYS pick someone with actual operating experience, preferably full P&L responsibility. The problems and challenges that early-stage start-ups encounter require operating experience to be helpful. Consulting and finance backgrounds can certainly be helpful, but you can’t save your way to success at an early stage — those skills are typically much more helpful during the later stages of a company’s growth. Our litmus test is whether or not someone has actually sweated making payroll. If they haven’t, it is fundamentally harder for them to understand and empathize with the Founder.
Structure with End in Mind
Don’t think just about the board structure for this round; rather, think about how you plan to grow the board into the next round as well. The lead investor of your next round will want a board seat, so think about how that will likely look so that you can try and optimize for it now. When we lead investments, we frequently agree with founders to have a 3-person board out of the gate — sometimes that is 1 Moonshot, 1 Founder and 1 Outside member (who both parties agree to) and other times it is 1 Moonshot and 2 Founders. We do this with the knowledge that the next round of financing will likely add at least one board seat, hopefully a “friendly” to the entrepreneur or outsider subject matter expert along with the new lead investor. In the instances where the board member has to be mutually agreed upon, we’ve sometimes made all the way to the next round without filling the empty seat.
Work it, Baby!
Once you have the board set up and you are operating — USE YOUR BOARD. You should understand the strengths of each board member and exactly how you will use them to help the company. Of course, they will engage in the governance, compliance and general board activities but I’m talking about putting them to work — elbow grease! Whether it is product expertise, sales team management or business development assistance — you have to actually map a plan for each board member. Take business development, for instance, all good VCs have incredibly powerful rolodexes. You should treat them like a high-powered sniper rifle — load them up with powerful ammunition and aim them at your target. For instance, within 30 days of initial investment, each of our portfolio companies sets me up in their CRM (or a shared Google Sheet depending on the start-up's size) and enables me to be an active and effective member of their business development efforts. It is critical to make it easy and effective for the board member to help you, so we highly recommend you follow our tips on how to write a forwardable email. We strongly urge our founders to be professional in their outreach as we know it is much more effective in getting both the board member to assist and in getting responses from the end targets. Board meetings shouldn’t just be about you reporting performance to the board members; you should put their performance up for everyone to see as well. I promise you that it will get results.
Key Takeaways
- Keep your board as small as possible as long as possible.
- No More Assholes — NMA.
- Only bring on operators.
- Think about the next round’s impact on the board to optimize now.
- Work your Board!
Moonshots Capital is a veteran-founded venture capital firm that invests in early-stage startups with extraordinary leaders.
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