I love meeting with founders about their private company boards. All of the issues around opportunity management –Who? When? Where?–condense in this particular crucible.
No one ever “sat me down” and explained private company boards to me.
I learned by doing, and you know what that’s like–tough. I’ve marinated in opinions, blog posts, and advice from my 30-year combined journey as a founder, an investor and a Kauffman Fellow. What I’ve drawn from decades of learning about boards from both sides is condensed for founders here. Separately, in the next post on our series about private company boards, I’ll address the journey the individual serving on a private company board.
Highlights for founders when building private company boards
- Evolution. Think of your board as an evolving group of leaders to support your company. As dynamic as your company is, your board should also be. Keep that firmly in mind.
- Job. Board roles are jobs. They have rules, responsibilities, and KPIs. Don’t get a vanity board. Purpose-less ego management is too expensive, no matter how rich your opportunity.
- Role. Your first board is an Advisory Board. This type of board is great for $0-$FIRST MILESTONE in revenue. Is your first milestone is $150,000 or $1.5 million? Hard to say. For software companies, it’s usually just over $1 million recurring. A way I like to look at your “first big milestone” is, it’s a revenue number that frees you to work ON the business, and not in it. What is that number for you?
Advisory Boards (Board of Advisors) have one job: bringing you the know-how and the introductions to get to that first milestone of independence that frees you from working in the business, to working on the business. Define their objectives around that. Recruit 3-5 people who can help you do that as Advisors. They may not have high profiles. That’s okay. It’s about executing the mission.
Also really important for Board 1.0–get inclusive.
Diverse boards are associated with up to 20% greater financial performance. Two female founders? Find a person with the skills/network you need who is also a guy. Two founders of color? Find someone from another background that contributes fresh insights around growth. Think of inclusion as a way of getting “eyes in the back of your head.” It is much easier to recruit from your own group, but it’s much more effective to have diversity. Want to be good, or want to be great? Great means diversity DNA.
What’s next? Some founders don’t have a next board. If your company is privately held and not investor-backed, you can run with upcycling the Advisory Board model indefinitely. The important discipline for you as a founder to develop is to re-assess your board every time you have a milestone to get to, and re-deploy invitations. Make your board appointments one year terms with your company milestones clearly communicated. (You can always renew a board member helping you make progress.)
Board compensation for Board of Advisors
Does this mean that granting equity is not a smart way to recruit for the advisory board? That’s right, it’s not. Unless it’s a really huge lift to your next milestone, equity is way more expensive than money. Many advisory boards perform happily for the opportunity to contribute, getting their materials at least a week in advance, and a few thousand dollars per quarter plus any travel expenses and incidentals (first class/four-star) paid promptly on the first of the quarter. (If you do offer equity, make sure it vests and ask yourself how many people might serve on your board in the next 5 years. It starts to take a chunk of equity.)
Graduating to governing boards (Board of Directors)
If you take venture capital from Valor or any other institutional venture capital firm, you’re going to get your first Board of Directors. The good news is, the investor tends to put most of this together for you with your new, post-investment operating docs. The more challenging news is, this board is now your boss.
For Series Seed, the stage where Valor invests, our founders generally still control the company and control most of the voting shares—so it’s not super bossy. This spectrum changes as you continue to raise venture capital and into private equity, where your board does hire, fire and set CEO priorities. Clearly, this is a different type of board–a governing board with fiduciary duties. A lot of seed-stage investors will play this very lightly with you in conversation, and say it’s no big deal, the board doesn’t even have to meet, etc. This is cotton candy cloud –lots of pink fluff and don’t believe it.
Compromises you make with a private company board of directors
That may be the investor’s understanding of the current situation, but the reality is, if you do raise venture, there are some compromises you’ll make on control–
- Read your full operating docs before you sign them, and make sure you agree this is what it takes to bring your company to the next level.
- Understand that the investor talking to you today, if they work for a firm, may not be working there later and the firm holds the rights they are negotiating as an entity, not a person.
- Understand—and ask your attorney plenty of questions—about how your decision making gets affected in a Board of Directors scenario.
- Embrace fiduciary duties. Here’s a good primer on fiduciary duties from Cooley, a law firm reknown in these matters.
Use and empower your Board of Directors like the sleek tool they are
While it’s important to be upfront about the perceived downside of boards (loss of 100% direct control), I’m a huge fan of the Boards of Directors format. Here’s why:
- These are the people who are truly aligned with building your business and are your eyes, ears and scouts around opportunity. They are there for you to use! Most CEOs don’t know how to use their board of directors, so this is an area you can really dive into for yourself. It’s beyond the scope of this blog but it’s a topic I expect to return to…just realize there’s a lot of learning for every founder here.
- Have confidence you have a lot of soft influence as a CEO/founder —the BoD can perhaps block you on certain things (like that huge debt you were thinking about or increasing your pay from $100K to $1.8 million), but ultimately, all of them are there because they believe in you and will generally hear you out and want you to be thrilled with them, their contribution, and the company’s trajectory.
- Private company boards can and should bring real diversity into your decision-making process—including positive challenges for you to grow in your role as CEO. One of the toughest parts of being a founder is how lonely it can be when everyone wants something from you (a raise, a job, leniency) and few will share their true opinion about what you should do. The Board just wants the company to succeed first. That is their job. It can be a refreshing place to grow the possibilities with a team of peers aligned on the company’s success. And yes, your board can hire a new CEO, but that’s such a huge lift no Board takes it on lightly. If you listen to their feedback and want to grow yourself, there won’t be any surprises there. The best boards push you, and you push them, and the company prospers.
- Where I see most CEOs-new-to-Boards-of-Directors failing is not holding up their end of the 2 way street. Your communications to the board should be:
- Timely above all. Private company board members tend to be even more overscheduled than you are. Make sure anything they need to weigh in on gets to them in writing a week in advance.
- KPI focused. It can be tempting to bring the kitchen sink to the board, but use your founder/manager/leadership skills to focus the board on the decisions and input that can drive value. Are you opening new markets? Need distribution partners? Recruiting for a COO? Thinking about vertically integrating manufacturing? Put these kinds of topics in front of them at a rate of no more than 1 per board meeting, and give your recommendation so they see your thinking. Board discussion gives them a chance to challenge, enlarge and inform your own pre-work. If you need to brainstorm before that, working groups and committees are perfect.
- Programmed. There are way too many board meetings that involve the founder or board chair going through a boring deck everyone already had. That’s a complete waste of time for you and everyone else. Study the board formats that work (there are several) and adopt one that will accelerate your own acceleration. It’s okay to figure out something unique that works for you. For those personal connections, dinners before or after are perfect. For the meeting itself, habit sets you free.
Private Company Board Conflicts of Interests — call out, kill, and conquer the next challenge
Finally, a quick note for founders on conflicts of interests. One of the best things about founders is they have few conflicts when it comes to their interests—they tend to live the brand, be the brand, and live in the future of the brand.
It’s important to understand most people do not live this sort of life. If a private company board member develops a meaningful conflict of interest (a role in a competing company, a relative applying for a senior role, a spousal conflict, the list goes on…), their decision making will be complicated by that conflict. More than you think.
What does complication mean? Even the highest integrity person will slow down their response to you because they are thinking through all the angles, and for them, there are many more than for others. In human relationships, it’s geometric expansion, not linear. So when you see potential conflicts on the table, develop the muscle to call them out, address, discuss and move on.
- If that means a board member should abstain for a vote, ask them to.
- If it’s a long-term conflict, ask them to resign if they do not offer.
- Even if you generally believe they have the best intentions, it’s better to top cycle and upgrade your private company board than to slow it down with decision making weight.
It’s often said companies move at the speed of the founder’s learning and growth. Nothing will impact the speed of your learning and growth more than who you have on your private company board—so choose wisely, and re-choose as often as you need to.
Worksheet for founders on building boards
If you’d like to dive in deep with your team on these topics, use this Valor worksheet to brainstorm about your board.