In most US states, companies are mandated to nominate a board of directors. For the startup founder, this may seem another burden imposed by the legal system. On the other hand, it may be an opportunity. In today's blog, I'll take the "glass half-full" position and look at the potential impact a board of directors can have on the early stages of a startup's development.
In the bootstrap stage, there are few constraints on the selection of the board. The temptation is great to nominate the founders and be done with it. This is a shortsighted view, however, because startup executives need all the help they can get.
Most startups fail because of execution problems, which is why I always advise entrepreneurs to form a board of directors that can help them overcome the many issues faced early on in the company's existence. Among other values, savvy, experienced board members can offer insights, a fresh perspective, and a network of contacts a technology executive may not have.
Those advisors are quite often willing to invest time with a startup and share their experiences. While they could serve as informal advisors, involving them as board members establishes a formal relationship that helps both. For the startup executive, advice imparted has more impact and can't be ignored. For the board member, joining a board is an opportunity to be part of an exciting experience. The board position enhances a career and might even deliver financial rewards.
This is probably a good time for a brief segue into the compensation of external board members who are not investors. Because the startup's cash resources typically are limited, the compensation will be in the form of stock options with a target equity position of 1 percent for a valued advisor. Stock options will have a vesting period from two to four years -- if the relationship is discontinued, the outlay of shares is limited.
Once the startup raises funding, the venture capitalists will require at least one board seat per round. Ideally, an entrepreneur would choose the investor based on the contribution he or she would make as part of the team, but that's not often how it happens.
In many cases, the role of the board is not well understood. Two responsibilities are more important than others and should never be underestimated. The first is the board's responsibility to shareholders: "Maximize shareholder value" should be on a plaque hanging in every boardroom.
Lest anyone forget, the chief executive officer works for the board of directors. A key duty of the board is to hire and fire the CEO. Moreover, board members represent all company stakeholders, and that includes founders, investors, employees, partners, suppliers, and customers, once the product ships.
The board should implement a culture of accountability, mandating a regular review of the CEO and the management team's progress. But no member should meddle in the day-to-day business operations unless an issue is identified at the board level, and it is decided by the board that a member be assigned to assist the CEO. The scope and duration of the board involvement should be well defined. Otherwise, the authority of the CEO could be undermined.
The interaction between the board and the CEO is an important one and should be bi-directional with open lines of communication. The entrepreneurial CEO should engage the board, and vice versa, to create value. A CEO must never surprise board members with bad news at a board meeting. Instead, all key items should have been discussed between meetings in a free-flow fashion. The CEO should be well prepared for each board meeting: A packet of information should be sent out a few days in advance of the meeting to give board members time to review and prepare.
The corporate counsel ought to be invited to the board meetings as a way to develop best-practices for both accountability and transparency. If the company is acquired, board meeting minutes will need to be made available to the acquiring company. Unfortunately and all too often, it's a mad scramble to get the minutes approved and signed during an acquisition. Corporate counsel can make sure this isn't a problem.
Becoming a member of the board of directors is in vogue right now. EE Times readers who work in Silicon Valley can take advantage of a course taught at Stanford University by Clint Korver, formerly of Ulu Ventures, now chief operating officer of NovoEd. The course is titled "Startup Boards: Advanced Entrepreneurship." More information can be found here.
It's wise to remember that most startups fail because of poor execution. An experienced board member can make all the difference. Entrepreneurs should select board members as they make hiring decisions -- carefully.
— Michel Courtoy is a former design engineer and EDA executive who sits on the board of directors at Breker Verification Systems.