Monday, December 5, 2011

How To Choose A Board Member

A number of companies I know have closed series A or B rounds recently.  The entrepreneurs' next step after closing a venture round is often to finalize the structure of the company's board, including choosing the independent board member(s).

WHAT DO BOARD MEMBERS DO?
The members of your board are the most important people you will ever "hire" for the company.  For an early stage company, your board will often:
1. Select the CEO of the company.  This means the board may be able to fire you from the company you started.  Part of the board's job is to hold the CEO accountable for deadlines, plans, and deliverables.
2. Block or push for major events in the company's life (future fundraises, acquisitions, selling the company etc.)
3. Provide great strategic advice or become pain in the butt, medling overhead.
4. Help with recruiting senior executives or key hires.
5. Teach you about nuts and bolts of the business, or processes as you scale.  Depending on the stage of the company and the sophistication of the founders and their executive team, board members may help you understand the process to set e.g. your first financial or strategic plans, coach you on how to manage larger and larger multi-functional teams, or other nuts and bolts of building the business.

For later stage boards, board members will be involved with compensation committee, financial audits, etc.  So the board of a company may evolve quite a bit from an early stage company to a public one.  This post is focused on smaller startups (e.g. 5-200 people in size).

A great board member can add enormous value and truly be helpful to the company.  A terrible board member can truly screw a great company up.  Most board members are neither great nor terrible - but this post will hopefully help you avoid the terrible ones.

THE INDEPENDENT BOARD MEMBER(S)
If your co-founder is your husband/wife, then your VC is your mother-in-law and the independent board member is like your father-in-law.  Just as you can't contract the mob to off your father-in-law, it will be hard to remove a director once you add one, so you should choose your board very carefully.

While some series A investors won't push for the independent seat to be filled for a while (and in some cases at all), others will push for a faster addition to the board.  Steps to choosing a board member:

1. Write a job spec.
This is one of the most important people you will hire.  You should write up what you would optimally want for a board member as a check list or hiring spec.  This should include:
a. Experience.
  • Operating experience.  Do you want someone who has operated a company at a certain scale or has started a company herself?   Can they share process or management best practices with you?  What can you learn from them?
  • Market experience.  Is there specific domain or market expertise you care about at the board level?  Are they in the information flow in ways that will give you a competitive advantage?  Can they provide intros to people in the market who can help you a lot?
  • Functional experience.  Do you want specific functional experience? (e.g. an ex CFO or VP International Sales)?
Depending on your existing board and experiences as a founder, you may or may not care about market experience, functional experience, or operating experience.   Or you may be willing to trade these off as it will be hard to find the perfect person.

b. Involvement with other early stage companies (optimally as a Founder).  People who have not seen a company go from 2 people in a coffee house to a multi hundred person company aren't used to all the bumps in the road that an early stage company experiences.  Things will take longer and will be rougher then expected.  And, unlike a large established company, momentum won't exist.  At an early stage startup, each bit of execution in an act of sheer will rather than an act of momentum.

Optimally, if there is just 1 independent board slot, the independent board member would be a current or former entrepreneur.

Other successful entrepreneurs will be able to relate more closely to a founder's emotional state and provide advice based on their own experiences.  They will understand both the newbie nature of being a founder/CEO and be open to answering "stupid questions" without condescension/judgment.  They will have first hand knowledge of how to build a business as well as understand the bumps that are coming along the way are inevitable.  Finally, successful entrepreneurs can serve as a counterweight to the VC board members in a way that benefits the company, and hence also benefits the VC (see below).

c. Personal rapport and attitude.
This is REALLY important.  You as the founder(s) should have great personal rapport with the independent board member.   They should be someone you feel you can trust, who you would feel good about calling at midnight on a Friday, and someone you think will be able to help you and your co-founder grow both the company, but optimally also grow personally.

The independent board member should be someone you feel comfortable calling up to ask a dumb, newbie question about your business.  They should be someone that if circumstances were different, you would be excited to start a company with them.

Things to avoid on this one:
  • The condescending grey-haired operating executive who sees you as a "bunch of kids" & who views herself as part of the "adult supervision".  This typically leads to the founder getting fired as CEO and some visionless "operator" coming in to derail the company long term.
  • The micro-manager who confuses being on the board and being your boss.
  • People doing it for the potential financial reward rather then impact/excitement about helping you build a business.
  • People doing it to "join a board" so they increase their own personal stature.
d. Alignment of vision.
Does the independent board member understand where you want to take the business?  Are they aligned with that vision and direction?   You want a common view of where the industry will evolve, and someone who will support that vision rather then second guess it.  Similarly, you want someone who will take a long term view to building a great company (if that is your intent), rather then a focus on a short term flip.

Look at their background - what has happened to the companies they have started or run?  Did they sell early, and if so why?  What other choices have they made in their career, and how thoughtful are they in hindsight about these decisions?

e. Raw intelligence.
This is self explanatory.  Some folks, such as Marc Andreessen, Reid Hoffman, and Vinod Khosla, are known for their raw horse power.  Notably, the former two took board seats or made investments prior to become full time VCs.

f. Entrepreneur friendly (or long-term relationship).  
A number of VCs will suggest "friend of the (venture) firm" as your independent board member.  These people will often owe the VC more then they will ever owe your company, and when shit hits the fan will vote with the VC.  In other words, the "independent" board seat will in reality be an investor board seat, and you will lose control of the company.

Signs that someone is a "friend of the firm" (FOF):
  • They have worked at multiple companies backed by the VC
  • They sit on a few boards with the same VCs
  • They are likely to get placed in their next job by the VC (e.g. VP of sales who wants to become CEO as their next job)
The best scenario is to find someone that your VC respects, but that you know is an entrepreneur at heart or will be more entrepreneur friendly.  Optimally, you will have a pre-existing, long term relationship with this person that will help you trust each other as the company inevitably hits a hard spot.

Given the importance of rapport and trust in the board relationship, you should make sure to get to know people (optimally over a few months or longer) before adding them to your board.  As such, you should push back if your investor is trying to get you to quickly add an FOF.

g. Respected by the Investors / VC
Part of the independent board member's role will be to remind the VC board member that they should be voting in the company's best interest (rather than the investor's own best interest).  They should have the confidence and insights to push back on the VC when it makes sense to do so.  The independent should help keep the VC "honest".  This does not mean the independent should rubber stamp the entrepreneur/CEOs every whim.  Rather, they are there to do what is best for the company and to remind the VC that their purpose should be the same.

This is easiest to accomplish if both the VC and the entrepreneur respect the independent board member.  This means both of you should spend a lot of time with candidates for your board before adding them.

2. AGREE ON THE SPEC WITH YOUR INVESTORS
Once you have defined what you want, discuss it with your investor and get agreement on the spec.  This helps you call bullshit on them (e.g. when they offer up a Friend of the Firm with no relevant background) and for them to call bullshit on you and keep you honest (when you suggest your best friend from High School).

3. CREATE THE LIST OF OPTIONS
Make a prioritized list of people you would most like to add to the board.  If you do not know them directly, contact them via your investors/advisors or on LinkedIn or AngelList.  A lot of people will reply to a random ping on LinkedIn or AngelList if it seems serious and you have e.g. good backers/investors.  Your investors may have good suggestions for this list as well.

4. SPEND TIME GETTING TO KNOW THE POTENTIAL BOARD MEMBERS
You will have a lot of pressure from your investors to finalize the board.  You should push back on this and make sure you take the time (many months) to find a great person to join.  Just as you would not rush to hire a crappy engineer "just to fill the spot", with a board member (who will be more of a pain to remove than a bad employee) this becomes even more important.

Some questions to ask/discuss with the potential board member:
  • Ask them to discuss key directions for the co.  Do they align with the vision and approach you want to take?  Do they have key insights or interesting feedback?
  • Ask them how they will help the company.  Where will they pitch in?  What are they good/bad at providing?
  • What are their goals/aspirations?  What do they want to do with their career or life?  How does the role on your board impact this?
  • Ask them to do something for you.  Try to put them to work and see if they will help with something relevant that they are experience in.
5. CHECK REFERENCES
What do people who have worked with them think of them?  Are they high integrity?  What are the helpful at?  If they are already on boards, what do the entrepreneurs they work with think of them?

6. FINALIZE WHO TO ADD
Optimally you will take a "common nominates, preferred stock approves" style approach to adding the independent board member.  Just like with the Supreme Court where the President nominates the Justices and Congress approves the nomination, the balance of power lies with the nominator (thanks to Naval Ravikant for this analogy).

SUMMARY
To sum it all up, choosing your board members will be one of things that could impact the future of the company substantially.  You should be thoughtful about who you are adding and why, and work with your investors to take the time to be thoughtful about who you add.  Once someone is on your board, they are very hard to remove.

Many thanks to Josh Hannah, Naval Ravikant, Sam Altman, and David King for providing feedback on a draft of this post.

Any other things you used to select the right board member?  Let me know in the comments section.

You can follow me on Twitter here.

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