Recruit Your Boards of Directors and Advisors

[The following is an edited excerpt from David S Rose’s book The Startup Checklist: 25 Steps to a Scalable, High-Growth Business.]

Once your company is incorporated, you are legally required to have a board of directors. Its official purpose is to represent the rights and viewpoints of shareholders—you, as well as your fellow company owners. But the board of directors should also serve a number of valuable purposes that can help to fuel and sustain your company’s growth and long-term success.

Understanding the Composition of the Board

A company’s board of directors is technically elected by the company’s shareholders, so before a startup receives outside funding, the board is “elected” by, and usually consists of, the founders (although for a tiny company with one or two founders, “the board” may exist in name only).

Once a company receives its initial seed, angel, or venture funding, there are now other owners of the company in addition to the founders. There are specific rules for determining who gets to make what decisions, because although “ownership” at its core level implies “control,” it is possible to separate the two. Once your venture is incorporated, the ownership of the company is divided into millions of shares of common stock, and the fundamental concept is that each share gets one vote.

All of the shareholders then get together vote for a board of directors to represent them in running the company. The board of directors hires a chief executive officer (CEO) who is charged with running the company on a day-to-day basis. The CEO then hires (directly or through subordinates) and controls all other employees in the company.

What gets a little tricky is that all of a company’s shareholders can get together and voluntarily agree to sign a Shareholders Agreement in which they all agree to cast their votes in a certain way. So for a startup company that has taken in an investment from angel investors or venture capitalists who might in total own, say, 20% of the company’s shares, the Shareholders Agreement might provide that the company will have a board of directors consisting of three people, and, regardless of how many shares anyone has, everyone agrees to vote for one director nominated by the company’s founders, one director nominated by the investors, and one “outside” director that everyone can agree on. So in this case, even though the founder still owns 80% of the company, the investors have an equal voice when it comes to control.

In a larger startup, perhaps after one or two investment rounds have taken place, the board might be expanded to five people, with two directors chosen by the common stock holders (the founders), two by the investors (for example, by the directors of venture capital funds that might have invested in the business, or by the most important angel investor, if any), and one independent director agreed to by everyone.

If, at this point, the company has a non-founder CEO, that position might get a board seat (with one for the founders). And if there’s only one major investor, they may choose to fill one of their two seats with an industry expert.

Typically, the common seats will be filled by the founder(s); the investor seats by the lead angel (for an angel deal) or the venture capital partner and/or an associate (for a venture-led deal); and the independent seat(s) by someone experienced and knowledgeable, and who is acceptable to all parties.

The Role of the Chairman of the Board

Many people new to the business world find it easy to confuse the role of the chairman of the board with that of the company’s CEO.

Traditionally, the chairman of the board is the senior person on the company’s board of directors. This may be an early lead investor or, rarely, an independent director who is very well known or has particular industry clout. The chairman is elected by the other members of the board, and usually is neither an employee of the company, nor works full-time on company business. The board as a whole (but not the chairman individually) is responsible for the company’s overall strategy and major strategic decisions, as well as hiring (and firing) the CEO. The chairman of the board will typically serve ex-officio on all board committees (including the executive committee), run all board meetings, and consult frequently with the CEO. While the chairman has the same vote as any other director, there is often an implied seniority and gravitas to the chairman’s role.

The CEO, in contrast, is the chief executive officer of the company. He or she is the highest ranking full-time employee of the company, to whom all other employees ultimately report. The CEO, in turn, reports directly to the full board of directors. In most cases, the CEO prepares the company’s operating plan and projected budget with the guidance of the board, which is then presented to the board for approval. Similarly, the CEO handles all hiring and firing, and proposed employee option grants (which are then ratified by the board).

The one exception to this structure is in the case of an executive chairman, which is a full-time, compensated, operating, employee role that directly manages the CEO (although, depending on the particular company and people involved, both might instead directly report to the board).

Because all power in a company ultimately stems from the board of directors, which represents the interests of all shareholders, the board determines just how much power it delegates to the chairman and the CEO. So, for a chairman or CEO to get more relative power, she needs to have sway over the other members of the board, either technically (because she has the right to appoint board members, according to the Shareholders Agreement) or unofficially (because the other members will take her side in the case of conflicts).

I would caution, however, that having a company where the chairman and CEO are at odds with each other is a toxic situation from which no good can ever come. It is much better for the party with the weaker hand to move on to another organization.

Keys to Assembling a Great Board of Directors

There is a saying in the not-for-profit world that your board members should be able to deliver one or more of the following: wealth, work, or wisdom. In my experience, those same qualities also apply to for-profit boards:

Wealth—as in investors who can write checks and help with fundraising in future rounds;
Work—as in directors with specific skills who can be helpful in recruiting, business development, customer introductions, exit analyses, and so on; and finally,
Wisdom—in the form of smart, experienced mentors who can provide sage advice to the CEO from an objective perspective.

In an ideal world, all of your board members would be able to contribute in all three areas. In the real world, however, you hope for the best, but settle for the best you can get…which can be challenging for a new startup. Because board members in a startup are not going to be compensated with cash, getting one or more great people to voluntarily give of their precious time is often a tall order. What you should NOT do, however, is be cavalier about your board. Don’t put any of your management team on the board (except for a cofounder); don’t put someone you don’t trust absolutely on the board; and don’t put your mother or your best friend on it. Instead, think about someone with real business experience who has been advising or mentoring you along the way. Typically, the initial board is only in place for a short period of time. Once you accept outside investment, the Shareholders Agreement (as discussed above) will almost certainly specify exactly who will be on the board—at which point the initial extra director(s) can be thanked for their service, and perhaps moved to a separate advisory board.

When it comes to compensation, it is unheard of for any board members of pre-profitable startups to receive cash salaries or stipends. But while founders, company employees, and representatives of venture capital funds receive no compensation for their board service, it is not unusual for outside directors—such as an independent director jointly selected by the founders and investors—to receive stock options (in the range of 0.5% to 2%), typically vesting over two to four years.

The edge case is when an angel investor occupies a board seat. There are no hard and fast rules, but typically, if the angel is the primary investor in the round and already has a significant equity stake, there would not be an additional amount allocated for board service. If, on the other hand, the angel only has a small bit of equity, and is on the board representing a larger group of investors, then they might be treated like an independent director, with a point or two of options on a vesting schedule.

Maximizing the Value Created by Your Company’s Board

To get the most out of your board, you should follow best practices in the way you approach it. Brad Feld and MahendraRamsinghani have written the definitive book on the subject, which is worthwhile reading*. But here are some key suggestions to get you started:

– Set up a regular schedule for board meetings that is appropriate for the stage of your company and composition of the board. In an early stage funded company with rapid growth and changes and many interested parties, the board might meet once a month. But for a mature company with relatively stable revenues and management team, the board might meet semi-annually. In my experience with early stage ventures, four to six meetings a year (one every two or three months) seems to work best.

– The CEO should send a full information package to all board members several days in advance of the meeting. It should include current month-, quarter-, and year-to-date financial reports, updates on key performance indicators (KPIs), and the slides to be presented at the meeting.

– Have a standard agenda for the meeting, distributed in advance and followed firmly. I’d suggest devoting the first quarter of the meeting to the CEO’s review of the previously distributed management reports, the second quarter to a more in-depth presentation to the board by a different management team member, and the final half of the meeting to a full, interactive discussion of strategic topics that require board input.

– The meeting should be nominally run by the board chairman, although in many cases he or she will defer to the CEO for administrative purposes. At the end of every meeting, there should be a few minutes set aside for an executive session, during which the CEO and any management team members are excused. That will provide the outside directors (the investors and independent members) with the opportunity to discuss any potential management issues, without having to uncomfortably demand a special secret session.

– Finally, after every meeting, draft board minutes should be distributed to all members for review. Minutes should include ONLY the names of the members in attendance and the specifics of any resolutions that were passed or actions that were taken—nothing else!

The Role of a Board of Advisors

Often, a startup founder will find that there are a number of people whose advice, contacts, and/or knowledge might be very valuable to the company, but who are not appropriate for, or interested in joining, the board of directors. These might be influential industry experts, people with valuable networks, wise advisors, or highly visible people who are willing to lend their names to validate the company. These people can be recruited to serve the company under the rubric of the board of advisors.

Unlike the board of directors, the board of advisors has no legal role or responsibilities, and is typically much more informal. It may actually never meet in person, although I would suggest that bringing it together once a year for a company update and to meet each other would be a good idea. In my experience, advisors usually serve the company through one-on-one relationships with the CEO, who might call them individually as frequently as weekly, or as rarely as annually. They can help refer customers, leverage their social media influence, provide mentoring or counseling to the CEO, or provide insights into the company’s markets. Advisors would generally be compensated with options, at perhaps half the level of board members.

Startup Mentors for Your Entrepreneurial Journey

Wikipedia’s definition of mentorship is:

“a relationship in which a more experienced or more knowledgeable person helps to guide a less experienced or less knowledgeable person…. It is a learning and development partnership between someone with vast experience and someone who wants to learn.”

The problem is that the term has become grossly overused and debased, for the simple reason that the large majority of people have never had a real mentor. A true mentorship relationship typically takes years to develop, is between two people who have worked closely together for a long time, and can last a lifetime. Most people go through life without ever experiencing this, and those who are lucky enough to find one will rarely do so twice. Instead, the term “mentor” as it is commonly used in business circles refers to someone who functions more like an occasional advisor.

The challenge in finding a true mentor is that there is a mismatch of your needs and those of a potential mentor. I strongly believe in giving back, teaching, and sharing my experiences with others, and I receive multiple requests each week from new entrepreneurs asking me to mentor them. The problem is that of all the resources that I possess, the one that is in absolute shortest supply is time. If I were to serve as a mentor for all of the deserving entrepreneurs who ask me to do so, I would have no time to eat or sleep, let alone run my own entrepreneurial company or invest in other startups.

The paradox is that the very people you would want as mentors are exactly the same people who simply don’t have the time to serve in that role, because they’re doing the things that make them good mentors in the first place. Therefore, the best that experienced people can do is try to figure out ways to “scale” their mentoring so as to positively affect the largest number of potential mentees.

Instead of embarking on a fruitless journey to “find a startup mentor,” I would strongly suggest that you devote your energy to soaking up all of the publicly available “mass mentoring” you can find: Read the books in the Startup Reading List in the Appendix; follow the blogs of industry experts; read answers to thousands of startup founder questions on Quora; and attend any of the hundreds of public lectures and events on startup topics. Then, do the best job you can at whatever project or startup you’re undertaking.

Do that, and the odds are surprisingly good that, in the course of your activities, without forcing the issue or explicitly asking for mentorship, you will find that, as the old Eastern saying put it, “when the student is ready, the guru appears.”

Footnotes

*Startup Boards: Getting the Most Out of Your Board of Directors, John Wiley & Sons, 2014.

This post is part of the “Grow” series of the Gust Founder Curriculum. Gust’s Founder Curriculum is a roadmap for founders navigating every stage of the founder journey. Check out our event series and follow along with expanded resources here.