At any company level, the board of directors has a direct impact on the organization’s product strategy, hiring, fundraising and much more. And startups have to be very selective in choosing board members who will advise the company in the right direction. In the big company realm, both the media and the company’s shareholders have questioned Yahoo’s board, which continues to employ a floundering Carol Bartz as CEO and supports a bizarre product and business strategy. Then youlook at Facebook, where founder Mark Zuckerberg has strategically assembled an all-star board to help the company grow as a public company and expand into new directions. Most recently, Facebook added Netflix co-founder and CEO Reed Hastings to its board, joining Marc Andreessen, Jim Breyer, Donald E. Graham, Peter Thiel and Zuck himself. Hastings not only will add his experience in taking a web company public, but he will also help Facebook navigate potential movie and TV show streaming opportunities. Facebook has a rock solid board—almost every member has been a strong innovator in the past few decades.
As we saw with HP, even huge, established companies need to make changes in board structure as a company’s strategy shifts. HP added five new board members early this year as new CEO Leo Apotheker took the reins. Of course, fast forward seven months and HP has announced that it will be discontinuing operations surrounding the TouchPad and all webOS phones, a major move for the company and certainly one that was influenced by the board.
The fact is that the board plays an extremely important role in some of the major events for any company with shareholders. The board helps manage and make decisions about financing, acquisitions, product strategy and even an IPO. So it goes without saying that entrepreneurs are faced with challenging decisions assembling a board. For big public companies, this has always been the case, but the role of the board at startups is also changing. I interviewed a handful of early-stage investors (and former entrepreneurs)—Jeff Clavier, Keith Rabois, Dave McClure, and Paul Lee—to find out what startup founders should know about picking and managing a board.
Lightbank partner Paul Lee echoes this thought, telling me that entrepreneurs have to be “very careful” about how they put their board together. “Each stage is different in terms of who you bring on,” he explains. “With an early startup in Series A funding, a smaller board is better because disparate voices make agility as a startup harder. When you get to five members, it is more difficult to come to a consensus.”
Of course, there’s a balance between finding board members who both challenge the company as well as reason with the founders when necessary. Having both is crucial, says Lee. He also feels strongly that giving equity to board members without any investment is not the right formula for many early-stage startups. “Entrepreneurs want board members to be vested in the company, and the board members need to have some skin in the game to serve the company best.”
In later stage companies, it makes sense to add seasoned execs who have run a successful companies in the role of the “CEO Coach.” In Facebook’s case, Hastings could fill that role. Another recent example of this was showcased by LinkedIn. In 2010, LinkedIn added former Ask.com CEO George “Skip” Battle to its board, as well as Netflix’s CMO Leslie Kilgore pre-IPO.
In the past, Lee says that the board used to be seen as a “collector item” of sorts, where it was an opportunity to add prestige to a company by adding well-known board members and CEOs. Board members basically sat there and looked pretty. Now, he explains, the board has become a more integrated part of a company where board members have actual responsibilities and are held accountable.
Well known angel investor Jeff Clavier, who runs his fund SoftTech VC, agrees with Lee that the role of the board has evolved in the past decade. As micro-venture funding started to come into play in funding startups, angel investors can’t sit on as many boards as they invest in. He says that in early rounds where there are 12 different investors (which happens pretty often these days), entrepreneurs have to make a strategic decision as to which investor or VC should take a board seat. With a group of rock-star investors, it can be difficult to choose who should join the board and who has the time for the role.
Clavier says that board member roles have become more proactive. As opposed to just sitting on monthly calls, more entrepreneurs are giving board members tasks outside the meeting such as helping recruit talent. For example, Clavier tells me that Zynga’s CEO and founder Marc Pincus would allocate certain jobs to board members, who had to produce a report on the status of tasks at meetings. He says that a successful startup brings together strong investors and advisors and engages them both in and outside the boardroom.
In fact, he compares early stage startups to houses with a bunch of holes in the foundations. One way to fill those holes is adding the right board members and advisors. As opposed to ten years ago, there are many more outside individuals involved in a startup’s progress from an idea to an actual company, and Clavier advises entrepreneurs to create a support network with a board. For example, many startups have created both boards of advisors as well as boards of directors. And he believes it is important for mid-stage, more mature companies to add experts from outside the investment community to a board. For example, the addition of former Ticketmaster CEO Sean Moriarty to online event tickets platform Eventbrite last year.
Keith Rabois, who is currently the COO of Square and an angel investor, has a unique perspective on the changes in boards over time, having been on both sides of the equation. He relates the experience of selecting a board to getting married with no possibility of divorce.
Jokes aside, similar to Zuckerberg, Rabois and Jack Dorsey have built an all-star board at Square. Kleiner Perkins Partner and former Morgan Stanley Internet analyst Mary Meeker, Vinod Khosla, and former U.S. Treasury Secretary Larry Summers all joined the mobile payments company’s board this year. Sequoia partner Roelof Botha also sits on Square’s board.
Rabois tells mepoint blank that very few investors are actually capable of adding a lot of value to company boards. But in Square’s case, all of the VCs on the board had prior careers that made their additions a natural fit for Square. He says that Boetha’s experience as CFO of PayPal made him an ideal addition. And Khosla’s insight as an entrepreneur and CEO of a multi-billion dollar company (Sun Microsystems) added a lot of value to Square. Meeker has made a career out of studying and analyzing what makes a successful technology company and this brought a new level of expertise to the payments company, says Rabois.
Square’s board meets every two months, and Rabois says there is really no set agenda in the board meetings. The group starts by reviewing the financial and business performance of the company, and focuses on several long and short discussion items that arise.
As for how boards have evolved over time, Rabois feels that today’s best entrepreneurs have moved away from a model where investors are supervising companies and are looking to bring more value-add to boards with seats. But how to extract value from a board can be a challenge for many young entrepreneurs. His advice to entrepreneurs is to recruit board members and advisors that you can learn the most from. And he says entrepreneurs should get into the discipline of having regular reviews with investors and board members.
Another trend that is taking place in current board structures is that founders are retaining board control longer, even as the company matures. Q&A platform Quora only has three board members, after taking an $11 million round of funding from Benchmark in 2010. Founders Adam D’Angelo and Charlie Cheever both have seats as well as Benchmark’s Matt Cohler.
Angel investor Dave McClure advises startups to keep control for as long as they can, and be judicious about selecting board members. In fact, McClure, who has invested in hundreds of companies, only sits on three boards himself. Of course, that doesn’t mean that founders should eliminate the board altogether, but McClure says it should be a gradual process. His belief is that if a startup has two founders, both should have seats, and it should add an investor in a Series A round, then perhaps another investor in a Series B round, as well as an independent “expert” of sorts.
He also says that the more recent trend of 15 to 20 investors piled into a round with no board seats can be problematic. “Everyone is along for the ride and no one is watching what is going on at the company,” he explains. And I’ve heard similar sentiment expressed from others in the investing community as well.
There are so many stories in Silicon Valley of board members shirking their responsibilities to early-stage startups by making it only to one out of every three meetings and worse. And board members that has different goals from entrepreneurs could easily block a major exit for a startup, or even a new funding round. The general consensus from all the investors and entrepreneurs I spoke to is to choose your board very, very wisely, and don’t rush into any decisions about naming board members.
To ensure the board is effective, it is important to continuously evaluate board performance. The board should evaluate its own performance and consider governance expectations and best-practice. The most common factors to evaluate are diversity, experience, teamwork and effectiveness.What are three questions you should be able to answer to the board of directors? ›
Make sure your executive team is prepared to answer questions like: What is the long-term vision for the organization? What is the organization's plan for growth? What are the largest roadblocks the company is facing?How do you measure the success of a board of directors? ›
A review of the board's agendas is a good way to measure board effectiveness. If the same items are appearing on the agenda with no resolution, it may be an indication that the board lacks the necessary expertise to deal with the issue. Boards should explore the frequency of information exchanges with managers.What is the most important aspect of board effectiveness? ›
The key functions of an effective board identified by the Guidance are to: Provide direction for management. Demonstrate ethical leadership – promoting defined culture and values. Create a performance culture that drives value creation without excessive risk.What four factors improve the effectiveness of a board of directors? ›
However, the following are essential for each director, regardless of the industry: financial acumen, communication skills, critical thinking abilities, and a willingness to prepare for and participate in meetings. Therefore, the first step to effectiveness is an evaluation of the current talent on the board.What are the 3 W's you should look for in a prospective board member? ›
The three W behaviors are Wealth, Work, and Wisdom. They're major behaviors in my leadership ethos, called servant leadership. (I'll talk about servant leadership in another post at some time).What are board attributes? ›
The board attributes examined include board size, board structure, board independence, board competence, board meetings and directors' equity ownership.What do companies look for in a board member? ›
In selecting board members, you need to make sure that they are people you trust, they know how to treat confidential information, and they don't have a conflict of interest. Ideally, you want board members who are smart, experienced, thoughtful, calm, and empathetic.How do you answer why do you want to be on the board? ›
Your answer should show that you are a team player who is willing to work hard and contribute your ideas. Example: “I thrive in an environment where I am constantly learning new things, so I would be excited to join this organization because it seems like there is always something new going on.What is board effectiveness? ›
A board effectiveness review provides feedback for maximising the strengths of directors and boards and highlighting areas for further development. The main purpose of external reviews is to ensure that the board improves its own effectiveness and the company performance.
A board evaluation is a method for a board of directors to verify members are meeting expectations, making progress toward goals, following bylaws, and a chance to gather feedback on the board's health. Luckily, they don't need to be intimidating or take up hours and hours of time.What is the importance of board evaluation? ›
Boards who commit to a regular evaluation process find benefits across these levels in terms of improved leadership, greater clarity of roles and responsibilities, improved teamwork, greater accountability, better decision-making, improved communication and more efficient board operations.Why is it that the board of directors should evaluate its own performance? ›
The board is responsible for its own development, job design, self-discipline and performance. These are not areas that can be delegated to the CEO. The board itself is accountable for the quality of governance. Self-evaluation is a way to assure yourselves and your owners that you take accountability seriously.