Dynamics of Managing a Startup Board of Directors

Dynamics of Managing a Startup Board of Directors

One of the most challenging aspects of being a CEO is working for and managing a board of directors. If you have had a successful career and worked your way up through organizations, you have a familiarity of having a single boss, or in some matrix organizations, maybe two bosses. However, once you become a CEO you are both the overall “boss” of the company, and you have five to seven bosses on the startup board of directors. You are also expected to lead board meetings. It is much different and presents a different set of challenges.

The startup board of a company is there to manage the CEO, focus on strategy and risk/reward, and to represent the company shareholders. Based on my experience of being a serial entrepreneur, running three companies, and serving on multiple for profit and non profit boards, here are some of my thoughts on the topic of managing your board.

Board Composition When Building or Inheriting a Board

If you are a company founder, then you are fortunate to be able to build your board of directors with people that you feel can help you to achieve the goals and your vision for the company. However, as soon as you make the decision to raise outside money, there may be a requirement to add an investor, or multiple investors to your board of directors. These board members are usually Angel investors or venture capitalists. Sometimes the board member can be an executive from a strategic partner that has made an investment in your company. Under all these situations, it is important that you understand who will get a board seat in your company when you raise this capital, and work hard to find investors that will be supportive board members of your company vision.

In addition to the company founders and outside investors, there are usually one or two industry experts that you want to have on your board of directors. These “outside directors” can be important advisors and sounding boards, both to you and to the investor board members in the company. If the CEO of the company is not a founder, then he or she will almost always be on the board of directors as well. In fact, I would never recommend becoming the CEO of a company unless you are on the board of directors.

In selecting board members, you need to make sure that these are people that you trust. They know how to treat confidential information, and they do not have conflicts of interest other than the inherent conflicts that go along with being a strategic partner or an investor in the company. Ideally, you want board members that are smart, experienced, thoughtful, calm, empathetic, and that possess significant domain expertise or technical expertise in your vertical markets and technologies.

Startup Board of Directors Team Dynamics

Ideally you want a board that works as a team for the betterment of the company and that are all committed to the success of the company. It is best if each of the board members brings something different to the table, or a unique skill set and perspective. It is very valuable to have board members with significant CEO experience, ideally spanning multiple companies, and both public and private companies. It is also very valuable to have board members with experience in raising capital. Many board members are Type A and Alpha Males. However, I think it is invaluable to have diversity on the board, as long as you don’t sacrifice expertise in the process.

In a couple of my companies, I had “board observers”, in addition to board members. Observers are usually strategic partners, and they can frequently have conflicts of interest, and even be competitive with each other. It is important to manage and navigate through these conflicts and ensure that confidential information of the company, its customers, partners, and supplier remains confidential.

In both private and public companies, it is important to have the right level of involvement of the management team, apart from the CEO. I am a proponent of giving key executives exposure to the board, but this needs to be managed properly. In the event that your team is involved in board meetings, it is important to have an executive session that is only attended by the CEO and other board members. I think it is also important to have an executive session where the no one in management attends. This is a requirement in public companies, but I think it is a good practice for private companies as well.

The Importance of Balance and Diversity

As mentioned above, I am a proponent of diversity on the board. This includes women, people of color, academics, various technical experts, business functional experts, and market ecosystem experts. Getting different perspectives has immense value. The importance is to maintain a strong team dynamic and collaborative spirit. It is also very important to have people with CEO experience, ideally with experience in your vertical markets.

I am also a proponent of selectively having business and technical advisory boards. This is a way to solicit expertise without the burden of fiduciary responsibility. It is also easier to manage various advisors that may have conflicts of interest.

The Importance of Domain Expertise

I cannot emphasize enough the importance of having domain expertise in your vertical markets on the board. It is important when the business is doing well because you can leverage their network and experience in how to grow the company, and to risk assess opportunities and various strategies. However, board members with CEO experience and domain expertise can be equally as important, and maybe even more valuable, during times of adversity for the company. These board members can be a sounding board apart from the company CEO, and can give perspective about situations based on their own experience.

Key Committee Work and Having Experts in Key Roles

In assembling a board of directors, it is important to have people that have sufficient expertise and experience to run the key committees: Compensation, Audit, and Nominating & Corporate Governance. This means that you need at least one person with a strong accounting background. This is critical in a public company, but still very important in private companies. If a company is involved in M&A discussions, it can also be helpful to establish an ad hoc strategy committee. This can help significantly in keeping a process moving forward without the need to assemble the full board for every little discussion. Some board members may resist this, but I have found this to be a valuable tool.

Leadership and the Role of the Chairman

The CEO is expected to lead the board meeting. I have never seen a case where this is not true in companies that I have run and in companies and non-profits where I have been a board member.   It is one of the most challenging roles for a CEO to be both the leader of the board, and have all the other board members be their boss.

I have been in situations where I have held both the CEO and the Chairman of the Board titles, and situations where I have only held the CEO title. Both can work, but I actually prefer to have an outside independent board member as Chairman. Sometimes a founder may have the Chairman title and still have an executive position in the company. I have found that this is typically a ceremonial title and not really of much value to the CEO, the company or the board. If the CEO and the Chairman have a good working relationship, the Chairman can be the “broker” of the board meeting agenda topics and also help with the flow of board meetings when it is awkward or difficult for the CEO to provide an extra push on certain board members.

Board Compensation and Alignment of Interest

Typically, in private companies that are not profitable, board members are compensated with equity. In profitable public companies, the compensation is more commonly a combination of equity and cash. Good board members are usually comfortable with equity, and it think this provides the best alignment of interest with shareholders.

The Compensation Committee for the board also sets compensation for the CEO and has a say in other executive compensation. The full board is involved in approving the business plan and financial model, as well as the equity compensation plan and structure. As such, the board has a big influence on compensation of all the employees. It is critically important that the CEO be able to convince the board to support a compensation structure that will allow you to attract and retain key talent for the company. I have found that using third party benchmarking is very effective, and it is a requirement for public companies. I have also found that equity compensation is the key carrot for most employees, especially executives, but it is hard to get most people to live without a reasonably competitive wage and benefits, unless they are very young and single and willing to take more equity, or they have already had a large exit.

The other critical part of compensation for executives is what happens in a change of control, and what happens in the event that you or someone on your team is terminated without cause. I think it is essential that you have competitive employment agreements in place for the founders and key executives. This is essential to attract and retain top talent.

CEO Needs to Manage the Startup Board of Directors with “Swagger” and Humility

Boards want to see seemingly contradictory characteristics in their CEOs, and this requires you to strike a delicate balance.  They want you to be a leader, but also someone that can take direction. The want someone who is confident, but not cocky.  The want to see someone who is passionate and who has conviction, but is also receptive to their ideas and remains calm. And the list goes on and on.

I think it is critical for a CEO to confident and passionate. However, his or her confidence needs to be grounded in experience, facts, and conviction to their cause. At the same time, a board wants a CEO that is receptive to their input. Boards want someone that will take constructive feedback with grace and style. I have been in innumerable board situations where I have been fighting for something that I believe. Some board members would say, “Patrick is stubborn. Patrick isn’t listening. Patrick is defensive.” Fortunately for me, in many of these circumstances, other board members would say, “He is listening, but he just doesn’t agree with you. And neither do I.” It is a delicate balance, and you will need to learn what works best for you to accomplish the key things that you need for your company, and to take critical feedback in stride.

If someone ever says, “we don’t have any politics in our company or on our board”, they are simply naïve, lying or incompetent. An effective CEO needs to be humble and have a balance between listening and leading.

I have found one of the most effective ways to do this is to pre-sell ideas prior to the board meeting. I always make an effort to reach out to each of the board members, and cover the key points I plan to cover in the board meeting and where I am looking for support. Understanding the power structure of the board is also critically important to getting support from the board on your key agenda items.

Risk Management and Fiduciary Responsibility

Public companies are required to follow federally mandated guidelines for risk management, and many large companies have established Enterprise Risk Management (ERM) processes. Although this level of formalization is not necessarily required or desired by startups, it is important to have risk assessment on every key strategic decision. The CEO should outline the risks to board members.

Dealing with a Loss of Confidence

Whenever you are in the time of business crisis, you need to shorten focus and milestones, while maintaining a longer term perspective on the big picture. What do I mean by this? In a time of crisis, some board members may panic. It is primarily a response to their personal reputation possibly getting damaged. The CEO as the leader needs to stay “calm in the storm”, and instill confidence that all issues that can be addresses are being addressed. The board also may have a tendency to blame outside factors on the CEO. This is where all the hard work you have put in to build credibility and trust with the board comes into play. It is also where having an outside board member with deep domain expertise and experience can be helpful. In times like these, I try to provide lots of transparency to the board, and over communicate. I give more detailed information to the board and I give more frequent updates. I work to show progress by discussing specific near term milestones and progress.

Strategy versus Tactics in a Startup Board of Directors

Board meetings should really focus on the bigger strategic issues, but board members, especially in startups, want an update on customer traction and progress. These tactical updates should be handled in a consistent format at the beginning of the meeting. I like tracking milestones and giving updates in an executive dashboard format. I also always give an update on financials and burn rate in a startup that is not profitable. I have found that it is best to compare progress versus plan. I like to explain the annual operating plan with monthly granularity. In startup situations, you may need to make quarterly adjustments to annual plans depending upon progress and financial runway. I have found that there are different sets of expectations among different board members about what information and how much information should be delivered in board meetings. It is important that you strike a balance in this and also work to get some type of alignment of expectations. If there are certain board members that want more information, you can always do this outside of board meetings.

The other critical thing is to bring solutions when you raise problems with the board. Just dumping your problems on the board is not showing leadership. If you want to brainstorm about solutions, do it with your team, your mentor, or a board member close with you outside of the board meeting. Socialize the most significant problems and your proposed solutions to individual board members prior to the board meeting.

Winning Feels Good: Managing Expectations

As the wise man once said, “Success has many fathers, but failure is an orphan.” In the case of a startup, it is important that the CEO accepts responsibly for “failures” and that he or she shares the success with their team and the board. You need to be very careful what you say about individuals on your team in front of the board. Board members, and especially VCs may make snap judgments about what should be done, and you want to ensure that you don’t cause disruption when there really isn’t a need for it.   Set goals that are achievable. Set revenue targets and expense budgets that are achievable. Build momentum by meeting key milestones.   Celebrating success with the team but don’t rest on your laurels. Share the wins and use them as a way to build momentum.

This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.

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