A key (and often undervalued) element in a startup journey is the board of directors. As I’ve written about previously, “The mythology of renegade founders building massively successful companies is unescapable. But of course nothing happens in a vacuum…One key element, easily overlooked or misunderstood, is the board.”
Boards at their core serve a governance function. But when executed well, they can do so much more to help coach founders & executives, provide unique business opportunities from their networks, and help build the company. These functions are often all the more important in global startups operating outside Silicon Valley, as well as those operating in critical industries (like fintech) where regulatory compliance is a must and doing right by customers’ money is of paramount importance.
That’s why I was so excited to discuss Board best practices with Brad Feld, as well as his and Mahendra Ramsinghani’s new book: Startup Boards: A Field Guide to Building and Leading an Effective Board of Directors. For this piece, I compiled questions from a range of global investors and industry experts.
Building the Best Board
Alex Lazarow: The first step in best leveraging your board is building a great one. To kick things off, let’s dive into these best practices. What can board members in emerging VC ecosystems learn from the best board members in developed ecosystems?
Brad Feld: The word “best” is important in “best board members in developed ecosystems.” There are many lousy or mediocre board members in developed ecosystems. And, just because an ecosystem is developed, doesn’t mean the individual board members, or the board as a whole, is any good. So, when trying to learn from other board members, make sure they are the “best.” Then, recognize that there are different styles and roles board members take. Each CEO needs a different kind of help, and the best board members know how to adapt to the particular characteristics of a CEO. The best board members are collaborative, know how to engage, but also understand the CEO runs the company. The best board members aren’t afraid of conflict and know how to engage constructively. If another board member wants to learn from a great board member, the most effective way to do this is to be on a board with them, observe, and learn.
Lazarow: Member selection is critical when building the board group, particularly to mix industry, geography and operational experience. Allen Tayler, Managing Partner with Endeavor Catalyst asked: With the importance of combining experiences on the board (e.g. local market expertise and industry expertise) how important is the relationship over time for board members in emerging markets?
Feld: Interpersonal relationships between board members is critical. CEOs should think of the board as another team they get to work with. They have their leadership team (their direct reports) and their board. While the board can fire the CEO, if it is an effective board, as long as the board members support the CEO, they work for her, and a great CEO will work to build the board into a highly functional team, just like they do with their leadership team.
Balancing The Role Of The Board With Creating A Friendly Innovation Environment
Lazarow: The board’s role first and foremost is governance. In regulated industries like fintech, compliance is of critical importance. But startups innovate by design. Managing this balance is of critical importance. Sid Mofya, Executive Director of the Draper Venture Network asked: Does it kill companies in fledgling markets to require governance that’s built for more mature markets?
Feld: This isn’t a market issue, but a company issue. Young companies need working boards. On these boards, there is more focus on helping the company get to the point where the business is working, there is product/market fit, and the company starts to scale. As companies become more mature, the governance issues become more significant. Note that I didn’t say “more important”, as they are always important, but the balance of board energy early is less on governance and more on the startup phase, whereas later there is more emphasis on governance. This is independent of market.
Lazarow: Of course, the converse is how do you manage the right level of governance to enable the company but also manage over a distance?
Feld: Given that remote work is now widely accepted and understood, so is remote board activity. It’s important that the CEO set the right cultural norms around remote participation and that the board engages with and respects the approach and cultural norms for the specific company. I’m on many boards – some are fully remote; others have regular (or periodic) in-person meetings. As long as the board members are aligned with the CEO and effort is put into the communication dynamics, it works well.
New Board Members
Lazarow: Board dynamics are important. Setting the right tone at the beginning and building a culture over time is critical. Teddy Himler, a Partner with Antler asks for new board members in the first 100 days: How do you get off on the right foot to ensure excellent board governance for the future?
Feld: This is an excellent opportunity to reference the book (Chapters 13 & 31). A few of the ideas include 1. Give the New Director a “Board Buddy”, Get 1:1s Scheduled, Get in the Weeds with Them (e.g. besides reviewing financials, you, your CFO, or your general counsel should spend time familiarizing the new director with the legal structure, capitalization, financials, and current business model), 4. Prepare an Onboarding Package, 5. Encourage In-Person Interaction and 6. Touch Base Periodically.
Boards At The End Of Companies
Lazarow: Boards have roles across the company’s lifecycle. One often overlooked period is at exit. Yash Kanoi, Head of Investments for Alter Global asks: In emerging markets there are less liquid IPO markets and secondaries can be powerful avenues for liquidity. What should be the board’s stance on approving secondary transactions in startups – their frequency and amount cap?
Feld: There is no real difference here between emerging and developed markets as both have active secondary markets for private companies. In all cases, the board should be well-briefed on the rules for any secondary transactions, which are almost always spelled out in the investor documents. Almost all companies have a ROFR (right of first refusal) on any secondary purchase, and often the major investors do as well. In these situations, a formal process which includes the board and major investors is required. In addition, shareholders will have confidentiality agreements with the company and won’t be able to share company information with a secondary buyer without approval by the company. Finally, many entrepreneurs and investors will want to constrain and control secondary market activity for various reasons, so the board should be well-informed and engaged around anything that comes up.
Lazarow: My take, and building on Brad’s point, is that the board’s role is important at all points in the company’s lifecycle. The exit is a critical juncture. This includes of course secondary exits but also an eventual sale or IPO, or in the downside scenario a wind down of the business. Working with the CEO and the management team to ensure a strong process, maximized outcomes, and ensuring stakeholders like employees are treated fairly.
Where We Go From Here
Boards play an important role in startups from the formation stages all the way to exit. To make the most of a startup board requires a thoughtful approach across board formation, culture building, etc. Many of these dynamics are all the more important in emerging startup ecosystems and regulated industries.
I very much enjoyed reading Startup Boards and hope you do too.
The conversation has been edited and condensed for clarity.