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Very Early Stage Technology Investing

Archive for the ‘Independent Directors’ Category

Build a Board You Don’t Deserve – For Entrepreneurs

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Recently, while sitting in a board meeting, I realized the answer to a question I often get:  “If you could tell a founder only one thing, what would it be?”  It’s rolled around in my head the last few weeks, but the board meeting clarified the answer for me:  Build a board of directors that is so good that you are embarrassed to have them spending time with you rather than solving bigger problems.  Building the super board also forces the you to confront many of the common flaws of the entrepreneurial gene, including introversion, hubris, concept narcissism, avoiding detail, risk addiction and selection bias.

You begin to form the super board as you prepare to take outside money that amps up your own personal responsibilities to others.  Taking other people’s money (OPM) is a big step in the entrepreneurial path.  Spend some time thinking about what type of people you want on your board post-investment, reserving a couple of seats for investors in the seed stage.  We like to see boards of five members when we close a seed round, consisting of 2 common seats including the CEO/founder, 2 investor seats, and an independent director chosen by consensus.

This may seem programmatic, too constraining to meet the super board goal, but a good board is built in stages, and this is Stage I.  Prior to investment founders should be thinking about this post-seed end state and focus on the extra common seat and the independent seat.  These will be hard enough to fill. Let’s set the common/independent seats aside and address the investor board members.  In seed stage investing look for experienced entrepreneurs with investment experience and institutional seed stage investors affiliated with a fund or group.

An experienced entrepreneur likely has had success and failure in their past, able to balance high expectations with the up and down reality of building a company.  The institutional seed investor will have broad market context and exposure, which means a lot when raising capital in good times or bad.  You always need a board member that sees more in your space than you do.  Your syndicate may include other investors, but you need the ones on the board who are able to roll up their sleeves.  Remember that investment terms constrain much of the decision making of the early stage board, so there won’t be a lot of cliff-hanger votes in the board room.  The Stage I board is a working board with governance responsibilities.  As the company matures the level of work becomes more governance related.

We can assume that the investor board members will have high expectations and hold you accountable.  The common board representative really has the same responsibility.  And if that is you, remember that you are a shareholder now, not some lone wolf founder pursuing an unproven idea.  You’re path to wealth is irrevocably linked to building enterprise value, nothing else.  As one of the common reps – CEO or the other common seat if you have a hired gun – you must separate your founder ego from your board responsibilities.  Even as the CEO you have to make this transition in thinking to realize the full potential of the company.  It will require creating an objective partition in your mind that is fed by outside information.  And this outside information first comes from your super board.

So we can now fill out the Stage I super board with an independent who gives the company something it can’t afford yet.  Maybe that’s great access to customer decision makers that are beyond the reach of other board members and founding employees.  Often this seat is used to bring in a world class technical or scientific founder to supplement the internal team.  You are looking for someone whose level one LinkedIn network includes a ton of people who can either buy or validate your product.  Then you need to actively convince the candidate that you are committed to building something compelling, worthy of their time.  Everyone else on the board is vested in the company, but the independent is investing time, reputation and access usually for a modest amount of illiquid options.  Harder to find.

Assuming you find a good first independent, you’ve now assembled five people who are stakeholders in the company’s success.  They should be leaning in at this point, and if you’ve chosen wisely you’ll be pressed by the board to work outside of your comfort zone, embrace accountability and grow professionally.  You can also add another independent if you identify another gap to address, but don’t build a big board prior to raising venture capital, which will complicate the Stage II board.  Expect to be challenged, and if you feel like you are coasting, shake up the board in some way.  Sometimes just brining in a new member or observer will raise everyone’s game.  I sit on a lot of boards and I board can become stale.  I try to roll off in those cases, bringing in a replacement that can stimulate new thinking.

Building this great Stage I board, even though it seems like a small task, is the first step to demanding more from yourself as you transition from struggling entrepreneur.  The path to first capital is grinding and can build habits that the founder/CEO needs to shed quickly.  The loneliness of the embryonic stage of creating the new company must give way to the collaborative task of bringing it to market.  You must crave scrutiny and fear what you don’t know to be successful.  Recruiting the super board is job one.