Every startup will need to give away board seats, but founders can shape the boardroom for success – here’s how.
Corporations are legally obliged to have a board of directors, and putting together the right people for this advisory and control function is one of the most crucial considerations any startup founder has to make.
From guiding you, to filling knowledge gaps and blind spots, and bringing their own experience to bear, there’s a lot to gain from having a good board and, on the flip side, a lot to fear from having the wrong people on.
Even the most promising companies can be thrown into turmoil if the CEO and the board are at odds, as the recent saga at OpenAI demonstrated.
So how do founders put together a board that helps rather than hinders the development of their business?
Line up motivations and timelines
Perhaps the most important thing early on is making sure that you are on the same page with potential board members about the long-term direction of the company. Not getting this clear at the very beginning can, and likely will, lead to more serious friction down the line.
One of the first mistakes founders make, according to Mario Augusto Maia, managing partner at Cogent Venture Partners, is to rely on the first wave of investors to put together the board for them.
“Fundamentally, as a founder you want to be really thinking hard about where you want your startup to go? Do you want to build a successful company? Do you want this to be something that gets acquired in three or four years?” he says.
Without a clear idea of what your endgame is, you won’t be able to put your board together effectively. Your board will naturally change over time, and having the wrong people on from the offset will complicate your ability to make changes when you need to.
You’ll need to think hard about why you want someone on your board, and why they want to be on the board in the first place. Is it just to burnish their resumé or are they really looking to help you grow? What are they bringing to the table, and would they still be comfortable not being on the board if they can no longer bring that to the table?
These are conversations that few founders will be comfortable having, especially when they need the money, but they are necessary to build perhaps the most fundamental element of any boardroom: trust.
“The building blocks of a board, to me, is always trust. If you can’t walk into a room of trust, then it’s going to be bad,” says Soren Nielsen, senior manager at Thursday Consulting and external lecturer at Copenhagen Business School.
Depending on what sector you’re in, you’ll need to ensure that you’re on the same page not only on the end goal, but also on timelines. If you’re in a sector that takes more technology risk and has longer development cycles, then having investor board members who are looking for a short-term exit won’t make much sense.
“If you have a VC who wants to get out in three years and you want to build this for 10, there is a mismatch,” says Maia.
Get the right kind of person
In the beginning, an ideal board member will want to help, can fill a knowledge gap, and is comfortable with the kind of calculated risks startups need to take.
“The ideal board member is somebody that knows what they can do and what they can’t do. And that means to me that the board member has a certain superpower and they know when to use it, when to contribute, and when to keep quiet. If you have a board member that thinks they can talk about everything and have opinions about everything, that would be a red flag to me,” says Nielsen.
Once you get to the stage where you need to scale, different ideal profiles begin to emerge – specialists who have prior experience scaling businesses, using data, and who know what the most important KPIs and governance processes are.
You’ll want to avoid potential board members who want to build up an overly intricate governance structure in the early days. While the company is young it should have the flexibility to operate without burdensome approvals processes for decisions.
“That’s going to give you the two worst worlds of the industry – the money of a startup and the governance processes of a big corporate. That’s just horrible,” says Nielsen
If you can, look at the individual track records before agreeing to give up a seat: Is this the first time this person has been on a board? Do they have a record of leaving boards too quickly? Are they already on too many boards to give you sufficient attention? In this downturn, are their portfolios filled with sub-par investments that will take up a lot of their time over the next year or two?
These are all questions you’ll have to ask, and tread carefully if the answer to any of them is yes.
Don’t inflate your board
Just because having a board is virtually unavoidable doesn’t mean that the more the merrier. Bloated boards can dilute accountability and add too many cooks to the kitchen. After a certain point, more people can just mean more divergent opinions and more potential problems.
“I think, in general, founders should optimise for fewer board members than more board members,” one startup founder in the retail space, who preferred to stay anonymous, told Global Corporate Venturing.
Broadly speaking, the consensus is that early on, three or four people on the board is plenty. You don’t want to overload it. As your startup matures, it will naturally grow, but that shouldn’t mean it grows indefinitely. Anything above around seven is generally regarded as overkill.
You’ll want a diversity of experience and perspective around the table, but threaded through with good chemistry in the room. Having different perspectives for their own sake doesn’t make sense, though, if the experience is not relevant or if the motivations would be divergent.
Board discussions are high-level, so having a corporate R&D person, for example, would make little sense as the agenda seldom gets granular enough to warrant it. Not only that, but the risk of the perception that they may be misappropriating information can lead to dysfunction on the board, as was once the case in Maia’s experience. By a similar token, having a corporate M&A person, who may be angling for an acquisition of the startup down the line, may give a perception of wanting to keep the valuation low. Whether or not the perception is founded or not, it is better to avoid the friction.
Tread carefully with CVCs
When you get a hard-nosed financial VC on the board, the risk you could run is that they push too hard for the returns or the hockey stick relative to what an angel investor might, for example. With a CVC, you can get the opposite problem – a strategically focused investor that may stand in the way of changes that could break with their strategic vision, even if it would mean more revenue for the startup.
“No matter how you twist and turn it, such a pivot, in my opinion, will take longer time to convince the CVC about being the right thing to do, and time is your biggest enemy when you’re a startup,” says Nielsen
Having a corporate on the board can also bring up questions of commercially sensitive disclosures if the startup has a corporate rival as a customer, and it’s not unheard of to have CVC board members step out of the room during certain discussions.
Having a corporate on the cap table comes with myriad advantages, but to have one on the board means you need to have absolute trust that they’re on the same page in terms of prioritising the needs of the startup.
Seek guidance, but don’t disregard control
The extent to which you optimise for control or guidance when structuring your boardroom will depend on several things, including how much experience you have building companies, and how founder-friendly the investors are.
“You have to operate within the constraints, and the constraints are that each equity fundraise could result in some form of board seats that you have to give up. So within that, you want to have more seats than they have seats,” says the startup founder.
“Otherwise, you have this Sam Altman problem where you can get voted out without you even knowing, and the next day you come to work and you’re like, what the fuck’s going on here? That’s effectively what you want to avoid.”
Guidance is important, he says, but when board members have control, they can be less incentivised to guide founders — as they could just replace them with someone they don’t need to guide.
Here’s another lever founders can pull: adding a board seat that you don’t need to fill right away, and saving it for a rainy day, as this founder did.
“[Investors in the last round] added another preferred seat, but I didn’t want a 2-2. So we bumped up the common seats to three, making it 3-2, but I didn’t feel the need to add anyone in there yet. If there’s a gridlock, then I will put someone in there to vote in my favour.”
Standing your ground is easier said than done when you need the money. If you have to choose between laying your people off and accepting a less-than-ideal board appointment, you might just have to bite the bullet. Even when you have a choice and can pick who you accept money from, you don’t necessarily get to pick who they put in the board seat granted them.
An experienced investor, though, will know that what they do now will have strong knock-on effects for their investment down the line.
“The more professional investors will understand that it would be an issue in future rounds if they give themselves too much control at this point, but the more immature or less professional investors will grab everything that they can,” says Nielsen
“I’ve helped so many different companies that had cap tables that made the companies unfundable because the investors simply had taken too much of the cap table and thus also too much control in the boardroom.”
Though you may have to take some things on the chin this doesn’t mean you have to take it all lying down.
“One of the things that tends to surprise some, especially new, founders is that they don’t think that they can kind of push back on these terms. They think that the terms are non-negotiable,” says Nielsen, even when investors present certain terms as industry standard or the “right way” to do things.
Who gets to sit on your board is, in some way or another, always going to be negotiable, and never forget that no board seat should be forever. Any investment agreement should have in it a minimum share threshold for board membership – dilute beneath that in future rounds and you’re out.