Let's start with the Board Basics
What type of board members exist?
There are three types of board members:
- Executive board members: usually the founder/CEO and sometimes a co-founder;
- Non-executive board members, including:
- Independent board members. (More on why this is important below.)
What is a board observer?
A board observer can either be officially designated or they can be unofficial. For example, it is common for junior VCs to sit in as unofficial board members to support a more senior partner holding a board seat. Despite their name, board observers are not silent observers during board meetings and typically participate in the discussions. Board observers don't have voting rights and can be excluded from certain sensitive discussions.
While many board observers won’t make much of a difference to your business, some can offer great leverage for you as a leader and for your organization as a whole. They possess useful skills, know your company well (typically, they worked on the due diligence of the company), and are usually eager to roll up their sleeves and help you because they are earlier in their career and hungry to prove themselves. Lean on them for extra support, wherever need; they’ll be delighted to add value to your company.
How big should my board be?
Typically, at the seed stage, most companies have a very small board (if at all), consisting of at most three board members. Very often, it's just the CEO and their cofounder. For Series A or Series B startups, it’s common to have 3-5 board members. Conventional wisdom says that you want to have an odd number of members on your board so that you always have a tiebreaker for key decisions. But the reality is that important strategic decisions in the boardroom are almost never reached by voting, but rather by discussing the issue as a group and reaching a decision. So having an even number of board members is not out of the question (roughly a third of Emergence Capital's portfolio companies have an even number of board members).
The board of an early-stage company changes as a function of fundraising. For instance, when a company raises its Series B, the new lead investor will likely take a board seat, either growing the overall size of the board or replacing an earlier-stage investor.
What is the function of a board?
Officially, the board exists as a governing body of the organization. Its key functions include overseeing the strategic direction of the company, reviewing the annual operating plan, and making other key decisions including hiring and firing key execs and setting their compensation. Board members have fiduciary duties towards shareholders, meaning they must represent the interest of the shareholders, as opposed to their own. In practice, the board of an early-stage startup should exist to help the CEO succeed (more on how below).
Now that you know the basics, it is important to understand how to build your board thoughtfully to set it—and your company—up for success. Below, I have shared the top four principles for building a better board.
Think of the board as an asset, not a liability.
It is very common for first-time founders to think of the board as a group of people to report to once a quarter. This can be daunting, especially for first-time founders, who might feel hesitant to be vulnerable with their board. This dynamic can get in the way of unlocking the value a CEO can get from their board members.
When built correctly, a strong board is an asset that helps a company and its CEO achieve its goals. It is an extra set of eyes and hands that can be leveraged toward the success of your company. Strong board members can act as sounding boards and help leaders make better decisions that enable the businesses to thrive. A healthy board will encourage the CEO to pull back the curtain and work together to overcome any roadblocks. With this healthy dynamic, board meetings can become highly productive working sessions to "get work done" as opposed to creating busywork.
Manage your board with transparency and trust.
In order to turn your board into a true asset, it is essential that it is built on trust. No board, even one composed of the strongest members, can thrive without openness and transparency. This is easier said than done. The first step is selecting individuals who are strongly aligned with your values.
But it doesn’t end there. Trust is built over time and requires you to invest time into building individual relationships with all your board members (even outside of the official set board meeting times). The best board relationships involve constant communication. There are many ways to achieve this, including monthly email updates, weekly phone calls, and board offsites. Whatever method you choose, use that time to connect as people, in addition to discussing business. This helps when you are faced with difficult decisions. It is a lot easier to reveal an uncomfortable truth and solicit real feedback from someone you know and trust as opposed to someone you meet with over Zoom four times a year.
Assume you are entering a 10-year relationship with every board member.
Because companies fill their board seats so early in their lifecycle, it is important to choose your early investors carefully. According to the Harvard Law School Forum on Corporate Governance, the average tenure for a board position is nearly 10 years. So before adding a new member to your board, ask yourself: “Am I ready to work with this person the next 10 years?”
At Emergence, we always stress the importance of investor/founder fit during the diligence process. Do you feel a pit in your stomach before pulling out your phone to dial your board members or are you genuinely excited to speak with them? Do you get energy from them or do you feel drained after each conversation?
I always recommend CEOs to diligence prospective board members extensively before agreeing to formalize the relationship. In particular, I always recommend finding other CEOs who worked with the same board member when the going got tough. Don’t be afraid to backchannel. Ask thoughtful questions and read between the lines of what’s being said. Ensuring fit is so important because once someone is on your board, that relationship cannot easily be undone.
You don’t have to be best friends with your board members, or even always see eye-to-eye. In fact, diverse perspectives and a healthy push and pull can significantly improve executive decision-making and the subsequent health of the business. However, it is important that during the due diligence process, you determine if you can work and communicate together well, especially under pressure or in high-stress situations.
Lastly, you need to feel confident that they support your vision and will be there to support you for the foreseeable future. If the board member you are courting is a Principal or Junior Partner at a fund, get to know the rest of their team so that you can understand the firm’s culture and the likelihood of that person leaving the firm—which would leave you with a replacement you didn’t choose to be on your board.
Add independent board members to fill any skills and diversity gaps.
Independent board members are people who have not invested in your company and are not part of the company’s management. Because they are external to a company, the purpose of independent board members is to fill strategic gaps that exist or might exist in the future.
Before bringing on independent directors, conduct a gap analysis across your board and management team, considering both your plan for the next 2-3 years and your longer-term vision. Consider the areas of expertise and competencies you will need on the road ahead, and what the current leadership team and directors bring to the table. Some areas you might account for:
- Functional expertise (i.e. Sales, Marketing, Product, etc.)
- Industry expertise
- Business model expertise
- Customer empathy expertise
- Experience scaling companies
Your gap analysis might reveal several gaps. Unfortunately, shortcomings in diversity are by far the most common. Him for Her’s second annual report with Crunchbase (an Emergence-backed company) on Gender Diversity on Private Company Boards revealed that in 2021, the percentage of US-based companies with at least $100M in venture funding with at least one woman on the board of directors rose from 40% last year to 51%. Despite the progress, there is still a dramatic deficit and more work to be done. The study also revealed racial and ethnic diversity gaps, with only 3% of board seats being held by women of color.
In contrast, every S&P 500 company has female or non-binary board members by law. It is important for companies to address these disparities from the beginning of a company’s lifecycle and granting independent board seats is an ideal way to do so. Ann Shepherd notes an encouraging trend: In the past, many companies traditionally only added independent board members in the 2-3 years leading up to their IPOs, but we’re now seeing an increasing number of companies adding independent board members at the Series B stage and earlier.
One way to find the highest impact independent board members is to look outside your immediate networks. While more than 80% of tech board seats are sourced through personal networks instead of through search firms, board members sourced this way tend to possess similar experiences (often as CEOs or CFOs), backgrounds, demographic profiles, and expertise as existing board members. Conducting a broader, more thoughtful search will increase your chances of finding board members who can strengthen your decision-making and help grow your company.
Keep in mind that independent board members should be ready for significant time commitments. They easily meet with executive team members several times a month and participate in key activities such as interviewing key executive hires so it’s critical to find someone who can commit to that time expectation.
Lastly, there is no one right way to build a board. No one is perfect at it starting out. It’s an art and a muscle you build up over time as a founder. But it is part of being a great CEO and critical to learn. Building a board with the right expertise and communicating transparently with them about your business’s performance is essential to your company’s long-term success.
If you’re looking for help in designing or filling your independent board seats, I recommend reaching out to our friends at Him For Her.
Please follow me on LinkedIn to learn more about Emergence, our upcoming events, and ways to get involved in our community.
"When built thoughtfully, boards can play an outsized role in a company’s trajectory. Strong board members can help leadership teams avoid strategic mistakes by helping test key hypotheses, attract talent, land customers, and navigate fundraising."
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