Board of Directors Essential to Making a Startup Matter

Published in the San Diego Union-Tribune, September 21, 2015

I recently was asked to serve on a panel to discuss how to assemble a board of directors. First, you need to commit to do it.

I am astounded at the number of startups I meet that have not created a board, much less thought about it. The entrepreneur who tells me he has no board is thinking more about control issues rather than the need for growth, Rolodex (call it what you want) and financial acumen.

In my opinion, there are only two kinds of people to put on a board of directors. Numero uno is a domain expert with the willingness to share it and make introductions for you. And numero dos is someone with financial skills, also known as money and how to get it and how to manipulate it and how to set up a cap table and series seed financing. The over-arching, single-most important characteristic within both areas of expertise is the requirement for a high degree of rational behavior — a history of making good decisions.

And finally, do they get along with the CEO? Can they mentor, can they collaborate, can they manipulate and change the story, can they read a balance sheet, and finally, are they independent and will they tell the truth?

Anything else is window dressing.

I concede that the above is a bold statement, but I have seen countless boards that are ineffective, do nothing, provide little, argue about more stock for themselves (greed usually wins) and in the end, go along for the ride. Much of the time, they are the “friends” of the founder. No strap hangers please, your company is not a subway.

Now the next question should be: How do we find the right ones and convince them to join our kandy-kolored tangerine-flake bus? One suggestion is to aim high. In other words, I will often ask an entrepreneur, “If you could have anyone, who would you want.” I do not want them to be limited by reality — at least not at the beginning. I want them to have a stretch goal. I always ask the entrepreneur: Who do you need to talk to? Who is the one person who can radically move your needle.” You would be surprised to learn that often they have no answer — they have not thought about that question.

The next issue is fiduciary responsibility and liability. Boards have strict fiduciary obligations, so you can’t get superstars to join the board without directors and officers liability insurance. And if they are famous and rich, you will need a lot of it. So ask them instead to be on the scientific board of advisers. You still give them stock, and they can help you without the board liability. Do not expect famous advisers to get into the weeds about product management. What you are paying for is the one phone call you can’t make. The one introduction, the one referral you need.

Now, the puzzle gets a bit more complex. You need to get “advisers” who can really move your needle, but you still need “directors” who can at least help you pick the right needle. The dynamics of a board are fascinating. It is always pleasant — until there is no money or a lawsuit or the product doesn’t work.

Here is my final suggestion. Because you will be replacing certain members of the board you start with (yes, as soon as you get real financing, the characters who give you the dough are going to want to have a say on how you spend it), I recommend you get the best board you can initially, and have each of them submit a resignation letter in advance. They need to know that they may/will be replaced as the company grows because the issues for a three-person startup are vastly different than taking a company public.

And because you are giving them stock, make sure you insist on vesting. It would be nice if they hang around for more than one meeting.

Rule No. 439

It’s a two-edged sword. Remember that the CEO serves at the pleasure of the board.

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