28 May Board Pieces
Creating a board for a start-up tech company may seem low on the priority scheme. Alternately, it may appear easy – just sign up the most qualified people available. Neither is true.
The board of directors for an early stage company should support and mentor senior management. Eventually the board should become a entity that promotes, supports, and guides the long-term strategic plan for the business. But at the very start, the only guarantee is that the entrepreneur will be overwhelmed and short on time, and facing new and bewildering situations and choices. A strong board can provide the guidance, wisdom, and emotional support that new entrepreneurs need.
Since it’s always easier to destroy than create, let’s first look at the people who shouldn’t be on the board. Every situation is different, but as general rules, consider the following:
1) Corporate counsel should not have a board seat. Realistically, the company should be receiving the benefit of the counsel’s wisdom, knowledge, and support, through the role of paid counsel . Putting the attorney on the board simply deprives the company of another qualified board member.
2) Family members should not, in general, have board seats. I have no doubt that family members play a crucial role in supporting the entrepreneur, but every family relationship, whether through blood or marriage, brings external issues with it. Unfortunately, these often remain hidden until times of stress, when suddenly they re-emerge.
3) Non-related industry executives who plan on minimum participation should not have a board seat. These individuals can seem like a godsend: someone who’s started, run, and even sold a business. The problem is simple: if they can’t take the time to learn the industry, the value of their advice will be limited. In my opinion, that’s a waste of a board seat. At worst, it may be a sign that senior management would rather have rubber-stamping than real assistance, especially if they’re likely to hear something they don’t like.
Now the hard part. Here’s concrete advice on how to create a board of directors for an early stage start-up tech company.
1) Size matters: For an early stage company, the proper size for a board of directors is three. In the first 6-18 months, the company may make many decisions at the board level. Moving quickly and effectively requires a small, dedicated group with appropriate knowledge. Three directors allow the entrepreneur to push initiatives by convincing only one additional person. At the same time, he can be over-ridden by the joint opinion of the other two. If the entrepreneur can’t convince two qualified, handpicked people, then the specific initiative probably requires re-evaluation. A two-person board can create deadlocks, and more than three, at the early stage, is simply cumbersome.
2) Money talks: A major early-stage angel probably deserves a board seat. The entrepreneur’s effort and the financial investment are the largest contributions to date and deserve representation. In my mind, however, as soon as a professional investment round takes place (whether angel, VC, or other), that initial investor should lose the seat, unless there are compelling reasons otherwise.
3) Nothing like real experience: In the perfect world, the initial financier will have some real-world experience starting or running a growth business, including expertise in reading financials and evaluating operational plans. It’s unfortunate, perhaps, that Sarbanes-Oxley doesn’t apply (in some way) directly to private businesses, because small growth companies would really benefit from direct financial expertise at the board level to provide accountability and a dose of reality. If the angel doesn’t have these skills, she should appoint someone who does to represent her on the board. This may be uncomfortable in the short term, but I’ve no doubt that it will be more than worth it. Smaller growth companies can too easily allow monitoring and documentation of fiscal matters to lapse. Like many start-up pitfalls, this is burdensome in the short term, but often catastrophic in the long run.
4) The customer is always right: In the ideal three-person board, the market should be represented. An active consumer of the relevant products and services helps the entrepreneur stay focused on value creation. A business may include a laboratory, but a laboratory is not a business. Entrepreneurs are notorious for having new ideas and envisioning new opportunities on a daily (or hourly) basis. Having a customer on the board helps evaluate and eliminate some of these ideas quickly, before they become distractions. In addition, the implicit customer buy-in at the board level can enhance the attraction to potential angel investors. It may be a single data point (and possibly a biased one at that) but it’s better than no data points at all.
5) Operations: If there’s still a board seat open, I recommend someone with operational experience relevant to the company’s provisioning of products/services. Supplying value to customers is a quantum leap from R&D. Someone with this kind of wisdom can help the company before costly rework or re-organization become necessary. We placed a CEO with direct operational experience on the board of one of our investments, and his biweekly visits to the company have led to substantive change.
Bored of Boards?
The majority of entrepreneurs don’t go through this kind of process to identify board members. Too often, the board is seen as a rubber-stamp, a legality, or even a necessary evil to be mollified or even pacified a couple times a year.
In reality, a good board can dramatically improve the quality of a company’s early decisions, improving the company’s chances of getting financing and hitting milestones. It’s not easy to put together a good board, and many entrepreneurs just try to make the best out of whoever is easily available.
The board of an early stage company should be as much a part of the team as the entrepreneur and the key employees. The best board members are people who visit the company or talk to the CEO regularly, a couple times of month if possible.
Professor Bob Pricer says: “Better an ‘A’ team with a ‘B’ technology than an ‘A’ technology and a ‘B’ team.” Don’t put together a ‘B’ team. Invest in your board. The tangible value may take a little more time to emerge, but you won’t regret it.
Adam J. Bock is the research manager for Early Stage Research, an angel network, and a regular contributor to the Wisconsin Technology Network. Editor’s Note: Adam Bock will be will providing perspective and expertise across a number of areas, including the world of angel financing as well as his own experience with start-up companies. His columns will run every other week. We encourage our readers to read, ponder and provide feedback to Adam on his columns on what’s useful, what’s not and submit your questions and opinions to firstname.lastname@example.org.