Independent Board Members: Why?
Me and My Brother Fighting for a Cupcake
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The Importance of Board Structure
Over the past year, I have had five founder friends get fired.
Fired from the companies they built. They conceived. They bled for.
Two commonalities:
They all bounced back. Thank god.
They all lost control of their board.
A couple of years into Graphicly, we had some level of success, but not enough to raise money like the kids do today ($20mm at $100mm), and the cap table was clearly not in the founders favor. It didn’t really matter, because our two board members were great and supportive. They were wonderful resources to me. I had no complaints. Except every once in awhile something would happen, or a decision would be made where I didn’t 100% believe it was done in (the founders’) best interest. Nothing wrong with that. Our investors job was to be supportive of their investors, just like mine was to be supportive of mine.
On a flight back from San Francisco, I saw a friend of mine. A fellow Techstars mentor, David Hose. We happened to be sitting next to one another, and spent the two hours flying home talking both about the business as well as my life as CEO. I will tell you that it was wonderful to talk to someone who seemed to care about me first, and my business, second.
As I was driving back to Boulder (where the company was at the time), it hit me. I didn’t know what it was; but I needed it. And that it, was David Hose.
David started as a CEO coach for me (if you are a CEO and don’t have one, please get one. I am happy to refer to help you out until you find one). After a couple of weeks, I started to invite him to observe the board meetings.
At the end of each meeting, he would ask me “How do you think they took X? Or what do you think of decision Y?” Almost every time, what I believed to be true wasn’t entirely. David explained to me why my board made certain moves and decisions.
After a couple of months, I asked him to join the board as our independent board member.
I just raised, why do I need a board?
When you initially raise money, most of the time, your lead investor will suggest to not have a board. Why? Because you two are going to talk several times a week; and frankly, its a big time commitment to be on a board of two (maybe three) people.
You may also believe that a board is unnecessary.
You would be wrong.
It’s important to have an early board for two reasons:
It’s important to set a cadence of investor communication. If you have a board meeting every 4- to 6-weeks, you will also get in the habit of communicating to all your investors. Plus, board meetings become mini-milestones and teach to realistically say what you are going to do, and then explain when it doesn’t happen.
It’s great practice. Your company will go through a period of sucking, and you and your investors will grate on each other’s nerves. Practice how and what to communicate, so that there are never any surprises.
Ok, then why an independent board member? Just my investor and I are enough, right?
Nope. Just you and your investor are a horrible board structure.
Here is the key value of an independent board member: They care only about you. They should always be in your corner. They have no LPs to report to; nor have any financial stake in the business. (Yes, you will give them equity, but do not take any money from them).
There will come a point in the life of your business where your investor board members will have to make a decision they feel is in the best interest of the business on behalf of their LPs that is often not in your best interest.
This often is expressed as:
Forcing a sale of the business;
Forcing the hiring of a CEO;
Firing a founder;
Blocking the sale of the business;
etc.
Nothing pretty. At those moments, having an independent board member who can both explain why and what, and express that to the other board members is invaluable.
Early in Graphicly’s life, we were talking to a few folks about a potential acquisition. When all the numbers were run, I would have ended up with about $50,000. I was pretty much against selling the company at that time, for what seemed like a clear reason: We (and I) could do better later.
David explained to me the concept of a management carveout, which I had no idea about. In basic, it was a way to motivate the management team by giving them a pre-determined slice of the proceeds. The investors take less, so that the management team gets more, and therefore will bust ass.
It wasn’t that my investors were hiding that fact, because they weren’t. They were operating on the assumption that as CEO/founder, I had done my homework. I had not.
More importantly, I felt that I could talk to David freely and in a way I couldn’t with my investors, precisely because he had no financial stake in the business or LPs to answer to. It was a win-win-win for everyone.
Ok, you convinced me. What should I look for in an independent?
He should be someone you find. If it’s someone that your board presents, you will never be 100% in love.
She should be a founder that has dealt with a lot. She doesn’t have to have built a ten billon dollar company, or raised a $100 million, or know the entire cast of Sesame Street, but they should be experienced. A great example of this is understanding and discussing term sheet deal terms. Your independent always will focus on making them the best terms for you; whereas the investors, who are on the other side of the negotiation, are looking for the best terms for their LPs. Yes, great investors understand how to align those things, but how awesome is it to have someone you trust implicitly to bounce ideas?
He should be involved in the startup community and have a decent network. He needs to add value in ways beyond support. David introduced me to VCs, many of which are friends today. He introduced me to potential deals, etc. He didn’t just sit on my board and pontificate. He was equally as active as our other board members.
You should like her. This is someone you will spend time with, perhaps cry with, you might as well find her company nice.
DO NOT SELECT HIM BECAUSE THEY ARE (INTERNET) FAMOUS. Or because he has a specific knowledge in a specific industry. Companies pivot; new investors come on board. You need to find someone who will last for the duration of the company.
Selecting the right independent board members are one of the most impactful things you can do as CEO. Having someone who is 100% in your corner is an amazingly important things to have as you build your business.
Choose wisely; but don’t opt out of selecting. It may require that one of your founders becomes an observer on the board versus voting member, but trust me, it is worth it.
You have to look at the board as a team that is your responsibility to optimize. Just like your engineering or marketing team.
Take the proper care, and you will be so much happier, and hopefully, so much more successful.