Startup Boards by Brad Feld

The Big Idea: Managing communications and making decisions effectively, in good times and bad, are two critical elements of a board dynamic. Proactively picking the best board members is like assembling the members of a band—the music can be awesome, if done right.

Ch 1 Introduction

  • Form a board early in the life of your company, regardless of how it’s financed.
  • Boards should not controlled by the founder, the CEO, of the largest shareholder. They must represent all stakeholders.
  • A great board member is a superb coach and mentor.
  • Success results from the entrepreneur. Failure belongs to the board. Be careful not to create a dysfunctional board.

Ch 2 What is a board?

  • Good boards invite legal counsel to join meetings.
  • Functionally, the CEO works for the board.
  • Legally, board members have a fiduciary duty to shareholders. Duty of care. Duty of loyalty. Duty of confidentiality. Duty of disclosure.
  • The board chair (aka lead director) runs meetings and recruits/manages the board members. Sometimes, the CEO is also the board chair.
  • When the company and the board grow larger, the following three committees are often formed: audit, compensation, and nominating.
  • Functions of the board: ensure survival, establish financial controls, develop shareholder reporting guidelines, CEO performance reviews.

Ch 3 Creating your board

  • The CEO sets the annual plan and the board approves it. The CEO sets compensation for the next layer of management and the board approves it.
  • The board can fire and replace the CEO.
  • Shareholder rights are defined in the articles of incorporation. Board members have fiduciary duties to all shareholders.
  • The CEO is almost always a member of the board.
  • Key attributes of a healthy board: trust, self-awareness, judgement.
  • A perfect early stage board would be the company CEO, an investor, and three other CEOs.
  • Key attributes of a great board member: bold mindset, entrepreneurial experience, domain expertise.
  • Key attributes according to Return Path CEO: They are prepared and keep commitments. They speak their minds. They build independent relationships. They are resource rich. They are strategically engaged but operationally distant.
  • Investor directors are a necessary evil. Independent directors are often the most valuable members of the board.
  • Roles for an independent director: CEO coach/therapist, board mediator, sounding board, go-to advisor when things are not going well.
  • Some boards have an executive chair. Often the executive chair is the founder, the largest non-investor shareholder, and a part or full-time employee. Eg. Reid Hoffman at LinkedIn. An executive chair should be advisory, not operational.
  • Companies often grant board observer seats to later investors. Strategic investors often receive board seats, which they sometimes prefer for reduce legal liability.
  • A good startup attorney should be included in board meetings and board activity, though rarely taking a formal board seat.

Ch 4 Recruiting board members

  • The ideal board member’s skill set depends on the stage of the company.
  • Possible skill sets to consider: customer development, product development, business model development, team building, fundraising.
  • Traits you always want in a board member: high integrity, high IQ, high EQ.
  • Andreessen Horowitz partner Scott Weiss list of board member traits: experience, sharp opinion, responsive, make a real contribution.
  • Create a list of ideal candidates, including aspirational.
  • Identify three potential board members who could change the trajectory of the company. Create a guerrilla marketing campaign to connect to them.
  • Interview many people, always face-to-face, and usually many times for the finalists.
  • Remember that asking someone to join your board is a big honor, so don’t be shy about cold-calling. Many successful businesspeople want to give back and mentor.
  • Interview many people, check references, have finalists attend a board meeting, have no fear of rejecting potential board members.
  • A good person to have on a board is someone with deep understanding of your target customer.
  • A good person to have is someone who complements the CEOs strengths and weaknesses. Yin to the CEO’s yang.

Ch 5 The formal structure of the board

  • Have good articles of incorporation and bylaws.
  • During the financing process, a term sheet often proposes the board structure, formalized in the shareholder rights agreement.
  • VC limited partners typically expect 20+ return over 10 years. VC will require a board seat to protect their interests, even though they are legally bound to act in the interest of all shareholders.
  • Remember that a VC needs big wins. A VC often will spend more time with their winners than their losers.

Ch 6 Aligning your board

  • Take the time to understand why each investor decided to invest and what milestones they expect to see.
  • A good board member will be operationally distant but can help guide operations when needed.
  • Although it will be impossible meet all individual’s communication preferences, it’s good to ask to accommodate most.
  • You should never pay a VC to sit on your board. It’s part of the VC job.
  • Outside board members are paid 0.25 to 1.0 percent as stock options, vesting over 2-4 years.
  • Until your company is profitable, don’t use cash as compensation.
  • Create a good board package for new member orientation.
  • General advice: avoid board meetings becoming status updates, avoid tactical discussions, seek strategic advice, an outsider CEO can rarely match a founder CEO insight into the business.

Ch 7 Is an advisory board useful?

  • One VC says: advisory boards are useless, but advisors themselves are very valuable to a startup.
  • While a formal board is responsible to the shareholders, an advisory board is responsible to the CEO and founders.
  • As a CEO, the board is not your friend. The board is your boss. Choose wisely.
  • While you traditionally compensate advisers by giving them stock, I suggest you ask them to match any grant with an equal investment in the company—so they have “skin in the game.”
  • An advisory board is a great farm team for potential outside board members.
  • Brad says, I encourage all entrepreneurs to add at least one outside director early in the life of the company.
  • A typical early-stage board configuration is two founders, two VCs, and one outside director.
  • Steve says don’t add a board member until after you raise a VC round.
  • An advisory board is a great way to “try before you buy.”
  • Advisors should invest some cash and have some skin in the game, even if just $10k.
  • There are five types of advisors you should consider: technical (product help), business (strategy), customer (marketing strategy), industry (domain expertise), sales.

Ch 8 The actual board meeting

  • A typical board meeting runs from one to four hours. The CEO providing an update on the business.The chief financial officer (CFO) provides a financial update. Various VPs present. After the updates, the board tackles substantive issues, typically covering one to three big issues.
  • At the minimum you should have one meeting a quarter. Most startups have meetings much more frequently, sometimes as often as once a month.
  • Publish the meeting agenda in advance of the meeting.
  • Rather than get caught up in the day-to-day details of the business, try to use your board to help you address key strategic challenges.
  • Give your board members enough time to read the board materials.
  • Have dinner (or something) the night before or after the board meeting. It’s important to build relationship among board members.
  • While speed and efficiency are the obvious advantages of a call, the challenges include dropped calls, lack of engagement, or rapport.
  • When done right, videoconferencing is remarkably effective and almost as good as being there.
  • To prevent getting bullied by a board, ‘I will seek your advice but I’ll make the decisions. If you’re unhappy with my performance, you can fire me.’
  • Learn some meeting tactics to deal with overbearing board members. A good board chair should also get involved.
  • There’s a lot of value in including your executive team in the board meeting.
  • Board meetings should always end with an executive session (board members only), then another session without the CEO or any executives, then a private meeting between the lead director and the CEO.
  • Ask for help. Board members can quickly become frustrated when critical issues such as a low cash position, poor market adoption, or endless changes in strategy are ignored.
  • It is really important that a CEO gets in the discipline of developing strong metrics, measuring these regularly and sharing these with an outside party in an objective manner.

Ch 9 Motions and votes

  • Minutes from board meetings should be taken.
  • Board meetings are governed by a parliamentary procedure called Robert’s Rules of Order.
  • The agenda should be defined and published in advance.
  • Make sure that your company’s attorney or outside counsel comes to the board meetings. In addition to recording the minutes, he can advise the board on any specific legal issues and serve as a business advisor.
  • Board members can present motions or request them to be put on the agenda. These motions are proposals for the entire board to act upon.
  • The bylaws of a company define how motions are presented and decided upon, so make sure you understand how this works for the board you are on.
  • It is essential for any entrepreneur to understand the procedure by which a motion is proposed, voted on, adopted, or debated.
  • Generally, minutes are brief, factual statements that state the resolutions and outcomes.
  • It is important to maintain accuracy and timeliness of these corporate records since they are a layer of formal documentation around the company.
  • Address the formal items, especially any matters that require votes, towards the start of the meeting, instead of at the end.
  • All super important issues should be lobbied and agreed before board meetings.
  • By law, one needs to create minutes to prove there was a legally held board meeting. Many lawyers feel that less detail is better than overly detailed minutes.
  • In litigation situations where a board was accused of not paying proper attention to a company’s situation, the simple minutes are often enough to show that the board had appropriately discussed the issue.
  • Besides taking official votes at board meetings, the board may also act by unanimous written consent.

Ch 10 Legal challenges

  • If the directors as a whole aren’t careful, their behavior, especially in difficult situations, can result in litigation.
  • If a board is going to be sued by outside shareholders, it’s often for one of two things: breach of duty or self-dealing.
  • Ask if the board had all the necessary information. Duty of care.
  • Ask if the board made the decision with reasonable belief that these actions are in the best interests of the company. Duty of loyalty.
  • Self-dealing, simply defined as “sitting on both sides of the table,” occurs when a board member enriches himself at the cost of the company.
  • Examples of self-dealing: The controlling shareholders loan money to the company and then foreclose soon after. A VC suggests another of his portfolio company’s performs services for another portfolio company.
  • By documenting major decisions, you can avoid the “he said, she said” dynamic.
  • Make sure you get formal approvals from your board.
  • If the transaction is a major one, get an outside expert.

Ch 11 Managing Ongoing Expectations

  • Responsibility for managing expectations around communication often falls to the CEO or the lead director.
  • It’s important to remember that the CEO runs the show.
  • The only real operating decision that a board ever makes is to fire the CEO.
  • The best startup CEOs have a gift—they are natural and are sincere and dedicated, which makes them compelling. Further, the best startup CEOs know what they know and know what they don’t know.
  • There’s no substitute for a CEO’s being completely honest with his board.
  • It’s imperative that a CEO avoids “managing” his board. By “managing “I mean controlling and spinning the information that is passed to the board
  • Be serious about preparing a board package and disseminating information early.
  • It’s a useful cliché that there should never be a surprise at a board meeting,
  • Good boards expect that the board meeting happens at the board meeting and not in private phone calls with each director.
  • Good CEOs are clear about what they need help with and making specific requests to board members for their help.
  • Good board members often do not care about the trivial things.
  • The best CEOs are ones who step up the communication when things are difficult. Boards are composed of very smart people; they’re big boys and girls, and they can handle the truth. One tactic is to overcommunicate bad news.
  • No new information at board meetings.
  • A CEO should not negotiate a round of financing, a sale of the company, or an acquisition of another company by himself. Many of your investors will have more negotiating experience than you and should be resources for helping you.
  • For a startup, a working board is best.
  • Over time and as the company evolves to a substantially larger company, a working board should morph into a reporting board, which focuses on governance, liability, and regulatory matters.
  • A good board will challenge assumptions, question key issues, and dig deep into the data.
  • A good working board “works” for the CEO.
  • Yes, a board can hire and fire the CEO. Outside of that, every CEO should view their board as working for them.
  • What should a CEO expect? Public and private support. Availability. Strategic advice. Contacts and relationships. Governance. Balance (and harmony).
  • Many VCs overreach with their pattern matching across different portfolio companies.
  • A VC should be able to help recruit candidates both through the VC’s network but also help to close the candidates that the companies identify themselves.
  • Board members’ social capital is most helpful in three situations: financing, sales, and recruiting.
  • Make sure to politely remind investors to run intros by you before sending them out.
  • Praise and recognition will help you get a bit more out of your VCs.
  • Ask your board members to provide leads for candidates for key positions.
  • An individual board member may comfortably settle into the role of emotional confidante for the CEO.

Ch 12 Trying New Things

  • Feel free to experiment with different aspects of your board communication,
  • Founders/CEO should invest one hour a week providing advisers and investors with “continuous information access” by blogging
  • For CEOs, the best way to learn about being a board member is to be an outside director for another company.

Ch 13 Communication Conflicts

  • As human beings, emotions play an equal, or even dominant role in our decision making. if you find yourself in a situation where the decisions of the board don’t add up, know that it’s not always logic at work.
  • During the negotiation process, VCs who invest together might collude to negotiate a better deal for themselves. Address this directly.
  • Our behavior changes, at times dramatically, when we are in groups. Group dynamics can decrease the quality of decisions.
  • Sometimes it’s bureaucracy, where decisions are made via the lowest common denominator approach. No one gets fired, but nothing ever gets done.
  • Other times, we subconsciously gravitate toward people who look like us, who agree with or compliment us, or are physically attractive. These people can disproportionately influence others.
  • If your VC firm invested in a competitor, there is no ideal answer for this other than being direct about the concern. If the VC offers to leave your board, seriously consider it.
  • If a board member ends up on the board of a competitor, this director should recuse himself from discussions that could be damaging to either company.
  • A walking dead VC partner refers to a partner who still has a business card of his venture firm, but is either on his way out of the firm or has been neutered at his firm. You may see the VC becoming erratic, disinterested, or disruptive.
  • A walking dead VC is the situation where the entire VC firm realizes that it won’t be raising another fund. Expect no more funding and limited motivation. Address the situation directly and clearly.
  • Some board members end up in a situation with management team members where there is fundamental mistrust and conflict. Like most conflicts, it’s best addressed directly.

Ch 14 CEO Transitions

  • The board really makes only one operational decision: hiring and firing the CEO.
  • One of the most common situations for a CEO firing is when growth of the company stalls. When growth slows, the best CEOs deal with it directly.
  • Remember the three things Union Square Ventures partner Fred Wilson says a CEO is responsible for: (1) creating and communicating the vision and strategy; (2) recruiting, hiring, and retaining; and (3) cash in the bank.
  • Do you want to make money or run a company? If you care about control, just bootstrap your business. Relinquishing control comes with the VC territory.
  • Why boards fire CEOs: the CEO is a control freak; the CEO is strategically challenged; the CEO does not scale; it’s time for change; a stronger CEO becomes available.
  • Establish annual metrics of CEO performance
  • The best CEOs attract fantastic people. However, CEOs who are unable to delegate attract mediocre people.
  • The board should offer warning signs to alert the CEO of lack of performance or team issues.
  • A successful transition path is the CEO becomes executive chairman, staying actively engaged with the business in a non-decision-making role.
  • Board members need to be eliminated if they fail to perform basic duties, are unable or unwilling to help with meaningful inputs, or create disharmony and angst.
  • Getting rid of your entire board may sound like a good idea especially during a dark moment when you are particularly frustrated with your board, but it’s highly unlikely you will be able to pull this off.

Ch 15 Financings

  • The board must approve formal resolutions associated with the financing.
  • it’s critical to have an experienced lawyer
  • When an existing investor leads a round, especially when that investor also has a board seat, there is potential for conflict.
  • If an existing investor leads a down round, the board needs to be extra sensitive to conflicts. Do a rights offering to all shareholders.
  • A common mistake of first-time CEOs is to expect that once they get a VC on board, they will have an easier time of raising money in the future. This is rarely true.
  • Many have expectations that their VC will magically open doors to additional capital and the process will be smooth and easy. Unfortunately, it rarely happens.

Ch 16 Selling a Company

  • When the founders want to sell, it’s time to sell the company.
  • At the beginning of any M&A transaction, it’s likely that the two parties (buyer and seller) will enter into a confidentiality agreement.
  • A signed term sheet will often include a no-shop agreement.
  • The board member has a fiduciary duty to the company. At the same time, a VC has a fiduciary duty to his limited partners.
  • As a CEO, if you see any of your board members tangled up in their own conflicts, try to enlist your lead director, your lawyer, or an outside director
  • A great lawyer is deeply involved in the transaction, helping negotiate the specific terms
  • There are potential conflicts everywhere.
  • Balancing the flow of information. There always needs to be a balance between too much and not enough communication,
  • Board members have differing levels of experience in the deal process.
  • Keep the process moving. As a general matter, deals have predictable, natural rhythms.
  • The lawyer’s demeanor and communication style matter. In most deals, the lawyer is the frontline communicator and negotiator.
  • Acquihires are popular in downside cases as a way to sell a company “for something” in order to get a graceful exit.
  • In some cases, companies are sold for less than their liquidation preferences, resulting in all of the consideration in the transaction going to preferred investors and none going to common shareholders and option holders. In these downside cases, existing management and employees often get nothing unless a specific amount of the consideration is “carved out” by the board, usually between 5 percent and 20 percent.
  • The board must consider who will be the ongoing shareholder representative, to deal with all the issues that arise between the buyer and the seller after the transaction.
  • Several years ago, we decided never to be shareholder reps again, as we see no upside in taking on this responsibility.

Ch 17 Going Public

  • As you march toward an IPO, the board responsibilities take on another level of formality.
  • You really want to build a collaborative, high-trust, transparent board before you go public.
  • the relationship between board members and the CEO will become more formalized.
  • The process of going public is a complex one that can take 6 to 12 months.
  • As you begin the process of becoming a public company, you should have at least three committees: compensation, audit, and nominating.
  • IPOs have a special type of confidentiality called a quiet period.
  • After a company goes public, board members will be deemed insiders. They will be subject to the same confidentiality and stock trading rules of any other executives in the company.
  • Some VCs like to serve on public-company boards; others, such as Brad, don’t.

Ch 18 Going Out of Business

  • While cash is certainly tight at this point in time, investing some of the remaining cash in strong legal counsel and following their guidance is a wise long-term move.
  • When a company begins running low on cash, the board must determine whether the company is in the zone of insolvency.
  • When a company is either in or getting close to the zone of insolvency, it’s imperative that the board is meeting often.
  • Some states impose a fiduciary duty to all “stakeholders,” not just shareholders at this point. This means that the board owes fiduciary duties to any party with a financial interest in the company, which includes all creditors and employees.
  • While certainly not a legal duty, the creditors, in practice, are taking priority over the shareholders.
  • Generally, reputable VCs will prioritize creditors and employees above their own self-interests in this situation.
  • Normally, board members don’t run the risk of personal liability as long as they comply with their fiduciary duties.
  • If board members resign or approve “fraudulent transfers” (for example, paying shareholders dividends) under such circumstances, they are liable for breaching their duties
  • Chapter 11 bankruptcies are not “going out of business” bankruptcies.
  • Chapter 7 bankruptcies are the “going out of business” type.
  • In general, a much preferable wind-down option to a Chapter 7 or Chapter 11 bankruptcy is an assignment for the benefit of creditors, also known as an ABC.

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