Early in a startup’s growth cycle, company founders usually look around for mentors to help them achieve their goals. One of the ways many young companies cope is to put together an advisory board that meets every so often.
Later in its development, after the startup has acquired funding, it will need a board of directors. That board often is made up of folks who have invested in the startup and others who can help it achieve its goals.
For startup founders, there are a host of questions regarding boards: What do they do? How should I use them? How can I find the right people? Will the board members take equity? So, last week the New Jersey Entrepreneurial Network put together a panel of experts to answer those questions.
The panelists were George Abraham, Raj E. Valli and Chris Sugden. Abraham founded Rhodium Strategies (Montclair), an independent consultancy firm for emerging growth companies, and has advised companies at various stages from start to exit; he has also sat on numerous boards. Valli, founder and CEO of Thinkster Math (Edison), an educational software firm that was recently rebranded from Tabtor Math, has developed boards for his company and sat on the boards of others. Sugden, the managing partner of Edison Partners (Princeton), currently sits on eight boards, and has been a member of 25 boards over the course of his career.
Here are some of the main points made by the speakers, in the order in which they spoke.
- Entrepreneurs need to get out of their operational and tactical bubble and think about things like strategy. Boards are best used for strategic decisions. Don’t look for tactical task-oriented people as your board members and advisers. Look for folks who can take the long-term view and help you get there.
- Pick a big strategic issue you want to work through ahead of time and let your board members know about it. If you get your board materials out to your board of directors a few days before your meeting, your board members will have time to think about it. “These aren’t necessarily one-time discussions. Also, they may evolve over time.”
- A good board member is someone who has insights and experience that are “accretive to the CEO” (i.e., who brings different skills to the table from those of the other people in the room). “You want [someone with] new experiences, not someone who is going to validate what you think. You want someone who comes prepared and reads the materials ahead of time. You want someone who is willing to sit down with you in between board meetings and get to know your company and who will also follow the industry, so they can give you good council from a place of trust.”
- It’s a good idea to set term limits for board members, so that they can be eased out if they are no longer adding value to the board. As companies evolve over time, you may need different skills on the board. “You can use the nomination cycles as a way to move someone out who may have been extremely helpful during a company’s early cycle and move someone in who may help strategically to the next step.”
Raj E. Valli
- From the entrepreneur’s point of view, consider having an advisory board that is not necessarily your board of directors and a board of directors that is not necessarily your board of advisers.
- You need a board that you’re willing to stand up to and say, “I disagree.” Remember that advisory boards are great and bring a lot to the table. However, you are in charge of your direction. “They didn’t actually put financial risk on the table, they didn’t take care of the risk on the table, and they aren’t the ones who have to go home” and run a life. And you are not getting paid.
- You need advisory board members during the earliest stage of your company’s creation, but “run a million miles away” from anyone who starts a conversation by asking how much equity they’ll get.
- Select advisory board members who are “capable of opening your eyes in an industry or functional area that you are weak in.” Also, you need people who have the time to serve. “You don’t need window-dressing board members. You are going to pay in Hell for those whose pictures appear on your website but don’t do squat for you.”
- Bring up your heavy strategy discussions ahead of time to your board members. You’ll find that there are three to five perspectives you hadn’t considered, and you may find that there are people who disagree with you. Make sure you have a consensus before you go into an actual board meeting. “Otherwise you’ll end up having a board meeting that doesn’t end and you’ll wind up needing a follow-up meeting.”
- Edison Partners takes a second board seat for every deal that it does. To this end, it has developed the Edison Director Network, which is a network of folks the VC has backed or who have sat on boards of the VC’s companies. The second seat is for an “operator,” not a financial person. “Having operators on your board is Rule Number One.”
- The right size for a board of directors is five to seven people.
- Take a look at your board. If it is heavy with VCs and angel investors, “you probably have a board that is not going to advance your business.”
- One thing we see over and over again is that entrepreneurs who use their boards as strategic weapons are the ones who win. Entrepreneurs who look at their boards as necessary evils don’t win.
- Flint A. Lane, founder and CEO of Billtrust (Hamilton), is an example of an entrepreneur who takes his board of directors seriously and makes an effort takes the time to assemble the right people for the board. He took several months to recruit one recent board member and to make sure that this prospective member had the time to devote to Billtrust business. “Don’t settle. Look for aspirational people to be on your board.”
- Just because the board of directors determines executive compensation, don’t be afraid of it. “One of the pieces I’ve been shocked about over time is the fear factor many entrepreneurs have for their boards. We backed a CEO who at the beginning thought his board was there to fire him. This was a guy who was a wonderful sales guy and should have never been nervous speaking in front of anyone. … It took time for him to see that the board was actually there to help him rather than evaluate him.”
- “I’m a big believer in putting customers and partners on advisory boards.” They shouldn’t be on the board of directors, however, because the customer shouldn’t necessarily hear about the other deals the company is cutting or about pricing information. “But the advisory board can be a great lever into revenue and into a product roadmap.”
- Typically, someone who serves on the board of directors for the length of a deal will be compensated with .5 percent equity.