Friday, July 25, 2008

Inside Leadership

How an entrepreneur can build the best board

Entrepreneurs approach creating and working with a board of directors with enthusiasm and reluctance, hope and cynicism. Despite that mix of feelings, there are steps you can take to ensure that the board will provide the most positive contribution to a company.

No entrepreneur can be an expert in every area required for building the company. A properly chosen board provides the entrepreneur with the types of expertise and guidance required to supplement what the entrepreneur brings to the table. Board members also can provide important leverage by opening connections to financing sources, customers and industry contacts. Equally important, the board can push for financial discipline. Finally, experienced board members who have been through a number of up and down cycles can give the young entrepreneur valuable long-term perspective when the company encounters difficulties.

Building the Board
Recruiting a board is best done by seeking directors who will be helpful for at least a three-year to five-year run. Each director should have a background in a business similar to that of the company. Beyond that common element, seek different perspectives by recruiting people with backgrounds as entrepreneurs, CEOs, and from the marketing and customer sides. The best board members will bring great personal contact lists of investors, customers, strategic partners and potential key hires.

A personal interview is essential — you will be spending a lot of time with these people, often in intense situations.

Don’t add big-name directors or advisors just to attract financing if those people won’t be active. Investors will see through this ploy.

You already are getting (and paying for) the advice of consultants such as attorneys and investment bankers; save the board seats for people you can’t get otherwise.

Several types of directors are inherently risky. Some of the risks can be mitigated and some should be avoided. For example, investors will seek representation on the board. If you have a choice of investors, the quality of the people they will put on the board should be factored into the choice. Many investment deals require that a so-called “independent” director be added to a board that is otherwise equally split between founders and investor representatives. It’s critical for the founders to be actively and intensively involved in selecting this director to ensure independence: Keep in mind that one of the tie-breaking votes may be about whether you keep your job.

Having multiple founders on the board risks importing interpersonal dynamics into the boardroom, but many founders work well together, and more than one founder may be needed to balance multiple investor and independent directors.

Leave family members at home because board relations are complex enough without importing family issues into the meetings.

Compensation
Board compensation for an early stage company is almost always done by grants of equity, not cash, with vesting over a two-to-four year period. One published survey suggests that startups reserve a pool of equity for the board equal to 10 percent of the company after the last pre-venture round, with the typical board member receiving between 1.5 percent and 2.5 percent of the company at that stage, while a very active outside chairman may receive twice that. Some companies offer, but don’t require, the opportunity to invest in the most recent round, if the outside investors agree.

Working with the board
Think of this in terms of “managing upwards.” You report to the board but you can still manage it to get the best advice and guidance. Be the chairman so that you set meeting dates and agendas. Set a regular schedule for meetings so that people clear their calendars. Send a draft agenda well in advance; and request comments to minimize surprises at the meeting. Between meetings, keep the board informed by periodic e-mails, breakfast or lunches with local board members and phone calls. Form committees for issues such as compensation, so that small groups can work on particular issues. And, always be completely straight with the board; lose their trust and you won’t get it back.

Let every board member know that the post is not forever. Periodically evaluate the board and ask them for self-evaluation. Eventually it will be time to add new skill sets, retire certain people, or reorganize committees. The ideal board is one that’s right for the company today and for where its strategic plan is taking it.

 

Richard Lucash is a consultant with Lawrence Associates in Wellesley and an attorney who co-founded LaunchPad Venture Group. He is on the boards of four companies. He can be reached at rlucash@lawrenceassociates.com.