Hey ChatGPT: Why does it make sense for a startup to have a board?
“A board of directors can provide valuable guidance, expertise, and support to a startup company. A board can help with strategy, decision-making, and provide a valuable network of connections and relationships. Additionally, having a board can also enhance the company’s credibility and attract investors and partners. Establishing a board can also help ensure good governance and accountability, which is important for the long-term success and stability of the company.”
Hey Brad Feld: How do I actually set up a board in my company? How can I avoid some of the mistakes others have made?
“Dude, read my book Start-up Boards.”
OK, we have input from two of the most popular sources of entrepreneurial intelligence — but what remains unsaid is that it’s damn hard to mindfully create a strong board for your start-up and to make sure it stays functional.
So here’s some guidance on that topic from my dealings with the real world of impact tech venture capital.
Avoid all-investor boards
When you raise your first rounds of capital and get VCs involved, most of them will ask for a board seat or an observer seat. Don’t blame them, it’s deep in their DNA. Some seed VCs won’t ask for board seats at very early stages. Nevertheless, you will inevitably end up giving away a seat or two.
But then the next round comes along with more VCs asking for board seats. This is when it can get messy. I’ve been on many boards with up to six other VCs and five observers — mostly male, by the way. This set-up doesn’t bring any additional benefits. In fact, it can open the door for group thinking, which is the last thing you want from your board.
In addition, some partners of VCs send their junior team members instead of joining the board themselves. Yet there’s nothing worse than having VC reps on your board who can’t call shots and need to “go back to their IC” for every little question. They will slow you down.
Lastly, most mid-level employees of venture firms are only incentivized to take calculated risks. They tend not to be motivated by carried interest. In other words, they’re too comfortable and don’t share the same entrepreneurial mindset as you. Again, this will slow you down.
You’ll need to push back in the legal stages of the round to achieve the above. If you already have issues, use your next investment round to sort them out and ensure new rounds don’t make things any worse.
During negotiations, keep board rights high on the list of things you won’t compromise on. Don’t give in just to please the nice investors who believe in you. Stand firm with your vision of a board that’s going to supercharge your company, not hold it back. That means a board where everybody’s values are aligned.
Really embody diversity
Most of the boards we are on at Ananda lack diversity. Yet diversity is the one thing that makes ecosystems strong, including boards. Diversity isn’t just gender — at a minimum, board diversity should also encompass members from different ethnic and economic backgrounds.
Also, make sure you create an environment where everyone gets to speak and at the same length. Here’s a beautiful article about how Google found out what makes a great team, with “evenly distributed speaking time” one of the core findings. Be mindful of this. Female board members tend to talk less or only when asked, and sometimes only the loudest (male) voices get heard. Your chairperson should help to give everyone a voice, so…
Choose your chairperson wisely
The chairperson should ideally not be a founder or the lead investor, because they need to be an effective mediator between the founders and investors. The chairperson should also be able to spend meaningful time (at least 1/2 day a week or 2 days a month) with the founders working on the most pressing issues.
So don’t go for a ‘superstar’, as they’ll not have the time to spend with you. Instead, choose someone with industry experience who’s been to the place where you want to go. And always compensate your chairperson fairly, because you’ll want to be able to count on them to be their best selves at all times.
So how do you get around these problems?
- Address the issue of an “all VC board” actively and openly with your investors in every round.
- Ask potential board members if they’re able to call shots themselves. If not, get someone on the board who can. At Ananda all team members that serve on boards can call the shots.
- Create a clause where board members automatically lose their seats in subsequent rounds (you can always re-invite them later).
- Carefully select which board members or observers may bring additional people to board meetings.
- Foster board diversity from the very start
- Choose your chairperson wisely and make this a priority
Finally, given that this is an article about how to mindfully create your board, I personally wish that every board meeting would start with a minute’s silence. I’ve found that this one little thing can often make all the difference between a good meeting and one where there’s a lot of asynchronicity and misunderstandings. I strongly encourage you to test it out!