A company board has two main jobs: governance on behalf of the shareholders and hiring (and firing) the chief executive.
In practice though, for tech startups, the board often performs other roles as well, providing strategic guidance, advice on best practices and even helping customer acquisition early on.
That’s why it’s incredibly important for entrepreneurs to choose their board wisely. Here are some top tips for picking the best people.
1. Make sure they add value beyond money
An early board member should contribute expertise and relationships that can help the company exit the founding stage and start scaling quickly.
Board members can add value in several different ways:
- They know the market, whether it’s enterprise, consumer, technology, or some other specialty.
- They have experience working with companies at the relevant stage of development.
- They have leadership experience in successful startups.
- Their reputation helps with marketing, recruiting and fundraising.
Board members bring their experience, battle scars and resources to help a startup grow. A great board member can relate to the decisions and dilemmas that chief executives face, particularly at times of rapid change, and can suggest solutions as well as anticipating problems.
2. Allocate an informal ‘position’ in your mind
Everyone in a startup’s leadership team plays a position: sales, marketing, customers, product, engineering or finance.
The same concept should also apply to the board, even if they aren’t officially assigned titles.
As a startup adds board members, each new addition should bring expertise to the table that allows them to play a position—product, strategy, technical, sales, marketing for example, rather than choosing multiple board members with the same skill sets.
All too often diversity in expertise does not happen in early enterprise startups.
Beware of the classic technology startup mistake: building a board full of product-centric venture investors, where everyone is a product expert. This can mean that board discussions overemphasise product and underemphasise other key topics, leading to poor business decisions.
3. Don’t look for a rubber stamp: some tension is healthy
The board must be supportive of the chief executive but cannot be a rubber stamp. The best boards push leadership teams. They create accountability. They force uncomfortable but necessary discussions. They help founders and executive teams grow, navigate change, and make the best decisions. Some disagreement and tension ahead of a big decision is the sign of a healthy board.
4. Be aware that you are picking your boss
Once a startup has a board the chief executive and founders are accountable to it and receive guidance from its members.
Decisions about compensation are made by the board. Future careers are influenced by the board. Adding an early board member is a multi-year marriage of four, six, or even ten years. Small misalignments amplify over time so pick thoughtfully.
5. Pick early board members as you would pick a cofounder
Early board members are typically investors who take a leap of faith to place a bet on an as yet unproven idea.
They need to believe in the founding idea and in the team behind it. Just as there needs to be a personality fit between cofounders, there needs to be the same with early board members.
Trust matters too. The early board member and founders rely on trust to get through the inevitable ups and downs of a startup.
Part 2: How a board functions
To understand how a board functions it’s important to note the confusing duality of loyalty for board members. Their primary job is to serve the shareholders, but for most board members the reality is that they answer to two constituencies.
First, the chief executive
The chief executive is ‘in the boat’ with the startup’s leadership team, fiercely rowing daily, weekly and monthly to drive execution and build value.
But the chief executive is also a member of the board, with a fiduciary responsibility to shareholders. In this role, the chief executive stands outside the boat, watching and clinically evaluating how it’s doing.
Balancing the dual perspectives can be tricky. But the duality has an upside: switching between the two perspectives can give fresh eyes on a particular situation.
Board meetings highlight this dual role. During board meetings, chief executives should deliberately push themselves to look at the company with both perspectives—as a company executive and a board member.
Second, venture capital board member
Venture capital board members have a responsibility to represent their firms and look after their investment capital.
But they also have a fiduciary responsibility to the startup shareholders to maximise value.
Usually these roles converge: the common objective is creating overall shareholder value for the company.
But there are situations—financings and acquisitions in particular—where the duality can create significant tension and conflict.
Third, independent board members
Independent board members are thankfully free from conflicting roles. Typically, they are successful executives or industry experts who bring operating expertise that commands respect.
They have one mission: to represent the shareholders. Because they often come with significant operational experience they can contribute an essential perspective in board meetings. And, because they’ve served time as executives, they can offer practical advice to chief executive.
In the early stages of a tech startup add at least one independent board member to provide an independent perspective and impartial advice.
As the company moves into the next stage and beyond the board will evolve, adding more independent board members whose only duty is to the shareholders.
Tae Hea Nahm is managing director and cofounder of Storm Ventures and author of Survival to Thrival: Building the Enterprise Startup: Change or Be Changed (Mascot books, July 2019)