Strategically Adding Independent Board Members in Startups
Written on
Chapter 1: The Importance of Independent Board Members
Navigating the role of a CEO in a startup can be incredibly challenging. One might assume that founders would leverage every available resource to support their journey. While many do, a frequent oversight is leaving the role of Independent Board member vacant for extended periods. This is often due to the misconception that such a Director is meant to stay with the company until its exit. Instead, the focus should be on identifying a senior external advisor who can provide invaluable guidance to the leadership team for the next few years.
Before advocating for a shift in perspective regarding Independent Directors, let’s clarify some foundational concepts. Every company, regardless of whether it seeks financing, has a Board of Directors. Initially, this board may consist solely of the founders or executive team. However, as they attract outside investment, certain investors typically negotiate seats on the Board to ensure their interests are represented in key company decisions. In a common venture financing scenario, a three-person Board is formed, often comprising two founders and one investor. As further capital is raised, this expands to a five-member Board, including two founders, two investors, and an open slot designated for an Independent member. This Independent Director should not be an employee or major investor but rather someone with relevant expertise, credibility, and a distinctive perspective to enhance the discussions and serve as a steward for the company.
Chapter 2: The Challenge of Filling the Independent Seat
This Independent seat often remains unoccupied for a significant time, primarily due to the numerous priorities vying for attention in a startup. Its existence is crucial to maintain an odd number of votes on the Board, yet when left unfilled, it’s often assumed that the founder/CEO will act as the proxy. Consequently, some founders may perceive filling this role as relinquishing control since the decision-making power shifts to an actual person who is expected to prioritize the company’s welfare over the CEO’s perspective—though ideally, these should align.
In previous discussions, I've emphasized the advantages of appointing an Independent Board member after a Series A round. My conviction has only strengthened after observing what I refer to as 'Interim' Independent Directors in action at several Series A startups. These individuals are ideally suited for this stage of development and contribute valuable insights to the discussions. Typically, they are seasoned executives from larger tech firms who have not yet joined public company Boards, thus transcending the typical 'advisor' role that usually involves minimal engagement. Their active participation in Board meetings, one-on-one sessions with the CEO, assistance in hiring, and provision of a non-investor perspective significantly enhance the startup’s chances of success.
While concerns about control are often exaggerated, two key reasons for the vacancy of these seats are the perceived difficulty in finding suitable candidates and the elevated expectations about who should occupy the role. Addressing the latter can alleviate the former.
At the Series A/B stage, it is unlikely that a CEO from a public company will accept an Independent Board position. For instance, while it may seem appealing to have the CEO of Marriott on your Board if you’re a travel startup, this arrangement may not be beneficial for either party at that early stage. Instead, consider the value of bringing in someone like the VP of Operations from a well-established hospitality brand or the COO of a larger tech company that does not compete directly with yours. Such individuals are accessible and identifiable. The key conversation to have is to frame this initial Board tenure as a 2-3 year commitment, after which both parties can reassess the fit. This simple agreement eliminates the stigma associated with transitioning Board members and lowers the barriers for who can contribute to the company. Just as you would hire the right talent for a product lead position based on current needs rather than future possibilities, the same logic applies to Independent Board members.
So, take the initiative to find that right person! This is an opportunity to enrich your Board with knowledge and potentially bring in diversity as well, especially considering the typical demographics of venture investors.
Chapter 3: Learning from Industry Leaders
To gain further insights, consider watching the following videos:
The first video, "Life Story of Ad Legend Paul Bainsfair," discusses the journey and experiences of a renowned advertising executive, shedding light on the importance of strategic decision-making.
The second video, "How To Create Your Advisory Board Or Board Of Directors," offers practical advice on forming effective advisory boards, crucial for startups looking to enhance their governance.