This post is for entrepreneurs as part of a series of observations and tips on building an effective board. This is Part 2.
Some of the first—and most important—decisions you will make when raising venture capital involve negotiating the size and composition of your board. Typically, your board will consist of representatives from the holders of the common stock (i.e., founders), the holders of preferred stock (i.e., investors), the CEO, and one or more independent directors. In the early stage, usually the founders are the largest holders of common stock and will control the board seats for the common shareholders and the CEO.
Size of the board
For early stage companies, we suggest a small and “balanced” board consisting of no more than five members, with two representing the common shareholders (including the CEO seat), two from the preferred investors, and one independent director recommended by the founders. Often it makes sense to avoid rushing to appoint the independent director, instead waiting until you can define the ideal candidate. It’s important to take the time to find someone passionate about your business and willing to leverage his network and expertise on your behalf. If the amount of capital you are raising is relatively small, or structured as a convertible note, it is becoming common to reduce the size of the board to three members composed of two common representatives and only one investor, a practice we generally support.
In an early stage venture-backed company, you actually need only a few meetings each year to meet your fiduciary and governance obligations. Indeed, most official board business is limited to operating matters such as approving the annual operating plan, issuing employee options, or larger events such as authorizing funding, partnership agreements, or acquisitions. Most of the time spent in board meetings, therefore, ends up devoted to discussing the company’s performance and strategy.
The communication conundrum
Herein lies a trap: Management and investors alike begin to rely on the board meeting as the preferred method of communicating with one another, and the meeting devolves into a parade of scripted departmental updates and forced strategy sessions, all crammed into a three-to-four-hour window. Moreover, a board meeting is arguably the worst venue for productive conversation, and too much time is spent looking in the rearview mirror while too little time is focused on teasing out key problems and opportunities. The group dynamic of a board often reduces conversations to the least common denominator, inhibiting an efficient and productive transfer of ideas.
For this reason, we prefer to spend most of the time working with management outside the board meeting, in a series of informal, and often open-ended, get-togethers.
The next area of consideration is what to expect from your investor directors, which is the topic of the following post in this series. Stay tuned!