Forming and Organizing Your Board

The typical board size ranges somewhere between three and seven members, and you should always have a good balance between founders, outside directors, and investors. It doesn’t have to always be equal, but you want to make sure you have a balance around the table and plenty of different points of view.

Transcript

Private company boards tend to range in size from very small to, in some cases, very large.  The typical size of a private company board is somewhere between three and seven board members.  There’s a lot of mythology around having an odd number so that you never get deadlocked on votes.  It turns out that because especially with investors the notion of how the votes actually work and who has what rights, that the odd or even number of board members tends to matter very infrequently. 

When you have three board members, you often have a founder, an investor, and an outside board member, or two founders and an investor, or two founders and an outside board member.  You always want to have at least one outside board member.  That’s a really powerful thing because you need an independent board member that doesn’t have either an ownership stake through a major investment in the company or an ownership stake through being a founder in the company.  That allows you to deal with lots of situations where you need an independent vote, where you want somebody who’s not directly involved in the economic outcome.  This doesn’t mean that they can’t have any economics in it, but that their economics are minor and it’s very easy for them to be viewed as an independent director. 

What you often see is boards, especially as they raise more money, they become very investor heavy.  So you start off with a nice, balanced board between investors and entrepreneurs, and all of a sudden you wake up one day and you’ve got seven board members, you know, the CEO, an outside board member, and four investors or five investors.  Those are not particularly good boards in terms of balance because then they shift way too much towards investor engagement on the board versus acting like a true board that’s helping the CEO and helping the leadership team. 

As an entrepreneur or founder, you really want to try to maintain balance between the entrepreneurs and the investors.  The best way to maintain that balance is to think about it as having a founder board member or a management board member for each investor board member, and then filling in the rest of the board with outside board members.  It doesn’t have to be exactly equal, but you want it to be a situation where there’s plenty of balance around the table and different points of view being represented. 

Private company board member compensation should be very straightforward.  First of all, you should never pay a private company board member cash.  As a startup company that’s growing, cash is extremely valuable to you.  What you should be willing to do is pay that board member in equity, a similar type of equity grant that you would give to a senior exec.  The best way to describe it is think of what you would give a VP level person, and divide by two.  That’s roughly the amount that you tend to give to an outside director.  In addition, you should be willing to cover their expenses for coming to board meetings, or doing any sort of board business.  And this is for outside directors.  For VC directors, you should simply be willing to pay their expenses for coming to the board meetings, but they shouldn’t get any additional equity for sitting on the board. 

The best way to enforce the two- to four-year board term is to create vesting of the stock that you’re giving to that board member over that period of time.  What I think is pretty typical is to have a four-year board term, and let’s say you’re granting to that board member half a percent or one percent of equity that’s going to vest over that four-year period.  By having a two- or four-year vest on the stock, that gives you an end point at which to have the conversation with the board member, “I’d like you to stay on the board for another two years; I’d like you to say on the board for another four years; here’s another grant,” or, “The four years is up, and you know, I’d like to replace you with somebody else at this point.” 

Some boards have an explicit leader of the board.  Sometimes that’s called the chairman, sometimes it’s called a “lead director.”  You as the CEO can enlist that lead director in helping to manage the interactions between the other board members, in managing the time dynamics around the board meetings, in helping make sure that the important things get surfaced, and having a single point of communication between the board and the CEO about issues that the board is concerned about with regard to the CEO’s performance.  

Suggested Readings

Founders School || Startup Boards || Forming and Organizing Your Board || Impact Guide (PDF).

Feld, Brad and Mahendra Ramsinghani. 2013. Startup Boards: Getting the Most Out of Your Board of Directors. New Jersey: John Wiley and Sons Inc. Chapter 3 “Creating Your Board”.

Steve Blank. “Don’t Give Away Your Board Seats.” Wall Street Journal. Online column, June 17, 2013.

Brad Feld. “Start Building Your Board Early.” Wall Street Journal. Online column, June 17, 2013.

Brad Feld. “Compensation for Board Members.” Feld Thoughts. Blog post, April 3, 2005.

Feld, Brad and Mahendra Ramsinghani. 2013. Startup Boards: Getting the Most Out of Your Board of Directors. New Jersey: John Wiley and Sons Inc. Chapter 5 “The Formal Structure of a Board”.

Blumberg, Matt. 2013. Startup CEO: How to Build a Company to Success. New Jersey: John Wiley and Sons Inc. Chapter 33 “Building Your Board”.

Questions for You

Do I have a balanced set of board members?

How will I balance the board as more members are added?

How do I handle compensation with board members?

Do I need a Lead Chairman? Who would fill this position appropriately?

Tools and exercises

Keep track of the different types of members being added to the board. Check the balance, and adjust accordingly.

Leave a Reply

Your email address will not be published.