How effective is your Board?
Board effectiveness is often a source of great angst amongst founders. Out of the 60 or so startups we have worked with over the past 10 years, all but a very small number have expressed deep frustration over this topic.
Few founders actually look forward to board meetings. Considering all the time and effort that goes into the preparation, the meeting, and the follow-up, it seems there is huge scope for improvement.
The real frustration is that great boards can be of enormous value to founders. In high-growth companies they not only provide an essential governance function but can be an enlightened source of strategic guidance. The collective experience and wisdom of the group can be applied to the thorniest of problems. Great boards create a forum for healthy debate that enlivens the CEO with even greater purpose and focus.
But great boards are rare.
Where does it all go wrong? What can founders do to avoid board disfunction? As founders are the principal architects of their boards, this question — at least initially — rests with them.
Our observation is that successful founders focus on handful of key areas to optimise board effectiveness. These are our insights:
Role of the board
Firstly, this is not a piece about governance or meeting structure. Many others have written extensively on these subjects. If you are looking for good, common sense advice on these foundational aspects, then look no further than Balderton’s excellent guide to board meetings, written by Laura McGinnis and published here.
Our insights build on these foundations. They start from the strategic perspective that the board is the steward of corporate value creation. The core role of the founder and the executive is to continuously increase this enterprise value.
Experienced founders know that the drivers of value creation evolve and change with each stage of company development. Effective boards understand these stages and their associated drivers. They make them priority topics and they demote all else.
Boards must similarly evolve with each stage of company development. A Seed stage board looks very different to a Series C board. The board is too large or has the wrong members when everyone is no longer able to meaningfully contribute to the priority topics.
Successful founders become adept at shaping and ‘managing’ their boards to support this evolution. They do this by ensuring the right board composition at each stage, ensuring stakeholder alignment with each term sheet, and ensuring that the common themes that all boards naturally gravitate towards are proactively managed. In doing so they avoid the pitfalls that can destroy board effectiveness.
Board composition — Seed stage
At Seed stage, the key driver of value creation in mainstream venture markets is achieving product/market fit. In this highly dynamic, formative stage, the board needs to be (very) small. In most cases it should be no bigger than the founder(s) and the Seed investor. Speed and agility are everything.
In large Seed rounds with multiple investors, especially in DeepTech businesses with an inexperienced founder, investors (occupying multiple board seats as ‘non-exec investor directors’) may seek more structure. This could mean appointing a non-executive chair to act as an ‘interface’ to the investors as well as being a ‘coach’ for the founder.
Even if the intent is well-meaning, this rapid insertion of structure can have a debilitating effect on how founders operate. It can create an imbalance between the execs and the non-execs on the board. It can also gradually undermine the founder’s standing with the investors.
And unless the non-exec chair is highly attuned to the stage-specific value-creators (e.g. the journey to product/market fit, crossing ‘the chasm’ from Seed to Series A, and identifying the beachhead market) there is real potential for founder conflict.
In any Seed-stage scenario where investors seek such structure, founders must very carefully assess all the implications before agreeing to the term sheet. They should seek independent advice from their network and be certain they know exactly what they are signing up for.
Once the deal is done, there is (almost) no way back.
Board Composition — Series A
At this next stage, the board normally constitutes the founder(s), 2 investors (including the Seed investor), and 1 or more independents. Again, a big consideration is achieving a balance between the execs and the non-execs.
Experienced Series A investors will work closely with the founder(s) to ‘level-up’ the board at this point. This is a golden opportunity to make sure the board has the right capabilities for the next stage of the journey. In mainstream venture this is about understanding how to engage the beachhead market and pursue early growth (‘land and expand’).
Given the increasingly large size of Series A rounds there may be pressure once again to add more structure. This is fine up to a point but again, founders need to carefully assess all the implications. Speed and agility still remain vitally important. The more people in the mix, the slower that decisions get made.
As the company eventually progresses further into the mainstream market, this is usually punctuated by Series B, C and D rounds. Here, the growing number of investors and independents will require the appointment of a non-exec chair. We are no longer a startup but becoming a scaleup, and the capabilities must be levelled-up again.
Stakeholder Alignment
Experienced founders work hard to ensure that every major investor they bring onto the cap table is fully aligned. Having a group of investors whose interests are at odds can create havoc.
For example, If one investor is looking to invest more (e.g. a new fund eager to deploy and keen to help the company grow) whilst another is looking to sell (e.g. a fund coming to the end of its life and pushing the company for an M&A event), then big problems can ensue.
This could also arise if a financial investor (e.g. a VC) is looking for an exit but a strategic investor (e.g. a corporate) is looking to sit tight and just leverage the relationship with the company. This doesn’t assume that such investor types are always misaligned as often they can work very well together.
The most emotionally charged misalignments usually come from accepting punitive terms from new investors. The 2 big ones are 1. Anything above a 1x liquidation preference, and 2. Participating Preferred stock. These should be avoided at all costs as they can dramatically degrade returns for non-participating shareholders. This will almost certainly include the founders and early Seed investors.
In times of liquidity crisis, such punitive terms may be unavoidable to save the business. But they are almost always just a way of storing up massive shareholder misalignment for later on. If you would like to know more about these terms then you can read more here.
Finally, there is cultural misalignment. This can be the deadliest as it is almost invisible at first. This arises when stakeholders don’t truly share the vision and the values of the company. Their behaviour, especially in times of high pressure, then causes disruption as they pursue their own agendas.
Experienced founders only invite investors onto their cap tables who they know well and trust. Quick deals with unknown investors have a habit of coming back and biting founders hard. Proceed with great caution here and do your own due diligence. This is going to be a 10-year relationship. Unlike employees, you can’t fire investors.
Proactivity on the common themes
Irrespective of stage, sector, or business model, there are common themes that all boards have to continuously grapple with. Laura McGinnis calls them the “Common Challenges”. They are easy to remember as they reflect the priorities of the CEO:
Speed of growth
Cash burn
Top 3 strategic priorities (often the big value-creation drivers as mentioned above)
Management capability
Management incentives
Experienced founders are always prepared to talk to these points in the board meeting. To anticipate conflict and make the board more effective, they proactively revisit these topics to establish joint accountability with the board.
And finally, that part about ‘managing’ the board
Founders and investors will almost never agree on this aspect! Investors will often advise something like: “Avoid 1:1 pre-board meetings as they eliminate authentic discussion and diminish the board’s power.”
But experienced founders know that the art of ensuring an effective board is to avoid surprises in the board meeting.
In VC Jerry Neumann’s forthright blog on the subject, which we covered in our earlier piece, How to avoid being fired as CEO, he says: The board meeting is not the place to convey important information for the first time. First off, they need to hear important information quickly and board meetings are, at most, once a month. Second, responses to bad news can be all over the place. You don’t want board members over-reacting to bad news (or good news) in front of other board members.”
In other words, if you have difficult news, gather your thoughts and then tell your board members as soon as possible. Tell them individually, put forward your recommendations, and then listen to what they have to say. If they want to blow up then this will be more of a controlled explosion than it might be in the boardroom. At the Board you can then communicate exactly the same news but now with a considered plan that the directors have already been party to.
In summary
Great boards are rare, but can be architected by founders with a judicious approach. By ensuring the right board composition at each stage, ensuring stakeholder alignment with each term sheet, and ensuring that the common themes that all boards naturally gravitate towards are proactively managed, founders will be well on the way to building a highly effective board.
Weekly Briefing Note for Founders is a newsletter published by Duet Partners every Thursday. Back issues can be found on our website here where you can also subscribe for free.
