I've sat on many boards over the past two decades and seen my share of both high-functioning and low-functioning ones. Here are some observations I have from this exposure.
If a company moves from strength to strength with predictable outcomes, easy financings, low staff turnover, and limited competitive threats, then the composition of the board probably doesn't matter as much. Even the best companies with the best outcomes, however, usually hit some difficult moments when a highly functioning board matters.
In the best cases, a board comes together to help a company get through its trough -- in the worst cases, infighting can mean an otherwise great potential business is hampered with misaligned incentives and drama.
Note: This is part of a series on a board of directors at a startup.
High-Functioning Startup Boards
High-functioning boards have a tight-knit relationship among members based on mutual trust and admiration. They are able to divide responsibilities and work to gain consensus on tough decisions that every startup inevitably faces.
It sounds obvious, I know. But you can't take it for granted that your board members will naturally commit to building meaningful relationships with one another. Your role as a founder who brings on board members should be to understand the importance of the team dynamic and to try to foster better human relationships, so that in the future when you need people to work together for a common purpose a trust and a rapport have been formed.
As an investor board member, I see this as my immediate goal too. I work hard to create working relationships with my fellow nonmanagement board members in the same way that every investor ultimately works to develop strong working relationships with founders.
What are the kinds of difficult tasks that need to be solved by boards?
- What should the cash burn rate of the company be and how long of a cash runway should the company maintain? (This requires a working understanding of the cash-flow statements and key levers.)
- What should the compensation of key executives in the company be? (This requires a strong knowledge of market data, employee performance, company performance relative to market, and available resources -- cash and unallocated stock options.)
- Should we raise capital, from whom, how much, and at what price?
- Should we cut costs, do layoffs, close divisions, or focus scarce resources on fewer projects?
- The founders of a company are fighting. Can we help them get along? Or is it time for one of them to go? And if so, who should leave and who should stay?
I find that some founders are insecure and hate the idea of their board members talking without them present. In fact, last year I was in a board meeting where we asked for time to meet and strategize without the executive team. We were trying to get aligned on a complicated set of issues and there were new board members whom we hadn't all had time to bond and align with yet. The founder kept coming in and interrupting and showing signs of visible frustration. I tried to explain to him that it was a healthy thing that the board members were all speaking.
Part of the way you get high-functioning boards is to spend social time together. It isn't always possible, but when it is I recommend that you try building in casual time for breaking bread or having a drink with board members before or after a board meeting as a way of building human bonds that lead to higher functioning boards.
I practice what I preach. Every year, I invite my largest investors to NYC to have an LPAC (limited partner advisory committee -- kind of like a board for a VC firm) meeting. We do lunch where everybody has casual conversation followed by six hours of content and discussion. We then do a cocktail party so that everybody can have informal conversations (including LP to LP), and then we do a dinner in a private room at a restaurant. The dinner is half casual (chitchat with your neighbors) and half group "table topics" where we share ideas.
Whenever I've faced my toughest moments or biggest decisions as a managing partner at a VC firm, having trust with my LPs and vice versa goes a long way.
Low-Functioning Startup Boards
If you've been around startup boards for a while, you've undoubtedly experienced low-functioning boards.
Many of us have sat on boards with fellow board members who don't seem to read the board materials before the meeting. Much time is wasted during the meeting teaching this board member remedial information.
Some boards are ineffective because management chooses to treat the board more as a group to perfunctorily update, rather than truly engage the board in strategic decisions.
Some boards are designed to showcase each and every member of management by every one of them lead a 20-minute update, with no time allotted for discussion or debate. I call these "filibuster" boards.
Some board members spend all of their time in the meeting on electronic devices doing email or even checking social media. I've seen both quite a bit. For some board meetings, all of the members dial in and you can tell they aren't as engaged as they would be in person.
Sometimes boards are misaligned because of incentives. One board member comes from a small VC fund hoping to exit early, while another has written a $50 million check and expects different decisions to be made.
Sometimes boards are ineffective because management doesn't schedule enough time for meetings, they don't happen frequently enough, or key issues aren't debated.
Sometimes boards have members with no skin in the game and no personal responsibility in outcomes. These board members can be cheerleaders for management in good times but avoid the really hard decisions in tough times as they get caught between founder and capital disputes.
And, of course, there are always the ineffective boards who have too many members, too many plus-ones who speak up, or too many customers on the board making it hard to discuss difficult issues. In fact, in some of these cases you even see shadow boards set up who often meet on different occasions.
Making Your Board More Effective
Choose the right members. Be thoughtful about their skills and motives. Build personal relationships. Spend the time to make sure they're updated before the board meeting. Test how they're feeling about you, the company, and fellow board members -- know your politics. Be responsive to any issues. Make sure the board member to board member relationships are strong, and don't assume it will happen on its own. Be thoughtful about what you hope to achieve.
A high-functioning board comes with active management, and you actually have to care about having a high-functioning board. It's an easy thing to overlook, because often you won't need to rely upon it. But if a crisis ever arises, all of the preparation you put in will be invaluable.