For most startup founders, the idea of creating a board of directors early in the company’s life is as welcome as spending a week at Burning Man without water or sunscreen. Thinking about boards makes entrepreneurs imagine instituting process-laden corporate governance, spending hours drafting lengthy board presentations and potentially losing control of their startups — how un-Zuck! In reality, every startup is legally required to have a board (assuming it’s a C-Corp or S-Corp). But there is ongoing debate about whether that board should include anyone other than the founder(s). An outside Director, specifically one representing investors, is tremendously valuable for seed stage companies. Here’s why:
Establishing a Cadence
Much like sprints in agile software development, setting up a regularly occurring board meeting at the seed stage establishes a cadence for the work of building the company. A scheduled board meeting can also help address another common problem experienced by startups — figuring out how and when to properly leverage your investors and advisers. Board meetings become checkpoints for founders to ask for assistance from an investor and to seek feedback on developments at the company. It doesn’t matter whether the board meetings happen monthly, every six weeks or quarterly. What’s important is that a cadence gets set and that the meetings are used in ways that are productive for the team.
Stepping Back and Getting Perspective
When your hair’s on fire each and every day as an entrepreneur, it’s easy to spend all of your time firefighting. A board meeting offers a fantastic opportunity to escape the day-to-day and spend some time thinking about the company’s overall goals and primary strategic issues. It’s too easy to just say that you’ll find time to talk about these things or to block “thinking time” on your calendar that never quite seems to happen. We’ve found that actually having time scheduled with someone to whom you feel responsible provides an opportunity to step back from the business and leads to regular and thoughtful conversations about issues that are critical to the business long term. Otherwise, those issues might go ignored for too long or are often impacted by decisions and actions taken in the near term.
Practicing for Later
A successful Series A financing usually comes along with a relatively large investment amount, a new board member (often two, if the board gets expanded to five, to let the founders keep “control”) and higher expectations for the company. Given all of that, why would a founder want the pressure of learning how to plan for and run a board meeting for the first time when there is even more to be done at the company? Creating a board early gives the founders the opportunity to learn all of this earlier in the company’s life, and when the board likely has a tolerance for some jitters and iteration. It’s no different than practicing your fundraising pitch before going out to raise money. Managing board meetings is a skill like any other. Learning early what model works for the company so that board meetings are useful and not burdensome sets the founders up for success when more is on the line.
Having an Accountable Investor
We often advise entrepreneurs as they construct their seed rounds that they should make sure there is at least one investor who has serious skin in the game and feels accountable to the founders and the company. The best way of ensuring this is by adding an investor to the board. Legally, that investor becomes a fiduciary of the company and has a responsibility to help the team make sound legal and financial decisions. The right investor-board member will not just be responsive to founders, he or she will be proactively helpful as the team works to build the business. Founders who choose well might find that board meetings become something to look forward to, rather than dread, because the board member truly acts as a member of the team, providing support and constructive feedback.
So now that you’ve created a board with an investor Director, how do you get the most of our your board meeting at the seed stage? The key is to use the board meeting as a working session rather than a meeting to simply report progress. Board meetings should be valuable to the company, so the agenda should be set by the founders. The founders should lead a discussion about the three or four most important operational or strategic issues facing the company and seek advice and feedback, but not decisions. In addition, each board member should leave the meeting with two or three pieces of homework, follow-up items for which he or she is responsible within an agreed-upon timeframe. More tips for running great board meetings can be found from true experts like Fred Wilson, Brad Feld and Ted Wang. Keep in mind that the size and composition of the board will change over time, and many seed stage investors will likely step off the board after a Series B financing or later.
When we make a seed investment at Homebrew, we certainly make a significant financial commitment. But more importantly, we’re also committing our time, mental energy, relationships, expertise, advice and personalities (for better or worse!). We want to be involved and to help the founding teams build the companies that they envision by meaningfully contributing to the probability, scale or velocity of their success.
When we invest, we require that we receive a board seat and that at least a three-member board be formed. Typically, the other seats are occupied by two of the founders, or by the founder and an independent third party Director. If your lead investor doesn’t want to take a board seat, you should be asking yourself why. We’d bet that the teams and companies that do add an investor to the board at the seed stage will benefit greatly.