How to Build Your Boardby Brady Bohrmann, Partner at Avalon Ventures

About Brady Bohrmann

Brady has over 20 years of experience as a venture capitalist and operating executive in both information technology and biotech. His focus is on early-stage investments and backing talented entrepreneurs.

Throughout his venture capital career, he has worked with over 75 companies. He currently is a director or observer of many Avalon portfolio companies, including Backupify, Chart.io, Cloudant, Inc., Conjur, Indix, Juliet Marine Systems, Kaltura, Kinvey, Memrise, Nanigans, Pingup, Redbooth, Selectable Media, Simulmedia, The Happy Cloud, Twinstrata and Vook.

Expert observations and tips on building an effective board:

• What is the purpose of the board?

• How do you compose your board?

• What you can expect from your investors?

• What makes for a great meeting?

1. Understanding the Purpose of Your Board

In its simplest form, the board of directors is a group of elected or appointed members charged with the responsibility of overseeing your company’s activities.

The Structure of Your Board

The structure of the board is spelled out in the company’s bylaws and typically includes:

• The number of directors

• How each director is appointed

• The minimum number of times per year the board must meet

The Primary Responsibility

The primary responsibility of your board members is to represent all shareholders—not merely their individual interests. You will often hear this described as a fiduciary obligation.

The Fiduciary Obligation A fiduciary obligation is composed of the three legal concepts:

• Good Faith: The presumption that all directors will deal honestly and fairly when making decisions, regardless of the outcome.

• Loyalty: Directors must put the interests of the company ahead of their personal interests.

• Duty of Care: Attempts to define a standard, often referred to as the business judgment rule, whereby a director owes a duty to exercise the judgment an ordinary person would use under similar circumstances.

Investor Board MembersFor venture-backed companies, investors will typically exercise control over their investment by requiring:

• One or more board seats

• A series of protective provisions

• Special voting rights spelled out in the investment documents

an example:The sale of a business may require your investors’ consent.

A subtle (and often misunderstood) distinction is that it is perfectly acceptable for your investors to vote in favor of something as board members, but block the very same activity by exercising their voting rights or control provisions.

The Foundation of Your Board

The concepts of fiduciary obligations and voting rights may seem foreign at first (or even like overkill for an early stage company).

If properly observed, they form the very foundation of your relationship with the board—and through it, with your stakeholders.

an example:There will be times (e.g. when raising capital, selling the company, or taking it public) when your stakeholders may question if you have properly fulfilled your obligations to them, so developing, understanding, and acting on these basic principles will serve you well.

2. How to Compose Your Board

Some of the first—and most important—decisions you will make when raising venture capital involve negotiating the size and composition of your board.

The IngredientsTypically, your board will consist of:

• Representatives from the holders of the common stock (i.e., founders)

• Holders of preferred stock (i.e., investors)

• The CEO

• 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.

The Size of Your BoardFor early stage companies, we suggest a small and “balanced” board consisting of no more than five members:

• Two representing the common shareholders (including the CEO seat)

• Two from the preferred investors

• One independent director recommended by the founders.

Defining the Investor Director

Avoid rushing to appoint the independent director. Instead, wait 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 their network and expertise on your behalf.

When to Keep it SmallIf 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

• One investor

This is a practice we generally support.

Board Meeting Frequency

In an early stage venture-backed company, you actually need only a few meetings each year to meet your fiduciary and governance obligations.

Board Meeting Content

Most official board business is limited to operating matters, company performance and strategy:

• Approving the annual operating plan

• Issuing employee options

• Larger events such as authorizing funding, partnership agreements, or acquisitions

The Communication Conundrum

Management and investors alike begin to rely on the board meeting as the preferred method of communicating with one another.

The meeting then devolves into a parade of scripted departmental updates and forced strategy sessions, all crammed into a three-to-four-hour window.

The Communication Conundrum trap:

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.

The Communication Conundrum (cont.)

Resolving the Communication Conundrum

At Avalon Ventures, 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.

3. Setting Expectations for Investor Directors

You should expect the same from an investor whether or not he/she is a member of your board.

Defining an Investor Director

In my experience, investor board members tend to fall somewhere on a scale ranging from:

• Those that think you work for them (avoid this type)

• Those who understand that the best results occur when they work in partnership with you (find more of these!)

A Good Investor Director

A good director will make you a better CEO by knowing:

• How and when to challenge you

• How to avoid undermining you

They will publicly support your decisions, even if they don’t fully agree with the choices you make.

A Good Investor DirectorYour company will experience tough times. You will want (and deserve) investors that will dig in, work hard, support you when things aren’t going well, and not run at the first sight of blood.

Vet Your Investors

Do your homework before choosing a venture fund by talking to as many people as you can to learn as much as you can about the person(s) with whom you will share the ups and downs of building your company.

7 Investor Director Personalities to Avoid

The Dictator

This is the person who mistakenly believes that by taking their fund’s money, you work for them.

Board meetings break apart into power struggles, often to the point of the CEO seeking ways to work around the dictator.

The Drive-by Director

This person consistently misses meetings, sends an associate in his place, or worse, uses the meeting as an update session to educate themselves about the company or the industry.

Valuable time is wasted on justifying past actions or conveying information your investor should already know.

The Stage Hog

These are the talkers and the agenda usurpers who view the board meeting as their personal stage.

They stifle productive conversation by consuming valuable airtime in an effort to prove their knowledge and worth.

The Patronizer

Typically designated by the founder or CEO, this person tends to be passive and unwilling to disagree with you, which would risk his relationship or his seat on the board.

A board full of these types is a ticket on a high-speed train to mediocrity.

The Meddler

This person would rather have your job than be a director. They thinks they can run the company better than you can.

At the very least, they are an eye-rolling distraction and someone to weed out at the earliest opportunity.

The Academic

A person who lacks real-world company-building experience and approaches the boardroom as a living laboratory.

Though they’re often charming and articulate, it’s best to let them experiment with someone else’s company.

The Often Wrong (but never in doubt) Investor

Typically, this is an investor director who is quick to pull the trigger on advice by drawing from the playbook they used in previous companies instead of critically thinking about your company.

Experience is a great teacher, but it’s dangerous if used indiscriminately.

from experience:Over the years we’ve had the pleasure of working with some great investor directors and observed how a bad director can single-handedly poison the culture and derail a company.

The very best are great listeners and have an intuitive understanding of how to adjust their style to the needs of the CEO:

• One CEO may benefit from a softer touch and Socratic style of leadership

• Another may prefer a no-nonsense and right-to-the point relationship.

4. How to Run a Great Board Meeting

There are many ways to run a great board meeting. Choose the approach that is right for you.

Finding the right approach

• Talk to other CEOs: see what’s worked for them.

• Consult with your board: find out their preferences.

• Remain fluid: the frequency and structure of your board meetings will need to evolve as the business grows.

. Here are 6 tips to get you started on the right track.

1. Don’t let the inmates run the prison. • As CEO, you have the responsibility AND the authority

to run the company.

• Your directors will counsel you and sometimes strongly disagree with you, but can’t make decisions for you.

• As the leader, you must fight for what you believe in.

• Many times we’ve offered different points of view to a CEO and ultimately accepted and supported their decision.

2. Corporation vs. Kingdom• It is very difficult to make the adjustment

from sole decision maker to being held accountable by your board.

• There are many highly successful founders who have maintained leadership positions in their companies (e.g. Jeff Bezos, Larry Ellison, Mark Zuckerberg).

• Remember and observe the fiduciary obligations you have to your stakeholders and always keep in mind the company is bigger than any one person, including you.

3. Keep it simple• You can’t cover everything in one meeting.

• Provide your board with a well-prepared board package that covers all the information it needs.

• Pick one or two key topics and plan to devote most of the meeting to discussing them.

4. Keep it short• Keep the meeting no longer than two or three

hours.

• Keep it sharp and to the point. A high-intensity and focused exchange of ideas is far more valuable than a low-tempo, meandering discussion.

• Clear the formal board business first, and be prepared to take important (but not immediately vital) discussions offline.

5. Solo artist vs. frontman• Some CEOs play it close to the vest and tightly

control the directors’ access to management.

• Others encourage direct relationships between directors and key members of the team.

• Either approach can work.

• We prefer to get to know the team inside and outside of board meetings; this gives us a better feel for the company and the people managing it.

6. Use your attorney • Ask your corporate attorney to attend all board

meetings to take notes and prepare the minutes.

• Keeping accurate and up-to-date records is a good habit and will pay dividends down the road when you sell the company or take it public.

• Poor record keeping slow downs or jeopardizes the sale of a company, and buyers will use it as a way to chip away at price.

The Takeaway• Understand your responsibilities

as CEO

• Know how to structure and build a great board

• Learn how to run a productive meeting

• This will lead to a fun and rewarding journey

Learn more!Visit http://avalon-ventures.com/blog for more actionable advice on early stage startups, VC funding and other entrepreneurial tips.