Thursday, September 29, 2022

How to Get the Most Out of Your Start Board, with Brad Feld

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Shreya Christina
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An important (and often undervalued) element in a startup journey is the board of directors. As I’ve written before, “The mythology of renegade founders building hugely successful companies is inescapable. But of course nothing happens in a vacuum… An important element, which is easily overlooked or misunderstood, is governance.’

At their core, boards of directors have a management function. But when done right, they can do so much more to coach founders and executives, provide unique business opportunities from their networks, and help build the business. These features are often all the more important in global startups operating outside of Silicon Valley, as well as in companies operating in critical industries (such as fintech) where regulatory compliance is a must and doing well with the largest customer’s money. importance.

That’s why I was so excited to discuss Board best practices with Brad Feld, as well as his and Mahendra Ramsinghani’s new book: Startup Boards: A Field Guide to Building and Leading an Effective Board of Directors. For this piece, I’ve gathered questions from a range of global investors and industry experts.

Building the best board

Alex Lazarow: The first step in getting the most out of your board is building a great board. For starters, let’s dive into these best practices. What can board members in emerging VC ecosystems learn from the best board members in developed ecosystems?

Brad Field: The word ‘best’ is important in ‘best board members in developed ecosystems’. There are many bad or mediocre board members in developed ecosystems. And just because an ecosystem is being developed doesn’t mean the individual board members, or the board as a whole, are good. So if you’re trying to learn from other board members, make sure they’re the “best.” Then recognize that there are different styles and roles that board members have. Every CEO needs a different kind of help, and the best board members know how to adapt to a CEO’s specificities. The best board members are collegial, know how to engage, but also understand that the CEO leads the company. The best board members are not afraid of conflict and know how to be constructive. If another board member wants to learn from a great board member, the most effective way to do it is to sit on the board with them, observe and learn.

Lazarow: Member selection is critical in building the board, especially to combine industry, geographic and operational experience. Allen Tayler, Managing Partner at Endeavor Catalyst asked: How important is the relationship over time to board members in emerging markets, given the importance of combining board experience (eg, local market expertise and industry knowledge)?

field: Interpersonal relationships between board members are critical. CEOs should see the board of directors as another team they work with. They have their leadership team (their direct reports) and their board. While the board can fire the CEO, if it’s an effective board, as long as the board members support the CEO, they work for her, and a great CEO will work to build the board into a very functional team, just like they do with their leadership team.

Balancing the role of governance with creating a friendly innovation environment

Lazarow: The role of the board is primarily governance. In regulated industries such as fintech, compliance is critical. But startups innovate through design. Managing this balance is critical. Sid Mofya, Executive Director of the Draper Venture Network asked: Is it destroying companies in fledgling markets to demand governance built for more mature markets?

field: This is not a market issue, but a business issue. Young companies need working groups. On these boards there is more focus on helping the business get to the point where the business is operating, there is product/market fit and the business is starting to scale. As companies mature, governance issues become more important. Note that I didn’t say “more important” because they are always important, but the balance of governance energy is less on governance in the beginning and more on the startup phase, while later there is more emphasis on governance. This is market independent.

Lazarow: The reverse, of course, is how do you manage the right level of governance to enable the business, but also remotely?

field: As remote working is now widely accepted and understood, so is remote management. It is important that the CEO establish the appropriate cultural norms around remote participation and that the board respects and respects the approach and cultural norms for the specific company. I’m on many boards – some are completely remote; others have regular (or periodic) face-to-face meetings. As long as the board members are aligned with the CEO and attention is paid to the communication dynamics, it works well.

New board members

Lazarow: Governance dynamics are important. Setting the right tone in the beginning and building a culture over time is critical. Teddy Himler, a partner of Antler asks for new board members in the first 100 days: How do you get on the right track to ensure excellent governance in the future?

field: This is an excellent opportunity to consult the book (chapters 13 and 31). Some of the ideas are: 1. Give the new CEO a “Board Buddy”, Get 1:1s Scheduled, Get in the Weeds with Them (in addition to reviewing financial data, you, your CFO or your general counsel should spend time familiarizing the new director with the legal structure, capitalization, finances and current business model), 4. Prepare an onboarding package, 5. Encourage face-to-face interaction, and 6. Touch Base Periodically.

Guessing at the end of businesses

Lazarow: The boards of directors have roles throughout the company lifecycle. A period that is often overlooked is the exit. Yash Kanoi, Head of Investments at Alter Global asks: Emerging markets have less liquid IPO markets and secondary markets can be powerful tools for liquidity. What should be the board of directors’ stance on approving secondary transactions at startups – their frequency and amount cap?

field: There is no real difference here between emerging and developed markets as both have active secondary markets for private companies. In all cases, the board must be well informed about the rules for any secondary transactions, which are almost always described in the investor documents. Almost all companies have an ROFR (right of first refusal) on every secondary purchase, and often the big investors do too. These situations require a formal process involving the board and major investors. In addition, shareholders have confidentiality agreements with the company and cannot share company information with a secondary buyer without the company’s approval. Finally, many business owners and investors will want to limit and control secondary market activity for various reasons, so the board must be well informed and involved in whatever arises.

Lazarow: My view, and building on Brad’s point, is that the role of the board of directors is important at all points in the company’s lifecycle. The exit is a critical point. This of course includes secondary exits, but also a possible sale or IPO, or in the downward scenario, a winding down of the company. Work with the CEO and management team to ensure a strong process, maximum results and ensure that stakeholders such as employees are treated fairly.

Where are we going from?

Boards play an important role in startups from inception to exit. Getting the most out of a startup board requires a thoughtful approach to forming a board, building a culture, etc. Many of these dynamics are all the more important in emerging startup ecosystems and regulated industries.

I really enjoyed reading it Startup boards and hopefully you too.

The conversation has been edited and shortened for clarity.

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