In the last article we wrote about structuring investor updates and how important these are in an unprecedented situation like COVID-19. Some startups are thriving in this situation and some startups are fighting for survival. Either way, the business environment is changing rapidly and this typically means startup founders and their boards are communicating much more frequently than in a “business as usual” situation. In times of crisis, it’s clear which boards are designed to help the company thrive and which aren’t.
In this article, we share our thoughts on board of directors at venture-backed companies in a FAQ format. To present a holistic view, we invited Jay Vijayan, Founder/CEO of Tekion, and Brook Porter, Founding Partner at G2VP to provide the different perspectives from a successful startup founder and a leading venture capital firm. This piece is a team effort with Christian Noske, Head of Alliance Ventures, who adds the corporate venture capital (CVC) perspective.
What makes a good board member?
Brook Porter: First is preparation. A good board member should read the material in advance, understand what’s going on in the business, and be engaged in the meeting. Second is domain knowledge that leads to a high degree of strategic thinking. This leads to impactful and actionable comments. Third is having a strong network to help with hiring talent, financing, and business development. On some level, the board member plays the role of a coach to the CEO. Being able to contextualize the operational experience is important, this can come from being an operator or sitting on other boards. A good board member has a combination of domain expertise and emotional intelligence to be persuasive.
Jay Vijayan: The needs from a board member largely depends on the growth phase in which the company is in and the background of the founder. There is one category of founders with a strong product vision, but limited operational business experience. As they do not have experience building a team and business, a good board member should be more involved in guiding the founder build the team and navigate the transition of building the business to scaling an organization. The second category of founders have a wealth of industry experience, have built global teams in the past, but may not have scaled a new business. The founder needs confidence that the board is there to answer questions in a timely manner, provide honest feedback, and follow through on action items. Perhaps most importantly, a good board member must understand the vision of the company. Board members do not have to be 100% aligned with the founder in everything but should be aligned on the broader vision and direction of the company. If they are not aligned, it may be better to not join the board.
Christian Noske: Every startup is unique and requires the investor to adapt to the needs of the board and the company broadly. That’s why I approach each board like a new “clique” where the newcomer needs to find his or her place to be most effective. Each board also goes through different ups and downs of the business and a good board member understands that different situations require different actions. Another important element of a strong board member is to be able to balance a great relationship with the CEO with the ability to be tough when the company requires uncomfortable truths, or recommended actions. From a CVC point of view, the domain expertise to elevate strategic discussion topics is the most important element for being a good board member, e.g. if the company is selling a B2G product, a board member with government experience could offer valuable insight.
What are best practices for board meetings?
Brook Porter: There are important tactical best practices: Circulate the agenda a week in advance so board members can comment on the agenda. The board material should be circulated at least 48 hours in advance so board members can read the material, ask for clarification, and touch base with other board members. In the meeting, the material for business updates can be the same material the management uses to manage the company. The heart of the meeting should be on strategic topics, this can be product, financing, recruiting, team culture, etc. The board agenda should ideally leave 30 minutes at the end for an executive session. Depending on the maturity level of the board, the executive session can also include a closed session with just the board members to collect feedback on the CEO, then one person is tasked with sharing this feedback with the CEO within 24–28 hours.
Jay Vijayan: First and foremost is clarity and organization: send and read board material ahead of time, have a clear agenda, and set aside time for an open discussion to get feedback from the board. Two, it’s helpful to bring next level executives to have them present company updates or give product demos to the board. These could be VP of sales, product, engineering, commercial, etc. It allows the board members to get a feel for who the executive team is and these executives will feel more accountable. Lastly is to maintain a healthy board environment. Every board member should do their part to foster an environment of healthy debate. You don’t have to agree on everything but conversations should be open, healthy, and discussed with a sense of respect for each other.
Christian Noske: Having an industry-focused investor join the board or a CVC board member, can be a great opportunity for the startup to actively involve their board members. The Alliance Venture’s portfolio company Enevate for example regularly asks strategic investors to give an update on their respective industries. Using this knowledge base effectively can help to support the strategic direction and discussions on the board.
What’s the value of a board observer?
Jay Vijayan: There are two types of board observers. One is the board observer that comes as a support to a board member; these people are helpful to follow through on action items. If a member of the executive team needs to reach out to the investor, they may feel more comfortable reaching out to the observer for the details. The other is the board observer sent by an investor who co-invested in the round. Ideally these observers tap into their network and expertise to add value. The founder should also manage the number of people in the room. It’s hard to make quick decisions with too many people around the table.
Brook Porter: The board meeting can get crowded quickly, so the board observer should manage the level of participation and contribute where it adds value. One great way to leverage observers is for domain expertise to drive strategic discussions based on their knowledge of the market or technology. At G2VP, every portfolio company has at least 2 people involved, often one board member and one observer. One person takes internally the advocate (pro) position while the other takes the catalyst (con) position. During follow-on investment decision, this structure is helpful to ensure the investment committee has a comprehensive understanding of the company. We avoid situations where the sponsoring partner has asymmetry of information over the committee.
Christian Noske: In addition to all the comments from Jay and Brook, I would note that the board observer enjoys a special importance for some CVCs by allowing the corporate investor to be involved without leading the financing round or taking on all responsibilities of a board member. Because of the size of the board and potential sensitive information, it’s important for the CEO or chairman of the board to manage the director-only session versus the open session (with all observers) well in order to have the right discussions at the right level.
What is the role of the independent director?
Jay Vijayan: The primary function of the independent director is to be the tie-breaker when the investor and founder have opposing views. If the board has good chemistry and is aligned on the vision, the tie-break vote shouldn’t happen. The independent becomes more important as the company scales and the board room grows larger. For example, if there is a M&A situation, the investors interest might not be fully aligned with the team’s interest. Independent directors can help here. The need for an independent director will vary based on the stage of the company.
Brook Porter: The independent director is very important. G2VP aims to structure boards with balanced governance including an independent director. The independent director should have experience with compensation structure, setting up committees, and making other complex decisions that impact the cap table and shareholders. It may be challenging to convince the founder to let go of control of the board, but good governance helps avoid many business problems.
Christian Noske: The independent director is also an opportunity to bring expertise that they may not have to the table and provide operating mentorship to the founders. For example, a highly technical founding team with proprietary technology might not know how to package a product. They could bring on a seasoned product executive from another company to serve on the board. Sometimes this can also achieved by bringing on a senior-advisor without increasing the board size. The expectations on the independent director should be aligned between the company and other board members before to ensure she/he can be most efficient in the role.
What’s a good frequency for board meetings?
Jay Vijayan: Formal board meetings should happen once a quarter. Every two months is okay, but once a month is too much. It takes time to prepare for board meetings. Ad hoc board calls may happen more frequently, but often email updates suffice.
Brook Porter: It depends on the stage of the company. Generally, early-stage startups should meet more frequently while later-stage companies transition to a public board cadence. It’s helpful to have monthly performance updates to supplement the board meeting.
If you have any questions or thoughts to share, please leave a note in the comments section or contact me directly at alex.h.lee2@gmail.com
About Jay Vijayan (https://tekion.com/):
Entrepreneur, inventor, business leader and investor.
Founder and CEO of Tekion Corp, a technology company building and delivering world’s best business applications on the cloud and is currently focused on transforming the automotive industry.
Proven experience in building simple and highly scalable technology platforms and solutions that help transform, scale businesses and enable highest level of operational efficiencies.
Prior to Tekion, as the Chief Information Officer of Tesla Inc. for over 4 years, hired and led a global team, which built and scaled Tesla’s digital and information platform from ground-up, enabling and fueling the company’s hyper-growth phase.
Before joining Tesla, led the Business Applications Development group for VMware during its significant accelerated growth phase. Preceding VMware, led product development teams at Oracle for over 7 years.
About Brook Porter (https://www.g2vp.com/):
Experienced entrepreneur, executive and investor.
Expertise includes early stage technology development, strategic business planning, economic and financial modeling, recruiting and executive team building, fund raising, incubating startups, investing across company stages and board level advising.
Founder of multiple companies, including two energy technology ventures and an education services business. Experience running technology development programs, developing large-scale energy infrastructure projects, licensing technologies, raising institutional capital, and forging strategic partnerships. Chemical engineer by training, currently named on multiple US and International technology patents.
Founding partner at G2VP — a new firm focused on investing in exceptional companies applying emerging technologies to traditional industries in novel, sustainable ways.
In parallel, continuing to manage portfolio companies within Kleiner Perkin’s Green Growth Fund.
Disclaimer — The views and opinions expressed in this article are our own and do not necessarily reflect the views of our employer.
