A field guide for board starters in a booming market – TechCrunch

A field guide for board starters in a booming market – TechCrunch

A field guide for board starters in a booming market – TechCrunch

Brad Feld, a 25-year venture capitalist and author of several books, has just reissued a book that first came out in 2013 and to which Feld, with the help of co-authors Matt Blumberg and Mahendra Ramsinghani, has added a lot for this new, second printing .

called Startup Boards: A Practical Guide to Building and Leading an Effective Board of Directors, the timing couldn’t be better. With public – and now startup – markets in turmoil, board members who may have gotten along in the longest bull market in history could suddenly find themselves at odds with the management teams that funded them, as well as with their fellow board members. After all, there are tough decisions being made right now and faced with very different financial pressures, many VCs are finding that their jobs have also become a lot more challenging.

We spoke to Feld last week about the book and the challenges startup boards are currently facing, and we touched on a myriad of issues, from the importance (or not) of an odd number of directors to avoid a stalemate, and why every startup board should have independent directors from the start. You can listen to our conversation here; meanwhile, we hope you find the excerpts below, edited for length and clarity, helpful.

TC: Why rework and republish this book? Why do startups need it?

BF: One of the reasons is that until recently we had an incredible, positive market for entrepreneurship and enterprise, especially where tremendous value has been created [notwithstanding a] a handful of cases where there has been really bad governance that has led to the catastrophic failures of companies. At the same time, there is a story, especially among companies, that they don’t really need management, [with] more entrepreneurs who do not take advantage of a board, especially external board members.

This whole idea of ​​what role a board really plays and how it can help a fast-growing company was not only lost, but ignored in many ways.

TC: Isn’t that also the fault of VCs who have written more and faster checks and invested less in their board positions?

BF: Absolutely. There’s no doubt that some of them were the VCs who were overloaded with boards, or in some cases didn’t even really understand their role because you had a lot of VC board members without much board experience before you started. [jumping into VC]†

[Part of it] † † † .tied to founder-controlled boards, where the founders have super voting rights, or the founders don’t really have a responsibility to a board as such. So you had something to do with that.

You also had a lot of investors, especially in recent years, who put big checks in companies, but didn’t take board seats.

But I think in addition – one part that’s missing from this part of the story – is that the most influential part of boards of directors, especially in high-growth and mid-sized companies, are outside directors. For many, many years, I’ve experienced tremendous value in the early stages from outside directors, especially with novice entrepreneurs, but also experienced entrepreneurs, who can expand areas of expertise they lack with another CEO on their board of directors. They also hear things from that peer differently than from their VC investor.

TC: When should startup founders start thinking about hiring independent directors?

Mine [coauthor and serial entrepreneur] Matt Blumberg has something he calls the rule of one. His view is that if you add a VC to your board with each funding round, you should always add an outside director as well. So if you start with two founders, and they each have a board seat and you add a VC and the VC takes a board seat, then you need to add an external director at that stage. If you do another round and another VC takes a board seat, then you need to add a second independent director at that stage. [Meanwhile]I’m amazed at the number of times an outside board member seat is empty when I invest in a company in a Series A or even a Series B phase and there is already a VC on the board.

TC: Because founders don’t know they should be doing this? Because VCs don’t want to be added to the board too soon?

BF: Often the VCs will structure the board so that there is an independent director. That’s pretty common. But no one is prioritizing it. And it’s especially important in the kind of cycle we’re going to go through, one that I expect will be a long one.

If you have situations where you have down rounds, you have recapitalizations, you have sales of companies under the liquidation preference – even if you’re dealing with something as simple as inside rounds – from a board perspective, having an independent director on the board is a very important positive governance characteristic.

There are many instances where it is a nice to have. There are instances where, if you don’t have one, you create a real problem for yourself in terms of the downstream legal dynamics around things like the business judgment rule and what you can rely on for that kind of financing.

And that is independent of the benefits of an independent director [when it comes to] governance in a downturn, because in a downturn you often get a lot of challenges between the founders and the investors, and you can have a conflict between investors and investors. If you have one or more people on independent seats, they can play a very different role when emotions are flaring up, or when there’s real tension, or when there’s real animosity between people because they have different incentives.

I know plenty of founders who are good at that. I know plenty of VCs who are good at navigating that. i know a lot of them Lake VCs who don’t navigate it well. i know a lot of them Lake founders who don’t navigate that well. It gets difficult. And having a few more people sitting around the board table who don’t get caught up in all those emotional dynamics often makes for much better discussions and much better decisions.