Lesson: BoD Management with Brian Ascher

Step #3 Constituents: The people make the BoD, so select your constituents carefully

Ideally, everyone is there for a good productive, constructive reason. You are going to have investors on the board. They may be angel investors, or seed, or your venture investors, and then it's really useful to have a couple of good independent directors. You might start off with just one or maybe two.

There it's really important, I think, to get folks who have the time and the interest to really dive in or roll up their sleeves, because often times they could bring things that the investors don't bring. They could be real confidants of the CEO in the best case, but you don't want to pack the board with cronies that are just there because they're buddies with the CEO, because that's not ultimately in the CEO's best interest. You want people that are going to call it like they see it and help you build the great business. And often times that is challenging what's going on and decisions management's been making.

But what I found with those independent directors, assuming they're willing to do the work and weigh in is you don't want to just try and plug a gap on the management team in terms of functional areas. If you don't have a good VP of Engineering, it doesn't really matter how technical the board member is. They're not going to build out your product road map and manage your engineering schedules.

I think it's better to get the industry expertise that you need. If you're serving the real estate industry, or retail, or financial services, but folks who have that broad view about your customers and the problems they face in a way they're used to, I think it'll be lot easier than trying to plug a gap that should ideally be filled by someone on your management team.

And then the last thing you don't want to do is just rent a high-profile name. Unless that person is truly interested in your business, is going to weigh in and help and be available. But often times those folks are so stretched in terms of time that you get the name and then you don't get a whole lot of time and attention. And that's just ultimately not productive.

I think a healthy board, really everyone is trying to represent the quest for truth and the quest for optimal performance. I think the entrepreneur needs to feel very comfortable with all of the independent directors that they choose. And that is usually a mutual discussion between those who have a statutory right to a board seat because they invested and what the founders negotiated up front by way of founder seats or seats for the CEO.

So it's really a collaborative decision, and it should be something that you can discuss over time and say, “This just isn't working. Let's look for a better solution.” But you really want to have a nice balance and alignment. If you get out of balance in either direction, ultimately, it's not great for the company if there are too many VCs and management feels like they're hamstrung.

But even I've seen it the other way. Honestly, companies where perhaps an early founder had a statutory right to the board seat forever. Maybe they're no longer with the company, they're not the CEO. There could be a cofounder who is the CEO, and you have this obstreperous former founder who's no longer even in good standing with their cofounders and they have a seat forever on the board. That's just not a good situation.

I think that you want to optimize for folks who are going to be highly credible to you as a founder, and really help you get to where you want to go. I don't think you need someone necessarily who can get you through the first six months of life and tell you how to sign an office lease and take out equipment line with the local banks. That's ultimately not strategic, and there's plenty of advice out there that could come from an adviser or your professional service folks or a fellow entrepreneur who is a year ahead of you.

You really want folks who've found product market fit, developed go-to market strategies, and ultimately scaled companies. Maybe not to the ultimate conclusion of an IPO, but someone who's had the success and maybe made some of the mistakes along the way to that success or earlier failures to give you the benefit of that hindsight, so that you can have an accelerated learning curve. Typically, it's folks who've had some success and experience and maybe done it more than once.

Especially if you're an entrepreneur attacking an industry that you don't come from, I would say you'd almost always benefit from someone actually from that industry. You may not fill both of your independent slots or all of your independent slots with industry folks, you might want one who's just been through the entrepreneurial journey that you're on and you respect the way that they built their company, and then the other would be that industry domain expertise vertical person.

I think it is important to have a diverse board along a variety of dimensions; expertise is one, industry expertise versus functional expertise, etc. And having gender or racial diversity is a great thing because every form of diversity is going to lead to a slightly different perspective on a given topic. So I think we should go out and seek diverse boards, and particularly as you have larger boards, which are going to have more independent directors, it's more in your control as to who you go after.

When it's largely investors and founders, you're getting who the investor was, but when you're choosing your independence then you can go and seek. Great women board members are in high demand, but they're out there, and they're super helpful when you can find them, and they're interested in your business.

How many executives from the company is a great question, and I think there's a balance. There are two schools of thought. One is you want to keep the room as small as possible and only invite in the execs for their specific section that they need to present.

And the other extreme is I’m going to have my whole management team there, my direct reports for the whole thing, except for maybe a small closed session at the end so that they get the experience of what the board is thinking and asking. I think you want a mix.

I think ideally if you have a good number two in the company. It could be a cofounder, could be a COO, could be a CFO, it's generally good to have those folks in for the whole meeting so that the CEO has a balanced perspective. Even after the meeting and says, “Hey, how did you take that discussion we just had?” And there’s someone there for them to bounce it off.

I think having the whole management team in most of the board meeting is hard because it does inhibit really honest discussion. You may need to talk about personnel. You may talk about acquisition overtures. You may have some real hairy problems that the team doesn't want to hear, or the CEO would prefer the investors don't poke on in an unvarnished way for concerns about morale or because there might be someone in the room that’s to blame for that issue.

And so I think it’s great to rotate your executive team through to present to the board, and it could come back to the strategic topics that you are going to come to episodically. Maybe you’ll have that product roadmap discussion. It’s a good time for the VP of Product Management or Engineering.

I would say the folks that we expect to see almost every board meeting, at least for their section would be VP Sales, certainly Finance, and that’s probably it. Early stage, you’d expect Product and Engineering.

Typically, observer roles are really only granted to investors. I haven't seen it happen in too many other scenarios. It’s not like management is proposing a bunch of observers, although they might in the case of multiple cofounders. Let’s say you are only going to have two co-founder board seats, and there is the third. Then it would certainly be appropriate and I would have no problem if you want to grant that person an observer seat.

But a lot of times, either a late-stage investor that is not going to have a formal board seat would have an observer or sometimes early-stage investors want to develop the younger folks in their firm or newer VCs. Sometimes that person may have sourced the deal or done significant diligence and having them as an observer make sense for their career development, for the partner who was on the board, and also importantly, for the management team because oftentimes that person is available for extra projects.

It’s almost like having a free consultant available to you because you could easily tasked them with discrete projects, might be involved in competitive deep dive, or what have you, and by having them in the board room, they’re familiar with the company's issues. They’ve built the relationships and the trust, and then they can go offline outside of board meetings and do the work maybe even come into the company between board meetings and really help the company. Free labor is great.

Not always. I think a great attorney is a true business advisor and counselor, and they may only speak up one or two or three times in the whole meeting and maybe on a legal topic. Certainly if there are legal topics, they are the expert. But they may come in with a very balanced perspective having sat through probably even more board meetings than your investors have, and they're really worth their weight in gold.

What you don't necessarily need is just the junior person who is there to silently take notes and then leave at the end without having said anything or contributed to this discussion. It's helpful to have them take the minutes, but someone in your team could do that as well. So hey, as long as it's free, and you like the person, and you don't mind, okay. But it's not essential.

Most of the local law firms will attend the board meetings without charging you for the hourly rate. I think that should be an expectation you’d have or certainly an ask. And if the answer is not that, then have a debate, maybe a negotiation, and see what you ultimately conclude. If you are going to be paying for though, I think you want one of these really experienced counselors in the room who could weigh in on more than just the board protocol and resolutions, and if you should have a legal problem.

Other events that might precipitate a change of board members could be if you've had a CEO turnover and that board seat was in the name of CEO, not an individual person or cofounders leave or sometimes a strategic investor or partner might have a board seat and all of a sudden you're no longer strategic to them if their own corporate strategy changes, and then they would relinquish their seat. Or it could be those early investors, usually angels or seed-stage investors rolling off once the company is pretty far down the track.

And then occasionally independents don't work out. They're either not involved enough or their life circumstances change so they bow out. Or sometimes you just find they're not delivering the value. They've been out of the game too long so they're not current in their thinking or just not working out. And there it's perhaps the toughest call, because you have to be willing to go to someone who has volunteered their time and say, "You know, it's not working."

Usually you set the terms at two years for an outside director and so unless it's been a real disaster from the beginning, you can usually let the term expire. Have that conversation six months in advance and I've never seen particularly hurt feelings around that if you've handled it appropriately.

But I'd say more than one or two board members per year would be unusual. You can generally tolerate maybe one turnover a year and maintain enough consistency in the board that you're not constantly educating new board members and you're gaining the benefit of someone who has some history with the company and knows all the challenges you've been through in the past and where some of the problems have been.

And of course with every new round of capital there may be a new board member joining, certainly for the A and the B, sometimes the C. Usually beyond that if you're raising new growth rounds, you might be adding an observer but you don't generally have to add a board seat.

Or if they do demand a board seat at that point you could be negotiating with them, "Hey, can you put an independent on here to represent you or an industry expert that may be representing you?" But they're still going to have a fiduciary obligation to the company and they're going to bring something different than just another investor around the table.

If you are a three-person board, you are essentially all the committees. Everyone is on all the committees. Typically, management is not. They are not technically part of the comp committee or even the audit. You really want outside directors as part of that, as part of the checks and balances between management and the board.

But I'd say once you have four or five members on the board, it's just more efficient to have a sub-committee drilling down on the nitty-gritty of compensation so that you don't take up a lot of board time with that. And you can just go in and just say that the committee has reviewed this, here's our recommendation.

And the charters differ depending on companies but, typically, they are bringing the final decision back to the board when it comes to increasing the size of the option pool because you have run out of options or finalizing an audit or switching auditors, things of that nature. But, they have done the work, they bring it to the full board and then generally it is a quick discussion and ratification of that decision. Four to five, it's time to start doing committees and breaking up the work.