Board Governance part 1

A number of readers have sent me emails regarding board of directors and advisors. I would put discussions around boards into three buckets: board structure, board composition and board management.

Board Structure:
I highly recommend two things around structure. First, that a company go with an odd number of board members and second, that it not go above 7 directors. Entrepreneurs often ask about 4 or 6 person boards. The primary issue with an even number is that it can result in split board votes (e.g. 2 for, 2 against). Stay with an odd number if you can.

For early stage companies, you often see small boards of two or three directors. When the first round of venture money comes in, the board will normally jump to 5 directors. This will include two investor board seats, the CEO, a representative for common (usually selected by the founders) and a fifth board member acceptable to both the founders and the investors. The fifth board member is usually an industry executive or fellow entrepreneur who can provide helpful advice to management. It should resist the temptation to jump to 7 board members at this juncture since it is harder to manage and sets the company up for a bloated future board.

The board will usually jump to 7 members at a second financing that is led by a new investor. These two extra directors will include a representative from the new investor and a mutually agreeable third party. We rarely see the board jump beyond 7. Should the company raise additional capital, the number of investor board members may jump to 4 and after this, these seats get shuffled around to represent the largest investor shareholders.

Often, there are either other value added players or more investors than there are available board seats. The company can give them board observer rights. This enables them to participate in all board meetings and receive all board materials, but without the formal governance responsibilities and rights. They do not vote on board matters nor have the formal fiduciary liabilities of a board member. Again, a company does not want to load up with observers since it leaves too many people in the room. You will see up to 2-3 observers.

Why don’t you want to have as many value-added board members as possible? It requires enormous work and time to manage. The CEO needs to establish and maintain strong relationships with each board member. This includes on-going communications, responding to opinions and requests and dealing with intra-board issues/conflicts/etc. Each new board member is someone who will be voicing opinion at the board meetings and requiring follow-up actions. It is a lot of work. It also increases the likelihood that you may get intra-board conflict as you add a wider array of personalities. Lastly, and more importantly, with that many players around the table, board discussions and decision making slow down dramatically. Forming concensus is much more difficult.

Tomorrow, I’ll discuss board composition…