Board composition varies dramatically between companies.  Some entrepreneurs push to add brand name executives to their boards in order to give credibility to the firm. Others load it up with friends and close acquaintances. Others add industry players or fellow entrepreneurs. I am a firm proponent of the latter.

The most functional boards I have been involved with have a number of leading executives from the industry as well as leading entrepreneurs. Board discussions are productive since directors have specific domain expertise around either the general management of an early stage company or the nuances of the industry. They can help think through hiring/personnel issues, financing activities or sales strategies. Industry participants can keep the CEO informed of trends, developments or breaking news. They can also help make introductions to potential customers, potential strategic partners, potential acquirors or potential hires. In one situation, the company was selling into municipalities. Board members new the key players and decision makers at many of the cities. They helped guide the sales force to the right people (or made the initial introductions). They also provided feedback on scuttlebutt, new developments or issues.

Fellow entrepreneurs are also very helpful. They can provide a sounding board to the CEO as he/she deals with day to day issues. Many of the board items are judgment calls. Experienced entrepreneurs can help guide the company through decisions based upon their past successes and failures. The company will want entrepreneurs that have enjoyed success and who come from similar industries. A biotech entrepreneur is not going to be very helpful to an Internet firm. Likewise, an entrepreneur who is still trying to figure out how to be successful might not have the best experience base upon which to draw learnings from.  Board members can act as mentors. Pick accordingly.

Too often, entrepreneurs pick current or former Fortune 500 CEO’s for board members. While this is very useful if you are about to go public, they do not often work out well for early stage companies. The company does not get the “marketing” pop that the entrepreneur thinks. However, these CEO’s are used to large staffs, governance issues and strategic planning. They often don’t have relevant industry expertise or are too high up to be able to answer or relate to the CEO’s day to day challenges. They get frustrated and the entrepreneur dozen’t get much from them.

Another common mistake is when entrepreneurs load up the board with friends and acquaintances. They know and trust these members and expect them to help the CEO maintain control of the company. The issue, again, is that they provide little day-to-day value. Worse yet, they encourage the entrepreneur to focus on the wrong things or give poor advice. We often see this when a company is fund raising for the first time. The company asks for non-standard items, seeks suboptimal structures and often focuses the entrepreneur solely on price or dilution. They pick fights over the wrong things, believing they are the important items. Smart entrepreneurs make dumb decisions in these situations.

Advice:
So, how do you know if you have a good board? Look at the number of times that you have had an issue or need and see the percentage of time that the board has been able to help you, especially on major decisions. Also, examine how useful and relevant you find the board’s recommendations and advice.

How should an entrepreneur go about finding these board members? I recommend that the entrepreneur make a list of the most plugged-in and knowledgeable players in his/her space. The ideal candidate is a leading, non-competitor fellow entrepreneur. The company gets both domain and managerial expertise. Make a list of the key candidates and begin a systematic process to build relationships with them. If the fit works out, you can approach them about greater involvement with your firm.

Find people who are selling similar types of products to similar customers. If you have a Web 2.0 company selling a consumer service, find someone who has scaled a sizable consumer service Internet company. If you are in etailing, find a successful etailing CEO from a different vertical. If you sell software to insurance and health care companies, find someone whose firm has successfully navigated and grown in the insurance and health care industries. At FeedBurner, Dick Costolo recruited Matt Blumberg from Return Path.  Matt is focused on email related services for major corporations while Dick is focused on RSS delivery services for major corporations. Matt provides a wealth of insight regarding day to day issues while also sharing successes and failures around different strategies and tactics. Elon Musk, a co-founder of Paypal, was on the Everdream board and provided an enormous amount of advice on everything ranging from satisfying the customer to call center management.

Lastly, how should you compensate board members? For early stage companies, cash is king. You see board members getting up to 0.25% equity that vests over a period of time. For hands on board members (like executive chairmen), this can go as high as 2%. The company also picks up transportation costs to and from the board meeting.

Next, I’ll discuss how best to manage your board…

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…

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…