My new Startup Board Mantra: 1-1-1
Last week, I blogged about Bolster’s Board Benchmark survey results, which really laid bare the lack of diversity on startup boards. There are signs that this is starting to change slowly — one big one is that of all the board searches we are running at Bolster, about ⅔ of them are open to taking on first-time directors; and almost all are committed to increasing diversity on their boards.
This is also something that I would expect to take some time to change. Boards are small. Independent seats aren’t necessarily easy to open up. Seats don’t turn over often. And they take a while to fill, as CEOs are thorough in their recruitment and selection process.
My new mantra for Startup Boards is simple: 1-1-1.
1 member of the management team.
Then 1 independent for every 1 investor.
Simply put, this means you should grow from having 1, to 2, to 3 independent directors as your board grows from 3, to 5, to 7 members.
Here are four tough conversations you may have to have along the way, with some suggestions on how to navigate them. All of these conversations need to come with a point of view of why independence and diversity matters to your company, a lot of empathy, and appreciation for the value the person brings to the table.
The conversation with your co-founder about only one founder/executive on the board. This one will be the most personally difficult, since you likely have a strong personal bond. Expect to hear things like “Aren’t we partners in this business?” and “How come my vote doesn’t count?” Just let your co-founder know that while of course they’re a key partner, the company has a limited number of board seats to fill — each one is a golden opportunity to get an outside perspective on your business and get really good mindshare of an industry expert and create a new brand ambassador. You already have 100% of the mindshare and ambassadorship your co-founder has to offer. You can make that person a board observer, you can make sure they’re in all the key board conversations, and you can even give the person some special voting right in your charter or by-laws if you need to. But do not put them on the board. It’s obviously easier to do this from the beginning as opposed to removing them from the board down the road, but at least try to have the conversation up front that someday, it’s going to happen (note this could be a different dynamic if the person is a founder but no longer active in the business).
The conversation with an existing VC about leaving the board to make room for new investors or an independent. This one will be less personally difficult but will require you to be very artful since the VC is likely contractually given a board seat – meaning you’ll have to get them to give it up voluntarily. You may also want to align with another VC on your board to help the conversation or process along. Depending on the circumstances at hand, your key points of logic could be one of the following: (1) you don’t own as high a percentage of the company as you once did, and I’d like to make room for the new lead investor to join the board without compromising our independents or making the board too big; or (2) I’d like to replace you with an independent director who brings operator perspective and comes from an underrepresented group – it’s important to me that we build a diverse board, and it’s not great that we have don’t have gender or race/ethnic diversity on our board in this day and age. As with a co-founder, you could change this person’s designation to a board observer so they’re still present for key conversations, you’re not changing their Information Rights, which are likely contractually given in your charter, and if required, you can give the person or firm some sort of special voting rights if there’s something they can no longer block (but which they have a contractual right to block) by losing their board vote.
The conversation with a new potential investor about not taking a board seat. If you have a big new lead investor writing a $40mm check into a growth round, you may not have a leg to stand on. But new investors who write smaller checks as you get larger, who might only be buying a 5-10% stake in the business…there, you might have some wiggle room to negotiate. Your best bet is to do it early in the process before you have a term sheet, and do it as an exploratory conversation. Otherwise, your talking points are the same as talking to an existing investor above. Investors are starting to realize the power of a diverse board, and may be open to this conversation. Some are making this a proactive practice, notably two of my long-time investors and directors Fred Wilson and Brad Feld (and some of their partners at Union Square Ventures and Foundry Group) — and those investors have also been willing to mentor the new, first time board members once they join.
The conversation with an existing independent director about leaving the board when their term is up. Perhaps you have an existing independent director who is not adding to the diversity of the board, but you already have a full board. Or perhaps your existing independent director isn’t doing a great job or has grown stale in the role. Once a director is fully vested, you have an easy opportunity to thank them graciously and publicly for their service, extend their option exercise period multiple years, and affirm that they’ll still take your call if you need help on something. You should set this expectation up front when you give the director their initial grant. If they ask why you’re not renewing them, you can simply say something like “We’d like to add some fresh outside perspective to the team.” One thing to think about, particularly for early stage companies, is only giving new directors a 1 or 2-year vest on their first option grant, so you can make sure they’re a high value director…and so you can have the option of an easy exit (or re-up) in a shorter period of time than a traditional 4-year vest.
The net of it is that as CEO of a venture-backed company, you wield an enormous amount of (mostly soft) power around the composition of your board – probably a lot more than you think. You just have to wield that power gently and focus on the importance of building a diverse board in terms of both experience and demographics.