Brad Feld, a venture capitalist of 25 years and author of several books, has just republished 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 quite a bit for this new, second edition.
Called “Startup Boards: A Field Guide to Building and Leading an Effective Board of Directors,” its timing couldn’t be better. With the public — and now startup — markets in turmoil, board members who may have gotten along swimmingly in the longest bull market in history may suddenly find themselves at odds with the management teams they’ve funded, as well as their fellow board members. After all, hard decisions are being made right now, and faced with very different financial pressures, many VCs are discovering their jobs just became a lot more challenging, too.
We talked with Feld last week about the book and the challenges currently facing startup boards, and we touched on a wide number of issues, from the importance (or not) of having an odd number of directors to avoid gridlock, to why every startup board should have independent directors from nearly the get-go. You can listen to our conversation here; meanwhile, we hope you’ll find the excerpts below, edited for length and clarity, helpful.
TC: Why rework and republish this book? Why do startups need it?
BF: One reason is until recently, we’ve had this incredible, positive market for entrepreneurship and venture specifically where there’s been huge value created [notwithstanding a] handful of cases where there’s been really bad governance that resulted in the cataclysmic failures of companies. At the same time, there’s been this narrative, especially amongst companies, that they don’t really need boards, [with] more entrepreneurs not taking advantage of the benefit of a board — especially outside board members.
This whole notion of what role a board really plays and how it can be helpful to a fast-growing company wasn’t just lost but in a lot of ways was being ignored.
Isn’t that also the fault of VCs who’ve been writing more checks, faster, and investing less in their board roles?
Absolutely. There is no question that part of it was VCs being overloaded with boards, or, in some cases, not even really understanding what their role is, because you had a lot of VC board members without a lot of board experience prior to [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 per se. So you had some of that.
You also had a lot of investors, especially in the last couple of years, who put big checks into companies but didn’t take board seats.
But I think on top of all of that — a piece that’s missing from this part of the narrative — is that the most impactful part of boards, especially in fast-growing and mid-stage companies, are outside directors. Over many, many years, I’ve experienced huge value from outside directors at early stages, especially with first-time entrepreneurs, but also with experienced entrepreneurs, who can augment certain areas of expertise that they are lacking with another CEO on their board. They also hear things from that peer differently than they hear it from their VC investor.
When should startup founders start thinking about bringing aboard independent directors?
My [co-author and serial entrepreneur] Matt Blumberg has something he calls the rule of one. His view is that at every financing round, if you add a VC to your board, you should always add an outside director, too. So if you start off with two founders, and they each have a board seat and you add a VC and the VC takes a board seat, you should add an outside director at that stage. If you do another round and another VC takes a board seat, you should add a second independent director at that stage. [Meanwhile], it blows my mind, the number of times that there’s an outside board member seat that’s empty when I am investing in a company at a Series A or even a Series B stage and there is already a VC on the board.
Because founders aren’t aware they should be doing this? Because VCs don’t want them adding to the board too fast?
A lot of times, the VCs will structure the board so that there’s an independent director. That’s pretty common. But no one prioritizes it. And it’s especially important in the kind of cycle we’re about to go through, one that I expect will be prolonged.
If you have situations where you have down rounds, you have recapitalizations, you have sales of companies below the liquidation preference — even if you’re dealing with something as simple as inside rounds — from a governance perspective, having an independent director on the board is a very significant positive governance characteristic.
There are lots of cases where it’s a ‘nice to have.’ There are some cases where, if you don’t have it, you actually 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 in those kinds of financings.
And that’s independent from the benefits of an independent director [when it comes to] governance in a down round, because a lot of times in a down round, you get a lot of challenges between the founders and the investors, and you may have conflict between founders and investors. If you have somebody or multiple people in independent seats, they can play a very different role when emotions flare, 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 navigating that. I know plenty of VCs who are good at navigating that. I know many more VCs who are not good at navigating it. I know many more founders who are not good at navigating that. It gets hard. And when you have a couple more people sitting around the board table who don’t get wrapped up in all of those emotional dynamics, it often makes for much better discussion and far better decisions.