Start-up Board Management and Best Practices

Founders of early-stage startups organize themselves and their businesses out of the chaos of start-up primordial soup.  If things go well, over time, an increasing amount of order and organization is applied to that chaos.

Arguably, the most significant point at which a start-up must mature their processes and procedures comes with the decision to use other people’s money to run and grow the business.  In particular, outside investment generally requires the creation of a board of directors and scheduling of regular board meetings.

It shouldn’t be lost on anyone that while employees of the startup report to the CEO, the CEO reports to the board of directors.  Therefore, one of the most important jobs of the CEO is to manage investors and the. For first-time CEOs, this will be the first time that they have to organize and run a board meeting.

The good news is that boards and board meetings have existed for decades and best practices exist to help create a framework for efficient, well-run meetings.  The bad news is that it’s not that obvious what those best practices are and how and when to apply them… especially in startups that are just starting to apply order to their chaos.

So that’s the point of this post:  to create a bit of context for running good board meetings and to sketch out some fundamental best practices for early-stage startups.  I have a feeling this post will grow and be edited over time.

I’ll update the board meeting presentation template for 2013 this month as well; this will be a companion piece to that post.

A Few Key Areas for Best Practices

Disclaimer:  I’m not a real-deal expert in board governance and there are tons of resources out there across all dimensions of organizing and running a great board of directors.  What I can tell you is that I’ve personally run a bunch of public and private boards in tech companies and I sit on the board of a bunch of early-stage boards today.  I have opinions that are in line with best practices but every startup is different and the requirements for boards evolve and grow as the startup itself evolves and grows.  These best practices are heavily influenced by my biases and experience.

Perhaps the easiest way to talk about best practices is to break up the discussion into three main areas and one chunk of history:

  1. Board structure and structural timing

  2. Board management by the CEO

  3. Board meeting processes and associated language

  4. History of all this board stuff
  5. (last) a set of questions I plan on answering soon, in an updated version of this post

Board Structure

While it is very uncommon for strategic disagreements or major decisions to be decided by a board vote in a startup, it’s a best practice to have an odd number of seats on the board to ensure that votes never end in a tie.

When a VC like Silverton makes an investment in an early-stage startup, it is common to create a three-person board with one “seat” that represents the preferred shareholders (the VC), one seat that represents the common shareholder (the founders; this is usually the CEO), and one seat that is an outside, independent director (a relevant, neutral third party).  During subsequent financings, two more seats would typically be added: one for the new investor and an additional independent seat.

Each board “seat” may represent a class of stock and therefore a particular shareholder group.  Typically, one of the VCs from the investing firm will occupy the “preferred seat,” a founder or CEO will occupy the “common seat” and a relatively neutral or unaffiliated individual (but typically an industry expert) will occupy the “independent seat.”  And while each seat is responsible for making decisions in the best interest of the company, the common and preferred seats have the added responsibility of representing the interests of that class of shareholders.

In my opinion, it’s not required that the independent seat be filled right away.  In fact, having an open seat on the board can be a very powerful tool for the startup CEO to engage partners and advisors, as potential independent directors, who might be able to help the business in any number of ways.

The CEO & Board Management

I really can’t overstate the importance of the CEO’s proper care and feeding of the board of directors.  To be as simple as possible, the best way to manage a board well is to have consistent, proactive communication from the CEO to each board member individually or as a group.  That’s it.

A CEO that manages the board “well” tends to show and do the following:

  • The CEO has awareness of what’s important within the business and larger industry as well as a desire to keep the board informed so that they may have the best context for the business and be maximally beneficial.

Board meetings should not be simple quarterly read-out and reporting events.  They should focus on business-relevant discussions and challenges that the board can help the company with.  This is easier said than done but it starts with the CEO ensuring that the board is properly informed ahead of board meetings.  The board has a responsibility to stay informed as well but the CEO should not count on the board to be as close to the business, the industry and associated nuances as the operators who live it every day.

  • The CEO recognizes that the worst thing that can happen between and board and the CEO are “surprises” regarding significant occurrences in the business.

Eliminating or minimizing surprises means a bunch of communication to board members ahead of the actual board meeting. For big business problems or important strategic votes, setting expectations and knowing how votes will be cast in advance of the board meeting will give the CEO an opportunity to understand concerns, answer questions, provide perspective and set / re-set expectations proactively. This is very time-consuming for a busy CEO, but it’s critical.

Surprises at the board level, especially bad ones, suggest that the company is out of the CEO’s control.  Because why else would the board not be informed proactively as described above?

  • The CEO has both discipline and respect for the board.

Sounds simple but board members have either invested in your company or have agreed to help you grow your business because you asked them to help.  Lack of respect is the fastest way to create a divisive board…especially members of larger boards that will likely exist as the company grows.

When I ran companies, I would very rarely delegate board interactivity into my organization even though I completely trusted my co-founders and executives.   That may sound like a bit of control freak behavior but the reality is that I wanted to be sure that I knew what was communicated to board members, what was communicated from board members and exactly how it was communicated.  Yes, that creates more work for the CEO but remember that the CEO reports to the board.

  •  The CEO delivers board materials to directors at least 2-3 days ahead of time.

Blocking and Tackling language

before we dive into the details, here’s an easy board “language” tip:  as the CEO or presenting CxO or VP:  try not to use phrases such as “to tell the truth,” or “truthfully” … your board expects everything to be truthful without any such disclaimer…saying sounds odd.

starting and adjourning the board meeting

CEO:   “I’d like to entertain a motion to approve the minutes of the previous board meeting.”

Board member 1:  “I move to approve the minutes.”

CEO:  “Is there a second?”

Board member 2:  “I second.”

CEO: “I have a motion and second, is there any discussion?”

CEO: (DISCUSSION OR NOT)  “All in favor?”

CEO: “ANY OPPOSED?”

CEO: (ASSUMING APPROVED) “MOTION CARRIES — MINUTES ARE APPROVED.”

NOTE: Unanimous votes are made easier by the fact that the substance of Board deliberations is not recorded in the minutes, only actions.  Well-drafted minutes gloss over detail and simply state that certain subjects were discussed.

Language / process for other motions such as option approvals, new board members and other board business.

CEO: “I would like a motion to approve the option grants just discussed [or other topic].”

Board member 1: “so moved.”

CEO: “Do I hear a second?” or just  “second?”

Board Member 2: “I second.”

CEO:  “Motion has been seconded; any discussion?”  (this step can be skipped)

CEO: “All in favor?”

board: “aye” or say nothing

CEO: “All opposed” or “any opposed”

board: typically silent

CEO: “Motion is approved” or “Motion is unanimously approved”

  • The larger the company, the more work gets done at the committee level (often the Audit Committee) rather than by the full Board. For highly sensitive matters like the Hurd affair, it would be customary to appoint a special committee of the Board consisting of independent outside directors to oversee an investigation, conducted by an independent outside law firm. The committee would then report back to the full Board with results and recommendations.

  • For something this sensitive and controversial, I’d expect a lot of back-channel communication occurred among directors, the special committee and its independent counsel, resulting in a “pre-vote” of sorts in which the Board members reached a consensus first, then convened a meeting that was carefully planned to allow the committee to formally report its findings, allow each Board member to state his or her views on the subject formally for the record, and then take a vote. Because litigation is virtually certain in this kind of situation, everything would be carefully controlled and documented. Again, no surprises at the meeting. No drama.

  • For more ordinary (but still important) matters, the committee chairperson or senior executive usually reports to the full Board, the directors then spend as much time as they need discussing or debating the decision to be made, and an informal straw poll is often taken first, and a consensus arrived at, before the Chairman actually calls for a vote. Among other things, this is a courtesy that allows the whole Board to discern which way the wind is blowing, so to speak, and gives every director the opportunity to cast his or her vote with the “winning team.” Again, unanimity and consensus are highly valued. The only exceptions I’ve ever seen are when a company is falling apart and the Board degenerates into warring factions (for example, founders vs. VCs or early vs. late-stage investors).

History: Board Processes & Robert’s Rules of Order

For the history buffs out there, I’m pretty sure that most of the formal board processes that are used today have been derived from Robert’s Rules of Order.  From Wikipedia:

The first edition of the book, whose full title was Pocket Manual of Rules of Order for Deliberative Assemblies, was published in February 1876 by then U.S. Army Colonel Henry Martyn Robert(1837–1923) with the short title Robert’s Rules of Order placed on its cover. The procedures prescribed by the book were loosely modeled after those used in the United States House of Representatives, with such adaptations as Robert saw fit for use in ordinary societies. The author’s interest in parliamentary procedure began in 1863 when he was chosen to preside over a church meeting and, although he accepted the task, felt that he did not have the necessary knowledge of proper procedure. In his later work as an active member of several organizations, he discovered that members from different areas of the country had very different views regarding what the proper parliamentary rules were, and these conflicting views hampered the organizations in their work. He eventually became convinced of the need for a new manual on the subject, one which would enable many organizations to adopt the same set of rules.

The first thing that a CEO should realize is that, unless you are explicitly NOT the chairman of the board, the board meeting is YOUR meeting.  The CEO runs the board meeting and is responsible for implementing due process and protocol at an appropriate level.

What is an appropriate level?  That’s a subjective assessment that must be made as the company matures, but having some process and applying some level of protocol is appropriate for boards at any maturity level.

Other questions I’ll try to answer in an future version of this post:

  1. When is formal too formal?
  2. what’s the list of things that must be approved by the board?
  3. role / responsibility of officers of the company in a board meeting?
  4. common fear:  does a board inherently mean you have less control and/or are more likely hood of being fired ? + other mis conceptions about board power

  5. what role does the chairman / lead director play; who is it? (typically CEO for early stage companies)

  6. role and timing of board committes: audit, compensation, executive

  7. role and timing of a secretary / role of “board minutes”

  8. when to have or not have other execs in the meeting; exec session vs board business and how to handle board business (when in the board meeting; who attends); the substance of Board deliberations is not recorded in the minutes, only actions.

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