Israeli Ventures

BME Capital Management


Bored of Directors! 
       
By Dr. Gideon Tolkowsky


The board of directors of a start-up can be a powerful instrument, available to the entrepreneur/ CEO.  But,  if not properly managed, it can also become a heavy burden, on the CEO's shoulders in day-to-day life. The golden rule, is not to let the board of directors turn into a "bored of directors".  In other words,  if you want your board to constantly make useful contributions to the start-up, you must keep it interested! Indeed, an entrepreneur leading a start-up faces a need to put together and manage a board of directors. Here are several tips, on how to do so:

1)     Don't bring into the board employees or fellow founders!

More often than not, a start-up is founded and led by a team of entrepreneurs, not just one. Often, the team members have a history of knowing each other, and working together e.g. coming from the same army unit. The entrepreneur / CEO then faces an expectation of all team members to sit on the board. They normally resent an arrangement where the CEO alone sits on the board. Here's our first tip to the CEO. Do not nominate to the board your fellow-founders.  It is very difficult for the CEO to have on his board individuals who also report to him/her. A board member, who is also an employee, is very difficult to manage, as it’s very difficult for the CEO to report to a person who is also a subordinate.Board of Directors

2)     Don't expect the board as a group to make decisions!

If an entrepreneur/CEO wants to get a certain decision out of his\her board, he\she should not wait for a board meeting to "sell" the desired decision. Rather, he\she had better meet each and every director one-on-one, prior to the meeting and "sell" the desired decision to each member individually. The CEO must see to it that all members reach the meeting after having made their own mind individually. Differently put, A CEO must try to "manage" each of the board members individually by way of preparatory meetings, rather than "manage" the whole board as a group by way of steering the discussion "the CEO’s way" during the board meeting. One should understand that the one decision that boards in general like the most, is: "Let us not decide on this matter in this meeting, rather, let us continue to monitor the situation and see how it unfolds. Let us make a decision in our next meeting three months from now”.  An entrepreneur/CEO rightly expects his/ her board to make decisions immediately, when they are required for operating purposes. To his/her great frustration, the CEO discovers that boards don't like to decide and are often incapable of deciding. Rather, they prefer to postpone decisions as far out as they can without making fools of themselves. Boards like to rely on life's momentum. They like it when the company as a whole, or one aspect of it continues to run as far as they have so far, just don't ask us to change anything (typically says the board). It follows that  momentum is a board of directors' best friend.

 

3)    Keep your board small! Up to 5 members, no more!

board of directors structureTypically a startup is founded and led by a small group of individuals, very naturally, each and every founder expects to sit on the board, and resists any suggestion that only the team leader (Normally the CEO) is to sit on the board. Just as typically, each and every investor (particularly an institutional one, that has its own investors and needs to report to them), also expects to have a board seat. If all of the above expectations are met, then the board's size quickly inflates to a degree that it can no longer function effectively (board meetings then become totally unmanageable). The question remains, then: What is the optimal size of a board of a small and agile start up?  Experience suggests that the optimal size is five members. One is the CEO, who is normally the leader of the founding team, two other are representatives of the largest investors, and two are external directors. Ideally the latter would be experienced in the start up process. One of them may be a successful entrepreneur who has gone through the entire process from fundraising to a very successful exit. The latter director may be an experienced manager of technology or marketer.

4)    Your board chairmen better be external!

Then there remains the question of board chairmanship. More often than not, it becomes only natural to give this job to one of the external directors, who is perhaps less emotionally involved in the company and whose relationships with the other directors are perhaps less emotionally loaded.

5)    Pay them!

There is also the question of compensation, particularly applicable for External directors, as their not on the company’s payroll. External directors should be compensated with stock options under a vesting schedule and perhaps with cash as well (e.g. several hundreds of dollars for each board meeting they attend, or per month.

In conclusion, the board of a small start-up, should be small as well (occasionally the start-up board becomes larger then the company itself, this should be avoided). Also, the board should be carefully managed by the CEO, preferably on a one-on-one basis. Differently put, an entrepreneur CEO should make sure his board of directors does not turn into a “bored of directors”. One way of doing so is to routinely feed the board with reports, preferably written ones, so that a board member can forward them to his/her partners and investors, and gain credibility.