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Chapter 2 The Board's Purpose

Why have a board of directors in the first place? What do they do? How big should they be? Do you even need one?

A board is legally required the day you incorporate your company. Frequently, the board consists of the founders, or even just one founder, until a startup receives outside financing.

Waiting to build a board is a mistake.

Your board can be a powerful strategic asset. If you choose the right directors, build and manage your board effectively, and actively engage your directors, the board can help you dramatically accelerate your business. When you run into trouble, which all startups inevitably do, the board can help guide you through the tough spots. As Jeff Lawson of Twilio is fond of saying, “As the founder and CEO, I get to build two teams to help me—my leadership team and my board.”

Clint Korver (Ulu Ventures, Partner), who used to teach a course at Stanford University titled “Startup Boards: Advanced Entrepreneurship,” says, “The most common mistake startups make is not having a board at all.” Clint points out that research shows that most startups fail due to self-inflicted wounds, including internal decisions about founding team roles and equity allocations. “Founders who are overconfident or choose to avoid conflict often miss an opportunity to bring in fresh perspective with input from appropriate individuals,” says Clint.

Depending upon the stage of the company, three kinds of boards exist: (1) a working board; (2) a reporting board; or (3) a lame-duck board. Ideally, for a startup, a working board is best as the board members don't pontificate, ask mindless questions or just show up for meetings relatively uninformed. Instead, they focus on the critical challenges of a company.

Accountability

In Startup CEO (2020), Matt wrote that the fundamental reason boards exist is that “everybody needs a boss.” For many founders, one of the reasons to create a startup is to get away from having a boss. Unless you own 100% of your startup, are a solo founder, have no intentions to ever grant or sell equity to anyone, and don't think you benefit from anyone else's experience and knowledge, you're accountable to others. Even then, you're still accountable to stakeholders, including employees, vendors, and customers.

The board ensures that the interests of all shareholders and other stakeholders are considered. In many startups, the primary shareholders and board members are the same. As companies grow, outside board members who aren't involved in the business and don't have a significant economic stake are added to the board. Collectively, this group is responsible for considering and balancing the interests of all shareholders.

Accountability is a powerful construct. Consider how effective you are at dieting or exercising on your own. Are you more effective if you have a nutritionist, trainer, coach, or friend to whom you're accountable? Regardless of how much you enjoyed your favorite class in college, how many papers would you have written if your professor hadn't assigned them and given them due dates? While it's possible to be completely self-taught and highly disciplined in elements of your life, it's rare to maximize your success without help, support, and accountability.

General Responsibilities

A board has other vital roles beyond holding the CEO and team accountable.

 Organize Your Thinking: With company communication running on email, Slack, text messaging, and numerous other applications, the quality of communication deteriorates, especially around significant decisions. Scribbled bullet points or half-baked spreadsheets enter the communication flow between team members. Long memos, overwrought internal wikis, or endless PowerPoint presentations waste enormous time, slow down decision-making, and become a crutch for critical thinking. A board forces your team to think through and question all aspects of what they are presenting, consolidate the communication, and commit to decisions.

 Match Patterns: An experienced board member links their historical experience to your current situation. They'll see a chain of events unfolding, reflect on something they experienced at another company, or identify a dangerous path you are heading down. The board member provides content, advice, and introductions to other founders or CEOs who have had a similar issue and can be a resource for you. While the board member might not have answers to every situation, it creates more context to help you steer your company around icebergs and avoid the damage lurking beneath the surface. The wonderful aphorism often attributed to Mark Twain, “History doesn't repeat itself, but it often rhymes,” applies.

 See the Forest for the Trees: You're close to your business and in the weeds of day-to-day activity. Your board isn't. A board member can point out things you completely miss, especially when mired in your operating results, team dynamics, or performance. While the board member can help you one-on-one, the collective board creates space for you and your leadership team to periodically engage in a higher-level discussion about the business.

 Drive Intellectually Honest Discussion and Debate: Even strong executive teams have difficulty disagreeing with a dominant CEO. The vast majority of boards don't. A healthy board challenges you and your team's assumptions while demonstrating how to engage in honest debate to get to an answer.

 Create a Forcing Function for Deadlines and Quality: A board creates a cadence for running your company around a set of regular, recurring deadlines. Unless you're in a business that has significant external deadlines imposed on it by partners or customers, deadlines often become elusive, regularly slip, or become vague targets, as in “next week,” “next month,” or “later this year.” While many deadlines are arbitrary, a lack of accountability can lead to procrastination and excuses. A public commitment to a deadline is powerful. While you may not reach it, decide to change it, or prioritize other activities, you'll have a board to keep you accountable.

 Support Transactional Activity: A CEO shouldn't negotiate a round of financing, the sale of the company, or an acquisition of another company alone. Many board members have more negotiating experience than the CEO and should be resources for helping improve a deal. Savvy VCs may know which investor groups make good partners and which ones to avoid. Finally, the board can veto any decision a CEO may have made if the board perceives the decision not to be in the company's best interests.

The CEO reports to the board. However, the board doesn't run the company—the CEO does. A common refrain of Brad's is, “My most important decision as a board member is whether I support the CEO. My job is to do everything I know to help the CEO succeed. If I don't, it's my job to work with the CEO and the board to get back to where I support the CEO. Ultimately, if the board loses confidence in the CEO, it's our job to replace the CEO.” Effective board members understand the nuance between supporting the CEO and having the CEO report to them.