Master class: Managing Your Board

Project Description

Master Classes are deep dives into venture creation by MIT ecosystem thought leaders. Browse all Master Classes Here.

Jim Baum is an experienced Tech Growth, CEO, investor, board member and startup advisor who is also a Lecturer at the MIT Sloan School of Management. He is currently an Executive in Residence at General Catalyst and sits on a number of prominent startup boards. 

Following are notes from a talk Jim gave in June 2020 at MIT about how to build and manage startup boards.

What’s a board for?

The first question to pose is: What is a board for? 

Providing oversight to you and your startup

Initially Jim thought it was a place for investors to sit and keep an eye on the business. That is true, however, the board’s ultimate role is to provide oversight to you and your startup. 

An interested party to help you see the big picture

Jim thinks of the board as a group of people who can provide him with perspective. One of the things that happens when you are building your business is that you get caught in details. Sometimes you do lose sight of the forest for the trees. 

One main function for the board, therefore, is to pull you out of the weeds, and think about the big picture. The strategic dynamic, what is happening in the market. Why you versus your competitors. People who serve on boards make it their business to have this perspective. He cannot overemphasize this enough. 

Responsible for major decisions

The other thing the board does is to approve important decisions, such as financing events. For example: If you raise a Series Seed or A, the board must approve it. They will also provide insight on terms, structure and so forth as you think through the financing event.

The one real operational responsibility of the board is to hire and fire the CEO. They have that power and responsibility. They do not have power and responsibility to hire and fire other executives. That said, you will find that there are board members who are former executives. They can be fuzzy on where the line is between the CEO/founder’s responsibility versus their responsibility. Sometimes you need to set the record straight.

Finally, they need to approve your budget. Every company should have a budget, at least on an annual basis. A lot of companies do this on a 6 month basis. How you spend resources, where you are hiring. The board has to say yes or not. 

In Jim’s experience, it is always iterative and a good process. It is more than just a spreadsheet, it is an operating plan for the company for the period they are approving it. The board is very useful for that.

Board member duties

It is important to be aware of what are the board members’ technical duties. They really have three areas of duties.

Fiduciary duties

First and foremost, they are a fiduciary of your company. What does that mean? Some think when someone joins the board they are there to protect their investment. That is not true. They are supposed to protect the interest of all of the shareholders. They are not there to protect their own investments. Those interests are often but not always aligned.

They are not there to protect you, the founders. They are there to protect the shareholders’ interest. If making a management change is the right move, they will back that. 

Duty of care

There are two terms you will hear about board members from lawyers. One is the duty of care. The idea is that a board member needs to make decisions on the board from a position of being informed. They need to make a decision based on relevant facts.

How does this manifest themselves? Board members engage on a quarterly basis. If they are not actively engaging in discussion in board meetings, they are not executing their duty of care. They are not paying attention and they don’t know the facts.  They must be engaged, they should be asking questions. This is a test that is applied in legal proceedings if your company gets sued. Did the board exercise its duty of care? It is an important thing to keep in mind when you think about who you put on your board.

Duty of Loyalty

The other is the duty of loyalty. It speaks to the idea that the board members need to act in the best interests of the company – and not in their own interests. This is where investors can be conflicted and need to sometimes recuse themselves to avoid conflicts of interest.

For example, an investor has invested in two companies and there are financial transactions being negotiated. That board member is now conflicted. How can they think clearly and exercise the duty of loyalty. It is important to recognize their duties. If there is conflict it is on the board member to recuse themselves. 

These duties and considerations usually don’t play a role in the actual board meetings, but these are guiding principles upon which boards operate.

Building the team

Build the board early & bring in an independent board member

How do you build the board? It is important to build the board earlier than later and to build it before a lot of formal investment dollars. It gives you the opportunity to bring in independent board members to help you with financing, building the team, go to market. It is an opportunity to bring in someone who is friendly to the company and who wants to contribute. 

Much of the board comes from investors

Investors have their own perspectives. Their job is to create a return for their fund. The independent may be a Seed investor but they are there really because they want to be part of your team, stay engaged and help you.

And so, building it early is a good idea. That said most of the board is coming from your investors. When you take investment it comes with a board member. Some of it, you will not have a say on. So getting an independent board member early is important. Choosing your early investors is important.

What do you want from board members?

You definitely want domain knowledge. If you are in a market where your board member has no insight, that’s not helpful.

This domain can be the market, the go to market strategy, knowledge of the customer. But it could also be a person who is really good at helping you build a startup. There are a lot of mechanics and sometimes the board member can simply be a very good entrepreneur.

This speaks to the mentorship question. It can be just as valuable to get someone on your board who can serve as a mentor to you. If you can get somebody on your team who can provide this resource and help you grow as an executive and entrepreneur,  that’s good.

You also need them for networking. Jim found that the best way to find employees, customers is through your personal and extended networks. It is much more effective to have a warm introduction from someone who is known and respected. The network connections are important. At a later stage you may need someone plugged into the financial services industries, all the CIOs. Early on you may need someone who is plugged into the ecosystem for your startup and can help you in talent.

Finally, you want experience and perspective. You can be bitten by lack of experience and from that bite, you will learn. It is helpful to have someone on the team who has been bitten so they can help you think it through. You don’t always have to listen, it is your company but they bring great perspective.

Between meetings

Let’s talk about execution. This concept of between meetings is the important point Jim wants to make.

Think of the board as another FTE (Full Time Equivalent)

People think of the board only during board meetings and don’t use the board between meetings. It’s better to think about the board as if it is another employee, directly reporting to you. Think about it that way and allocate your time that way. That means finding the time to build a relationship with each board member individually. Understand their perspective, how they think about the word, how they think about you.

Establish a relationship with each board member individually

The most important thing here is to build trust. Things won’t always go great. When things don’t go great there’s 1 person held accountable – which is the CEO/ founder of the company. You need to have a level of trust and confidence to have dialog with the board to say, yes, we screwed this up, this is what we are doing to fix it and be credible. They need to say, yes, I get it, here’s my perspective on how I would approach it. If you don’t have the trust foundation, they can turn negative on the team and/or the company. That relationship is super important.

Keep them apprised- good news and bad

Some teams don’t celebrate wins, wins are supposed to happen – they spend all their time focusing on things that don’t work. But at the same time it is very important the baron feels they are a part of a winning team – same as employees. Make sure the board is not only involved in the challenges but also able to celebrate the wins. This balance is very, very important to keep the board psychologically engaged.

The best board work happens between meetings 

That’s when you build relationships. Then when you come to board meetings, the dynamics are completely different if you have done this work. If the founders have not done this work, the board meeting is very formal, and not very productive.

Lastly, as you build your board, it is very important that not only you have a relationship with your board members, but your board members have a relationship with each other. You need open sharing of thoughts and perspectives. When people know and trust each other, your board meetings will be so much better. 

Find a way to build these relationships. A lot of founders do it as a dinner the night before the board meeting. Find ways for the board to come together in social ways to get to know each other.

Before the board meeting

Get the board materials out ideally 3 days in advance

Seasoned teams put a lot of effort into the board materials. This helps board members get a good understanding of what’s going on. On the other hand you cannot overwhelm the board with unnecessary detail. It’s not a bad thing but there is a balance you need to find. Solicit input from the board about the board package. What did you think? Was it useful?

Get input on content

From investor board members they will mainly give you feedback on the financial side of things. That’s fine. It is important to figure out ahead of time what your financial board members need for financial data.

We highly recommend you get the information out 3 days in advance, ideally with a weekend in between. 

Speak with each board member individually

Before each board meeting, call each board member individually. Talk to them about the materials. Did they read it? What do they see? This is what we want to talk to you about. These are the top issues.

And so when you are at the board meeting all issues are at the table. The input may be conflicting but you can work that. 

Presell actions

You need to presell any actions you want the board to take in the meeting. For example, you may want to have a conversation about option grants to employees. You do not want to go to the board meeting not knowing where they stand.

Be prepared to respond to issues when you have these pre-meetings

Marketing issues, competitor getting funding. Be prepared to respond. 

Conducting the meeting

First thing to know: Don’t be late! 

The CEO/founders sometimes show up late. Don’t do it! That’s bad form! Be prepared and understand the big picture perspective. Know your business, know your numbers. Then you can have a substantive, in-depth conversation with the board members.

Structure the meeting

Create an agenda that you stick to and take people through. Be on time, run the meeting so you end on time. Jim highly recommends this structure:

• You need a smaller amount of time for the board and CEO alone. Jim likes doing that at the beginning of the board meeting – where he shares what they want to talk about and see what the board wants to talk about. This is no more than 20 minutes.
• Then bring in the team. The management team works with the board to review the business. Here’s what we are working on here is our progress. Make sure you have an ask: “I really need your input on this issue”.
• Then let the board have a conversation without any team members including the CEO. The board needs time to talk about the company without you. Sometimes they will talk about you, and you have to be comfortable with that.

Stick to the allocated time window

End on time! 

The final rule: No surprises. 

You should never have a board member say: “What?” That should all be done before the board meeting. They should know everything on the agenda.

 

Q&A

Q: Fiducial duties and duty of loyalty can be in conflict. One is in the interest of the stockholder, and the other is to the company. Are there scenarios where board members make decisions and one of the two takes precedence?

A board member’s primary responsibility is fiduciary. The other two are secondary. Where things can go wrong: An inexperienced board member may be confused whether they are making decisions based on the best interest of the company or the firm. Their fiduciary duty is not to the firm. 

Where that comes into play is conflict of interest. Here is when the board member thinks: I am an investor in X, I am on the board of company Y. Y has to make a decision about X. I am in a conflict of interest situation. Then I should recuse myself and not vote. The CEO needs to know what these conflicts are.

Duty of loyalty is one where you are acting in the best interest of the company and that is when you are fulfilling your fiducial duty.

Founders sometimes think board members should be loyal to them but they should be loyal to the company.

Q: I’m keen to see your thoughts on how big a board should be relative to revenue levels. Because from what I understand you argue for relatively large outside boards from the get-go?

A: European boards are different from US boards. They tend to be very focused on fiducial issues and less focused on operational advice. Jim advocates not a large board but to have an independent board member from the get go. It may not be a board member title. It may be an advisor. The board will grow naturally as you gain more investors who want board seats. You will not have a choice.

Early on you will have no board. Fairly soon, if you can find a good person – you can bring in an independent person who has perspective and experience to help you. 

As you raise money you will get board members from Series Seed, Series A… etc. They will grow over time. 

5-7 is a good number. For much later on – 7 is fine. Never go bigger than that. 5 is a good number for a board member count with independence on the board as well as investors. You will get investors no matter what.

Q: How much do you compensate board members?

Board members are compensated via equity. They are also in many cases compensated essentially by the return on their investment. An angel investor could serve that role of independent advisor. That person will invest some money in your company and sit on your board. In that case you may give that person a small number of options. They will be compensated via options and equity.

In a second case you bring on an independent board member and they are only compensated by options.

In a third case you will get an investor and they are compensated via the equity.

Either way you use equity. It can be anything from 0.5% to 3% (in very early stages). There is no answer that is one size fits all. 

You could find somebody who is a very engaged mentor – you may give them a little bit more.

Last point: There is NEVER cash. You NEVER spend cash to compensate board members. Later on when you are public – sure. If someone wants cash they are the wrong person.

Q: Is there an independence risk/conflict of interest if you get board members who have well established relationships with you prior?

The topic of independence is related to the percentage ownership of the company. It is a test of independence from a financial and fiducial perspective. But there is another interesting issue. Is it problematic to have board members with long standing relationships. Will they behave independently in decisions?

Jim has served on a lot of boards where investors know each other well, founders and board members know each other well. What he has seen is that the pre-existing relationship is positive because it helps with communications especially when things are tough.

Jim thinks inherent in the question is that maybe there is some risk where there is an independent who is closely related to the investment fund. Will that person be compromised in their independence? He has not seen that happen yet.

Q: Should non profit boards function differently, and if so, in what way(s)?

In the non-profit world there is a different incentive. In the for—profit world everything comes down to the financial performance of the company. 

In the non-profit world it is about fund raising and how to position against the overall object of the non-profit. The non-profit world is still a fiducial role but more focused on the  issues. 

A lot of people who sit on non-profit boards have passion about the mission of the non-profit, and they bring their expertise. For example a former CFO of a tech company becomes passionate about feeding the homeless in MA. They may bring their CFO skills and they will be more operationally engaged in those conversations. Because the level of expertise they have developed in the for-profit world is not available for hire in the non-profit world. They are not there for gain but for passion.

Finding people for those boards – you need to understand the skillsets you need. A passion for the mission is important. Understanding the skillsets where board members can compliment your team in a more hands on way is more important. For example, marketing – someone who is a very capable marketing executive in a commercial enterprise can help them with marketing and messaging, go to market and so forth.

As you are building that board, step back and think about what are the roles you need help with. Then go find people with passion for that mission.

Q: How do we find suitable candidates for independent board members?

The recruiting part will come through your network. MIT, university networks. These will be people you will find. 

Q: Can board members be fired?

When you bring a board member on, you can get rid of them but it can be hard. Always – bring them on with a pre-determined term – 3 years – make sure they leave. They can renew or not. That makes it easy to have that conversation – when you need to refresh the board.