This post is by Mark Suster from Both Sides of the Table - Medium
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Startups that are backed by professional financial investors almost always have a Board of Directors that consists of some set of founders, investors and sometimes independent directors.
While the management of a startup company deals with the day-to-day decision-making within the company (strategy, budgets, goals, tasks, compensation) ultimately the Board of Directors has the legal governing responsibilities for these things. This is often called “corporate governance” — in case you’ve never heard that term.
It is worth pointing out that there are actually three levels of governance in venture-backed startups. What most founders think about is the daily management of their businesses and they realize that they periodically need to check in with their board of directors to get buy in for key decisions.
But there is ultimately another level of governance I might call “investor governance” in that once a board of directors has decided on an action there are times where the company still needs “shareholder consent” in order to achieve their objectives. This is often true when the action of the board could dramatically affect shareholders such as raising new capital, acquiring new businesses (that drain existing cash or dilute shareholders), selling the company or raising a lot of debt. You will often find these governing conditions in the “protective provisions” section of your company’s legal documents.
These are truly protective even though sometimes founders find them to be an unwelcome level of approval required. Without these protections there is little to stop a board, for example, from issuing new cheap stock that dilutes all of the shareholders so that certain individuals could take control of the company. Equally without protective provisions a board could vote to load the company with a ton of debt that can’t be repaid and thus diminishes the value for shareholders. Equally it could vote to increase the stock option plan to 99% of the company. These are edge cases that would be fought in court regardless but they speak to why protective provisions exist in the first place.
If you’re going to be effective as a founder you need to understand what rights and expectations you have in daily decision-making, what issues are relevant for a board to decide and what your limitations are in your legal governing documents and what votes are required to achieve big changes.
What exactly is the purpose of a Board of Directors and how do boards best function? I plan to write a series of posts on the topic. One goal I have is to help founders better figure out how to structure boards, how to communicate with boards and how to get the most out of boards. Equally, I plan to write for the benefit of investors and independents,
to offer some tips on how can you get the most out of the boards on which you sit.
For this summary post I will outline the following objectives:
- The role of management is to run the day-to-day business and make key decisions within the framework agreed between management and the board
- The role of a board is to agree an annual operating plan (budget) and strategy and to periodically (usually quarterly) review progress and make adjustments when necessary. The board’s job is also to confirm the financial results (audit), to manage the compensation of key executives including the CEO. Finally, the boards job is to vote on key considerations including budgets, financings, legal issues and on rare occasion — hiring & firing the CEO.
In many cases management teams confuse the roles and responsibilities. At times this means management teams brining issues that a board isn’t required to weigh in on and thus subjecting everybody to meaningless debate and unnecessary arguments when a certain board member disagrees with a decision that could be handled by management all along.
At other times boards try to micro-manage details that should be left to management teams and therefore offer “helicopter advice” without having to actually own the results or knowing the daily idiosyncrasies. Don’t confuse “advice from a board member” with a “board matter.”
Some topics I will cover in subsequent posts:
I plan to cover the following topics. I’m open to lobbying via Twitter (I’m msuster) which order to write them in and/or if you think I’m missing a topic.
- Some Observations on High Functioning vs. Low Functioning Boards
- Should All of Management Attend Board Meetings? There are reasons to have management present — it helps board members know your team and it motives management by giving them board exposure. You just have to carefully manage how much time you dedicate to this so that every board meetings doesn’t become one long update session. This post deals with the how and why.
- Who Should be on Your Board? It depends on the stage and how much capital you have raised. In this post I talk about when to set up a board and how the composition of the board will change over time. I also offer some tips on how to negotiate when early investors require board seats.
- The Role of Independent Directors on Boards
- Board Observers — What are they for? When should you have them and when shouldn’t you? How do they differ from board members? I give the full lowdown in this post.
- How to Have More Productive Board Meetings
- Managing Board Difficulties / Distractions: Electronics, Disruptive questions, presenting vs. discussions
- Why Board Meals can be as Important as Board Meetings
- How to Prepare Before Your Board Meeting
- How to Run an Effective Board Meeting
- How to Run an Effective Board Meal
- How to Follow Up After Your Board Meeting
- How to Deal With Controversial or Hard Board Votes
- How Often Should a Board Meet
- What is the Difference Between Board Votes and Shareholder Votes?
- How do you Handle Compensation Questions with Boards?
- What if a Board Has Disagreements
- How to Avoid a Going Down a Unnecessary Board Rat Hole Discussion
- Should Founders Always Have Board Control?