Independent Directors

Boards are important. They might not do the day to day work of company building but they set the tone at the top. The group that the CEO reports to has a big impact on the CEO’s mindset which trickles down.

If you raise capital for your business you are likely to get investors on your board. If you choose well you might get some good board members that way. But you might also get indifferent or worse.

The biggest piece of advice I give to entrepreneurs on the topic of boards is to get some independent directors on their board. Ideally these would be peer CEOs who have a lot of experience building and managing companies.

Recruiting board members takes time. Most entrepreneurs prefer to recruit people who work for them and can impact the day to day effectiveness of their organizations. And so they prioritize that.

What they miss by putting off the work of adding independent directors is that they should be also investing their time in improving the effectiveness of the group they work for.

If your board is you and your cofounder(s) and some investors you have a suboptimal board structure. Do yourself a big favor and recruit a few strong and experienced independents. It is well worth the time and energy you will spend on it.

#Uncategorized

Comments (Archived):

  1. jason wright

    guten morgen. cet on avc. this is so much better.

    1. fredwilson

      Yeah. I could get used to this time zone

      1. ShanaC

        how about german coffee?

      2. AlexHammer

        🙂 Going the extra mile always brings at least one or two perks or silver linings.

  2. Russell

    I was just wondering why this came up so early. Welcome to Europe!

    1. fredwilson

      yeah. i post in the mornings. when i am in europe, that turns out to be late evening on the west coast of the US

  3. William Mougayar

    And you have written at length on the Boards topic, eg http://avc.com/2012/03/the-…Yet, many entrepreneurs CEOs delay adding an independent director until later, as if it was a luxury rather than a necessity. I wonder why.

    1. fredwilson

      that’s why i wrote this post

      1. William Mougayar

        I think your post raised the awareness and the need to do it. But I was asking “Why” it gets delayed in the first place. Getting to the root of the issue. There are reasons. E.g.: Early stage VCs should insist on having an independent member when they get their first seat.

    2. awaldstein

      This is not a simple topic.In the seed stage, no matter how large, building a formal board is simply not what is thought about nor really done. And the larger seed rounds become and the further into a true model you get before your A the more complex this topic becomes.Finding this a lot now clients are growing in size and model maturity and CEOs are naturally thinking about how to evolve from an Advisory board group to adding a true board.You ask why? You know this first hand my friend–cause growth at an early stage is just a crazy ride with you at the wheel with no map.

      1. William Mougayar

        Reality is that early advisors fill that gap for the entrepreneur who doesn’t have a board yet. It’s lonely at the top.

        1. awaldstein

          DunnoEarly stage is not a business in many cases.You manage cash flow and you don’t need a board for that.You use modeling and margin as strategic gateways to discover your market. I do this as an advisor all day long. Boards are oversight and represent the investors. Till you have them in an equity structure, you really don’t need them.To Fred’s point, when you do diversity, helps.

          1. William Mougayar

            I meant it fills the gap for talking through issues and discussing the business, not from a fiduciary perspective necessarily.

          2. awaldstein

            That was my point.

          3. JLM

            .I agree with you more than you do with yourself.One thought — you only graduate from being a fledgling minor league startup when you decide to and when you take the actions to operate otherwise.JLM.

  4. JimHirshfield

    Marissa just called. She wants you on the Yahoo! board. You in?

    1. fredwilson

      Nah. She has a good board I think

  5. pointsnfigures

    I know companies that just want “Yes People” on their boards. Dumb rookie mistake. Criticism is tough, disagreement is tough, but if it’s honest, open and non-political, it’s constructive.

    1. JimHirshfield

      YES

    2. Steven Kuyan

      This is true. I’ve seen many instances of CEOs confuse independent with friends they can use to agree with them when the time is right forgetting that the purpose of the board is the success and longevity to the company, not the CEO.

      1. sigmaalgebra

        I can see that at times a good board could help with, say, M&A, IPO, some big contracts, some contacts, some big issues in management, e.g., maybe the current Ben Horowitzhttp://www.bhorowitz.com/ho…”How to Ruin Your Company with One Bad Process”.Of course,. if a board really knew a lot that was good and solid about management, then it could write a good business book/text that so far has eluded some scores of authors, all that have made an attempt so far — how to manage a company.The business class scene in the movie ‘Back to School’ was wildly funny, a riot, but also far too close to reality for comfort. Yup, I had to guess that the clip is on YouTube. Yup, it is!http://www.youtube.com/watc…I’ve been a B-school prof: I taught applied math and computing which was solid material, couldn’t argue with the correctness, but there was some issue of relevance. Otherwise, I never suspected that anyone on the faculty really knew more about how to run a business than some high school girl who knew how to organize the decorations for a home coming dance.What I saw of a board at FedEx was not good. The board did much the same as nearly everyone else: Take one of the obvious issues in the design of FedEx, go through the first five steps of the standard, obvious arguments, and finally slow down and listen to the good solution we’d already long since worked out.There was one independent director who’d long been at American Airlines and seen a study there of the difficulty of having connecting flights work. Then he concluded that FedEx could never schedule the fleet. Halt. Tilt. The company and its funding were on hold. Tick, tick, … on the way to bust. I wrote some software; it spit out a good schedule; our two General Dynamics (GD) guys (right, representing board member GD) said “It’s a little tight in a few places but it’s flyable”; and the board was happy and the funding on the way again.Okay, my software and the fleet schedules it produced had some value, but the crucial use was just to beat down some absurd nonsense from a board member with much more power than good sense. Bummer. That hurt, nearly sank the company. We didn’t need that.The CEO, top management, staff, and other workers were trying to make the thing go, and, really, on nearly everything about the details of the company the board was at best a drive by, fly in, drop by distraction or threat with much more power than good sense or even good information.Board member wants to get into details? Okay, that could be good: Here’s my paper with the applied math for the ad targeting techniques we have in mind. Read over the paper, check it for correctness, see if you can improve it, write the corresponding software and get it running, and then will be eager to hear from you again. Oh, by the way, for the math, start with measure theory and functional analysis, i.e., a lot of Lebesgue and von Neumann, and then quite a lot of probability from Kolmogorov forward about 70 years (uh, real ‘data science’!), and, for the software, about 5000 Web pages of documentation, mostly on the .NET Framework, at the MSDN Web site. You can get back to me in, what, a week or so? We’re in a hurry here and don’t want to take too long!What’s it take for care and feeding of a board, two full time assistants to the CEO? For a little company, at’s a lots’a time, money, and energy. There’s a way to make this work and not be a 50 ton anchor on a 100 pound birch bark canoe crossing rough waters?I know; I know; the most important job of the CEO is selling, always be selling, raising money, the big picture, motivating the employees, publicity, …. How about the most important job is getting the work done as needed to make the company successful?Gee, maybe at the first board meeting I’ll give the math for the ad targeting. Any questions? Uh, guys, we do like powerful technology with barriers to entry, right? So, we’re not looking for something just anyone on Sand Hill Road could do, right?

  6. Robert Heiblim

    Very good advice Fred, and true for boards or advisory boards.

    1. awaldstein

      Advisory boards are invariably unaffiliated.There are exceptions but true in most all of the ones I participate in.

  7. bfeld

    Self promotion alert – I wrote extensively about this in Startup Boards: Getting the Most Out of Your Board of Directors – http://www.amazon.com/exec/… – including a few sidebars / quotes from you.

    1. JimHirshfield

      ^^ That’s about as spot-on targeted a sponsored comment we’ll ever see.

      1. sigmaalgebra

        Yup, Internet ad targeting is good stuff!

      2. fredwilson

        Well played

    2. sigmaalgebra

      Okay, Fred’s post today and your book are both indexed in my main list of things to remember! If I am on the way to having a Board, then I’ll get the latest edition of your book and use it!So, from that equity check that looks so good, for each board meeting and for each board member I have to pay for his (her?) limo to the airport, first class air fare (cheaper than a charter or private jet), a limo to a five star hotel, a limo to the board meeting, high end lunch food at the meeting (no McDonald’s, pizza, or cheap Chinese carryout), and more limos and airfare back. So, one board meeting a month, several board members, and in a year at’s a lots’a green from that equity check that doesn’t look so good anymore. Hmm …!

      1. Ovidiu Schiopu

        Don’t hesitate…get it now… It’s an informative and fun read.

        1. sigmaalgebra

          First things first: Wait until I’m about to have a board. I’ve got the book reference and more from this thread just where I can find them easily and won’t forget when I need a board.My ‘burn rate’ is so low, by the time I’ve got ‘traction’ enough to get an equity check and a board, I may not need or want either.So, the first thing is to get the traction, and now it’s to fix the last bugs in my software. I had something else for the past two weeks, but maybe today I’ll fix the only bug I know about at present. Bugs fixed; get initial data; go live; get publicity, traction, and revenue, and then think about a board, maybe. For the time to read a book on care and feeding of a board, I could fix several bugs, get a lot of initial data, my domain name, business checking account, tax ID, etc.First things first.

    3. ShanaC

      nothing wrong with self-promotion

  8. JimHirshfield

    As an entrepreneur, the board is your boss. And other than the investors that have a board seat as a right, hiring other board members is basically a hiring yourself a boss. If you had to hire your own boss, who would you choose? Likely a friend of a friendly mentor…or no one at all. It comes down to a conflict. It’s hard to make the right decision and hire an independent board member. Also, I don’t know that early on investors want the board diluted by non-investors.

    1. Steven Kuyan

      I would think that an investor would rather see a high quality independent board member instead of no one or a friend/family. It should obviously be someone with domain expertise. If an investor is pushing back on a independent board member that is highly regarded in the industry and has domain expertise, I’d say its the investor you want to question not the board member.

      1. JimHirshfield

        No argument there. You’re right.

  9. John Revay

    I was actually thinking a little about this the other day…..specifically what your experience has been – being on a Portfolio company Board vs say a not for Profit.Fred – I recall that you joined the NYU board of Trustees a few years ago…. I must be quite a big difference – small start-up board vs large Board of Trustees.

    1. fredwilson

      a world of difference. i prefer startup boards.

  10. JLM

    .Investors can directly influence the makeup of a Board as part of their investment. I often hear investors extolling the merits of “independence” while never using one of their allocated Board seats to actually appoint an independent Boardmember.When an investor makes an investment, he can require the addition of independent directors or use his own organic right to appoint a director to make sure there is, in fact, some degree of independence.Not to put too fine a point on this but shareholders (investors) typically vote on the appointment of directors, the individual directors are characterized as either “independent” or management or some other measure of “not” independent, the directors retain management typically subject to a contract which usually mandates the CEO will be on the Board as a condition of employment or the Employment Agreement.All of these administrative features are simply part of a well thought out and designed scheme of Articles of Incorporation, ByLaws, Shareholder Agreement, Board Charter and Employment Agreement.Left to their own devices, most startup CEOs do not have enough experience or seasoning to balance the composition of a Board and to actually influence or run a Board. Not unexpected.VCs, on the other hand, are responsible for investing OPM and have a fiduciary duty to ensure that this stewardship is handled correctly which should place a huge responsibility that the enabling documents noted above are consistent with good practices.Having said all of that, I would counsel any CEO to be very, very cautious about following the advice of VCs as it relates to the composition of their Board under the caveat of not taking advice from people who can fire you. Protect yourself.It is the very unusual CEO who is comfortable enough that he can withstand both the supervision and threat to his long term employment that is created by how the Board is composed. This is why CEOs should own a lot of stock in their company — plain old fashioned control.This is a slightly different take than Fred’s well made point — put people on Boards who have actually been CEOs. This is a huge consideration. A former CEO is likely to be able to guide a current CEO in a more effective way but also is likely to understand how truly difficult the job can be.JLM.

    1. JimHirshfield

      “…not taking advice from people who can fire you.”Well said. Well played. Sounds like you’d make the perfect independent board member.

    2. PhilipSugar

      To Eric’s point, below I too have seen investors say we should really have an independent board but what that means is me plus and EIR or another jockey I can trust if I think you are screwing up.I would want a peer CEO that is not in between gigs. One that is hip deep in their own horseshit and not thinking, I could do this better if I had the reigns, but I am in the boat with you buddy.

    3. David Semeria

      There’s a lot wisdom there, JLM.Managing a board is like playing chess: it’s not enough to know the rules, you also need to know the most common gambits.A bit like being a politician, sort of.

    4. sigmaalgebra

      > plain old fashioned controlOtherwise sounds like the CEO ‘managing’ the board is nearly another full time job, a great opportunity for mud wrestling, a 50 ton anchor on a 100 pound birch bark canoe crossing rough waters, and, for the company, extracting miserable defeat from the jaws of magnificent victory. I’m terrified of having a Board of Directors, and, the more I learn, the more terrified I get.The key is to make money and put it in the bank — a board can really help with that? I mean, e.g., can the board write code? What board member would I be willing to hire, e.g., can they do well selecting a LAN switch for my server farm? Get me started with VMware? Get me going with high performance, high reliability SQL Server? Do they eat at their desks, cheap food, three meals a day, seven days a week? Right, I thought not.”Control”? Okay, got the message: Keep burn rate low, e.g., ‘team’ of one, founder does 100% of everything, personally. Fund from own checkbook. When there’s plenty of revenue, and if it’s a good business there should be, use the free cash for ‘organic’ growth.With what I got back from Menlo Ventures, by the time they are willing even to consider writing me an equity check, I’ll already have a nice lifestyle business with plenty of cash to grow. Maybe they think I’ve got a big team with a lot of mouths to feed and a big burn rate — nope.Keep it as a Sub Chapter S or an LLC.The US is just awash, coast to coast, in businesses run this way. If a guy still with wet feet from the Rio Grande, in the lawn mowing business, with a new pickup truck, can do it, I can, too. It’s just that not all such businesses have a shot at rapid growth.E.g., the biggest page on my Web site sends for 400,000 bits. For about $100 a month I can get upload bandwidth of 25 million bits per second (Mbps). So, if on average I can half fill that 25 Mbps, that would be sending25 * 10**6 / (2 * 400,000) = 31.25Web pages a second. My pages are designed to have on average about 5 ads, and if I can believe some Mary Meeker (KPCB) data, I can get paid $2 per 1000 ads displayed. Then sending 31.25 Web pages a second would amount to2 * 5 * 31.25 * 3600 * 24 * 30 / 1000 = 810,000dollars a month in revenue, from maybe two mid tower cases on the floor beside my left knee with the Internet connection from my office.And, in that situation I want a Board of Directors? And lawyers, lots of lawyers. We’re talking smoking funny stuff here, right?> plain old fashioned controlGot the message.

    5. fredwilson

      it’s hard to get even one board seat these days in negotiations with founders. two is impossible. so we are left to beg and cajole founders to bring on independents. which is partially why i wrote this

      1. JLM

        .That’s very interesting to know as that is not what I am seeing from the ATX. Real world info trumps everything. Thanks.Stay safe in Berlin.JLM.

  11. Tom Labus

    Someone to push back a bit and also push you. Buddies not needed

    1. JimHirshfield

      True that. However, some of my buddies are the biggest pushers I know.

      1. Tom Labus

        Hire them

  12. Conrad Ross Schulman

    Apple needs Fred on their board so they can move away from hardware and have a chance at survival..

    1. Richard

      Based on Apple’s earnings conference highlighting China’s adoption of the iphone, enterprise initiatives with IBM, new macbook OS and double digit sales growth, new IDE for the iphone, all seems to be going well on the Apple mothership.That said: Apple might think about replacing the App phone/contacts project manager. How about giving me an option as to whether i want to file the contact by first or last name. And do i really need to fill in the city and state?? why not default to my home city and state.

  13. DJL

    Hey Fred – is there another angle to this, meaning that a well-rounded board should also provide functional experience (ie. finance, marketing, governance) where the management team is lacking? We are putting together an offering that would provide information securty advisory services (Virtual CSO) to boards and within due-diligence procedures for M&A work. So far the NACD and others seem very interested because of Target, et. al. I would love to hear from the group.

    1. LE

      I’m curious if it can also be a problem to have functional experience on a board. People who know nothing tend to over entrust the opinion of someone who has more experience than they do. “He’s a computer guy. He’s a lawyer so…”When in fact they might not even come close to the exact expertise that is needed and could lead people in the wrong direction. And what happens if a consensus after the fact contradicts the wisdom of the one board member? (This is like asking a family member for medical advice it kind of ties your hands in using people you don’t know where you have more flexibility to find the “right” answer).

    2. Dave

      You’d need to be a large company before you are focused on functional expertise to that degree. As a company scales it will often add Finance expertise to chair the Audit Committee. InfoSec/Privacy would periodically report either to the Audit Committee or the full Board, but usually as part of an operations review (or sometimes a specific section of the Audit Committee). But other functional expertise varies a lot. You are typically only talking about 1 or two independents so it is mostly a matter of finding a person who fits well with and compliments the Board when you add up all the pieces of the Board and the person.Your service seems valuable but not to small, VC backed company Boards.

  14. ErikSchwartz

    It’s also important to start discussing independent board members with potential investors BEFORE you actually agree to take money from them.I had a situation once where we were supposed to have a BOD of 5, 2 founders, 2 investors and an independent. I brought many suggestions of industry professionals who I knew or we were actively working with. The lead investor nixed every single one saying since brought them to the table that they were not really independent.

    1. PhilipSugar

      Really good point. Independent means my friend to many people.

  15. JordanCooper_NYC

    what do you think is market/attractive comp for a great independent? Is that the primary incentive when recruiting?

    1. fredwilson

      $50k of vesting per year for four years at todays’ stock price.

  16. BoardProspects

    Great blog post. I have a start-up, BoardProspects.com, which is a free board recruitment platform. It is a great resource for start-ups (and any type of company) to identify and connect with great board candidates. If you are interested in becoming a board member, BoardProspects is also an ideal platform to promote yourself. We have board members from several Fortune 100 companies. In addition, we provide the latest in boardroom news and best practices.

    1. LE

      Interesting. I’d be curious what JLM thinks of this idea.

  17. Guy Lepage

    Great advice. Thanks again @fredwilson:disqus

  18. LE

    Most entrepreneurs prefer to recruit people who work for themI’m also guessing that there is a bias toward “people like me” and feeling more comfortable with their contemporaries or peers.I’ve had a similar problem in the past with a manager who would always give bonus points and hire attractive women (or at least it seemed that way..). I actually did the opposite. I felt that the less attractive someone was, the more likely they were to not get poached by someone who was like this particular manager (at a competitor). I remember hiring a bookeeper (do they even have these anymore?) and thinking “she doesn’t make a good interview impression, no curb appeal, exactly what I want”.

  19. Pranay Srinivasan

    Would you prefer industry experts who are unknown to either investor / founder (professional board members) or someone equally known and respected by both?

    1. fredwilson

      i don’t really care. but they must be independent, have relevant experience, and be willing to do the work

      1. Pranay Srinivasan

        Yes, but as a professionally hired Board member, does that make them a better value add as a professional resource? Or as a mediator / deadlock resolution mechanism? Interested, because we’ll be formulating our board in the coming months and this is important in the growth arc for sure.

  20. André DeMarre

    How should independents be compensated?

    1. fredwilson

      options. see my reply directly above

  21. MikeSchinkel

    fredwilson,Okay, so other than the feel good or ego boost that a prospective board member might get, what’s their reason to sit on a board since time is an effective person’s scarcest resource?- Payments per meeting? I doubt a startup can afford enough money to make it worth the time of that individual if they are only in it for payment.- Stock? How does a startup that is not one of the top 10 high flyers provide enough stock that the upside is worth the effort to the prospective board member without diluting significantly?- Treating them like royalty (as mentioned by sigmaalgebra?) If they are effective people chances are they can treat themselves like 10x the royalty the startup can afford and have effectively no notice of the drain on their net worth.- Something else?Said another way, how does one gain the interest of a highly effective person to sit on one’s startup’s board?

    1. fredwilson

      options. i like to offer something like $50k per year for four years at today’s price for directors. often they negotiate for more than that.

      1. MikeSchinkel

        @fredwilson:disqus Thanks. What about vesting and/or buy back in the case of a board member who clearly doesn’t work out?

        1. fredwilson

          Its a four year vestThat’s what I meant by “over four years”

          1. MikeSchinkel

            Thanks again, and sorry my question wasn’t clear. Do they get the first $50k after year one but nothing if they are not involved for a year? If there is an acrimonious exit, do you typically have some type of buy-back clause so you don’t end up with a poisonous minority shareholder? And are the option taxable to the board member when granted? (maybe cover this in a future post instead of replying in comments?)

          2. fredwilson

            With options you don’t need to buy back. You just don’t vest. I don’t think a one year cliff is the right approach with a director but I have seen it done

  22. Charles Stanton

    Remember, entrepreneurs don’t work for the board, they work for the company

    1. fredwilson

      well the board works for the company and the CEO reports to the board. you are correct in your meta point. but technically they do.

  23. andrewmaguire

    Fred – can you address the considerations the entrepreneur should keep in mind related to board control when adding independent outsiders? Is there downside risk associated with adding board members who might not side with the entrepreneur in difficult situations?

    1. fredwilson

      well if they are truly independent then the only control they impact is an entrepreneurs control. which i think is tenuous at best.

  24. ShanaC

    hey – how do you find these people (and if you are a good match)

  25. obscurelyfamous

    This could have been written as a personal letter to me and it still reads perfectly. Very good advice.

    1. fredwilson

      it wasn’t. but it could have been 🙂

  26. fredwilson

    Thanks!

  27. David Semeria

    Yes Charlie, that was a cracking post.

  28. fredwilson

    no

  29. Pranay Srinivasan

    would you serve as an independent?