MedCity Influencers, Startups

Choosing great board members — what startups need to know

Many investors and outsiders view the caliber of the board as a proxy for company quality.  The validation that comes with respected board members means other investors are far more likely to consider investing in your business.   

Note: This is the latest in a series of articles on corporate governance advice for startups.

If you read the first installment in this series, you understand the board’s role and when a startup should consider pulling one together. Often, line of sight to institutional funding and commercialization are the catalysts to start the process. The next step is to determine who you do and don’t want on the board.  

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Who you don’t want

For starters, the common practice of offering a board to seat to anyone who writes a big check is a bad idea. Here’s why. Frequently, these are investors who were very successful in non-healthcare businesses. With their wealth, they have decided to invest in healthcare so they can “do well by doing good.”  After all, what is more virtuous than deploying one’s wealth to advance tech that improves the human condition?

The problem is that these investors, at best, may add little value beyond their capital (“dumb money”) and at worst, can be highly disruptive.  A board member who does not appreciate the complexity of healthcare and the glacial enterprise sales cycle may require a lot of education. To quote our president, “who knew healthcare could be so complicated?”  At worst, they will apply pressure and the relationship can become contentious and accusatory (“Your team can’t close! Get a new head of sales!”) They often employ the old school tactic of whipping the team harder to increase sales, which is the philosophical equivalent of “the beatings will continue until morale improves.”

The above frequently applies to having friends or family members on the board who don’t bring relevant experience or networks.  Founders often do this to ensure they have like-minded board members who they believe will always vote in their favor. But to fresh outside investors, these folks don’t appear to add value and are perceived as a net negative.

Who do you want?

Now that we have narrowed the funnel, let’s create a profile of our ideal board members.  This starts with some careful and honest introspection. What are the gaps in the management team? Beyond needed operational and domain expertise, you can expect board members to provide tangible contributions in the following areas.

Fundraising

The definition of a startup is a race against insolvency.  Every board member should be ready and willing to support fundraising efforts. If they don’t believe strongly enough in your team and solution to make warm intros, they should not be on your board.  

Additionally, seasoned executives who have extensive fundraising experience will help you refine and tighten your investor pitch. You get one bite at the apple–even small pitch mistakes can be an expressway to the “No Bucket” (see my prior article on pitch mistakes).  

Problem solving

Individuals with successful track records bring operational expertise based on pattern recognition. They help steer you away from the rocks.  Equally important, they roll up their sleeves and do not panic when inevitable setbacks or crises emerge. Said another way, good board members recognize and solve problems well before they reach critical levels.

Imprimatur

Many investors and outsiders view the caliber of the board as a proxy for company quality. The validation that comes with respected board members means other investors are far more likely to look at your deal.   

Network

Building a company takes a village. Warm intros to vetted advisers, service providers, and potential employees save more than time — they enable you to leverage critical resources who have a vested interest in your success.  

Emotional support

In a startup, the emotional rollercoaster ride is inevitable — you can go from your best day to your worst in a single phone call.  Term sheets get pulled, strategic partners leave you at the altar, cash gets low, customers churn, and key employees quit. A few near-death experiences are part of the journey.  Almost every successful entrepreneur needs to be talked off the metaphorical window ledge at some point in their journey.

Chemistry

Board chemistry is critical. A good board is like a good band — they synergize and riff off one another. Transformational ideas result and problems get solved when you put several smart experienced people who like each other in one room.

To assess fit, get to know a potential board member by having them socialize with you, your team, and your other board members. Conduct reference checks with founders from other boards the individual served on. When possible, speak with the CEO of a company where things did not go well.

One disruptive director can destroy a board’s chemistry. I have served with board members — “loud talkers”—who are always the smartest guys in the room. Trust me, no one looks forward to these board meetings. Executives would sooner choose to stick sharp needles in their eyes than serve on unproductive boards with abrasive directors.

Compensation

Startups need to be hyper capital efficient. Board members who expect cash compensation are likely not a good fit. Most of them get equity participation via stock options. The range varies widely and depends on many variables.  Are they expected to only show up to a board meeting each quarter and take an occasional call? Or will they be expected to interact with your team for several hours each week?  A range of 0.5-3 percent is not atypical.

The best approach is to actually quantify what the options could be worth, and explain the numbers to the board member.  For example, say you have offered the prospective board member options on 1 percent on a fully diluted basis. The explanation might sound like, “We are offering options equal to 1 percent. After you help us build a great company, we hope to exit in the $100 million range. Your options could be worth [do the math and fill in the blank, let’s say $1 million].  We hope you agree that $1 million for [X] hours per month is fair compensation.”

To summarize, forward thinking founders take control of board formation before it is hoisted upon them.  Be proactive — identify your needs and build relationships well in advance of actual board formation. The value of a great board can’t be overstated and can be the difference between success and failure.

The next article in this series will identify the tricks and traps of managing board interaction and communication.

Photo: Caiaimage/Paul Bradbury, Getty Images 

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