Entrepreneur

5 huge mistakes startups make when choosing board members

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This is a guest post by Eran Laniado, the managing director of BMN!.

Has this happened to you? You needed to consult with a friend about an important matter, but when you finally met, you realized that he was hardly interested in your problem. Even worse, he half-heartedly gave you vague and remotely related advice. Could it get more frustrating?

Similarly, a CEO may feel that the board of directors does not help the company. She may be right — board meetings could be a waste of time; board members may be unproductive or burdensome; in the worst cases, lack of board cooperation may prevent a successful exit. Kevin Rose got an offer to sell Digg for $60 million a few years ago, but his board rejected it. Digg was sold for mere $500,000 back in July 2012.

Board ineffectiveness often stems from board nomination mistakes. Here are five big mistakes that are often made when choosing board members — and, maybe more importantly, tips on avoiding them.

1. Wrong People on the Board

Board members can be great resources who provide support, knowledge, and access to unique professional networks. Unfortunately, not all board members offer such value.

For example, some board members prioritize the interests of the investors or founders whom they represent far above those of the startup.

Scott Kurnik, an experienced entrepreneur and investor, advises not to nominate to the board anyone reporting to the CEO. Interestingly enough, he also suggests putting the founder’s best friend on the board.

Additionally, one should be careful of five types of dysfunctional board members as defined by Jack and Suzy Welch: The Do-Nothing; The White Flag (will do anything to avoid confrontation); The Cabalist (driven by personal agenda); The Meddler (dwells incessantly on details); and The Pontificator (only enjoys hearing himself speak).

How to avoid this mistake:

  • Carefully consider board nominees and ask for feedback from people who have worked with them.
  • Appoint at least one independent director, loyal to the company only.

2. Misalignment Regarding the Board’s Role

Boards of directors have many fiduciary and legal responsibilities. Still, boards often have additional roles, correlated with the venture’s stage.

At early-stage startups, members should support the management (without micro-managing it). For example, they may help guide product decisions or provide access to recruits, customers, and investors. Ideally, board members could also mentor founders. More established startups, however, may need a different type of assistance related to scaling sales, engineering, logistics, and other functions that no longer fit into a garage.

The above roles differ from those at publicly traded companies, where board members extensively monitor the firm’s performance and confirm that the management does not put its interests before the company’s (“the agent problem”).

Matt Blumberg, the CEO of Return Path, provides a useful summary of what makes awesome board members.

How to avoid this mistake:

  • Check whether the candidate has board experience with firms of similar stages and needs.
  • Discuss with the candidate expectations of the board’s role and responsibilities.

3. A Homogeneous Board

It is important not to form a board of too similar profiles (e.g., all are engineers or all have similar VC backgrounds) and to diversify your startup to confirm that the various required skills are in place.

David Roth, the co-founder of AppFirst, described recently how the need to balance the board guided his startup’s decisions.

Aileen Lee of Kleiner Perkins Caufield & Byers has an interesting argument, that the next board member should be a woman, especially if women compose a significant portion of the venture’s users.

How to avoid this mistake:

  • List the skills and experience needed from the board (Product design? Customer acquisition? Partnerships? User experience? A great rolodex?).
  • Consider rejecting solid candidates whose skills and experience are common within the board in favor of candidates who possess the missing skills and attributes.

4. Too Many Board Members

An entrepreneur once complained, “My board keeps on growing.” VC-backed startups often encounter this problem when a new round of financing entitles investors to board seats. Sometimes, “observer rights” increase the number of attendants even more.

At some point, a board’s growth has diminishing returns. For a startup, a ten-person board will rarely be as engaged and helpful as a smaller one will. Further, the logistics (assembling everyone, arranging one-on-one time with the CEO before board meetings, etc.) become exponentially more complex. Fred Wilson from Union Square Ventures thinks a board of five members is ideal. He recommends no more than 7 board members (two founders, one to three VCs, and one to two other industry professionals).

How to avoid this mistake:

  • Negotiate the number of future board seats entitled with investors in the shareholders agreement.
  • Prefer nominees who will agree to leave the board when it grows or when their skill sets become less relevant.
  • Consider building a board of advisors to access additional experience without increasing the size of the board of directors.

5. Poor Organizational Fit

Some board relationship problems can harm the company severely. For example, board members who get involved in day-to-day decisions instead of supporting the management (or replacing the CEO, when necessary) can inhibit the CEO’s ability to lead.

Another problem occurs when board members accustomed to aggressive corporate cultures meet a CEO for whom “aggressive” equals “rude.”

Furthermore, pushy board members can cause CEOs to commit to unrealistic plans. It’s true that CEOs are responsible for their own decisions, but they can still be unduly pressured, especially when the board member is an investor (whom an inexperienced CEO may feel obligated to please).

Last, some board members may be professionally adept, but they do not show interest in mentoring the management, nor can they successfully interact with other members, bond, or build team spirit.

Steve Blank provides a painful example of poor relationships between one of his ex-students and the chair of his startup.

How to avoid this mistake:

  • Check each candidate’s track record (tenure, reasons for leaving, relationships developed) as board member at other firms.
  • Replace board members who negatively impact the board’s internal relationships. This is not easy, but in extreme cases, it is necessary.

eran-2Eran Laniado advises multinational firms and mentors entrepreneurs. He gained corporate experience as VP of Business Development & Strategy of a NYSE traded firm and as a member on boards of directors. He writes about strategy, business models, and innovation on his blog on bmnow.com and can be followed at @EranLan.

Board meeting image via Monkey Business Images/Shutterstock


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