Op-ed: How solid boards lay strong foundations for startups

Veteran entrepreneurs map out everything founders need to know about creating and managing effective boards
Micheal Kelly
According to the authors, the mistake many startups make is to populate their boards with friends and family who have no ability to address the challenges that the company faces or make decisions in its interest, writes columnist Micheal Kelly.

Book review: Startup Boards: Getting The Most out of your Board of Directors by Brad Feld and Mahendra Ramsinghani. Wiley, December 2013.

This is a book that every entrepreneur and prospective board member should read.

For most startups, establishing a board of directors is not a top priority.  Entrepreneurs are typically too busy trying to get the company off the ground and feel that establishing a board can wait until after they have raised their first round of capital. Others may consider boards as nothing but a nuisance undermining their ability to control their company.

The authors of Startup Boards strongly recommend that entrepreneurs create a board early in the life of their company no matter how they are financed. They believe that if you do it correctly, choose the right directors and engage them actively, you can dramatically accelerate the growth of your business.

Research shows that the success rate of early stage companies is in the 10 to 20 per cent range. Failures are often attributed to execution problems caused by managers inexperienced in key business functions. This is where a board can play a valuable role. Outside directors with management and operational experience can help offset some of the management deficiencies of startups. They can also help companies develop their business models and add value in terms of their networks and access to key external resources, customers and new investors.

There are a lot of books on governance for established companies, but the literature on this topic related to startups is quite sparse. This is a valuable addition by two experienced authors. Brad Feld is a popular writer on startup issues, founder of several venture capital firms and co-founder of Techstars, a mentorship-driven startup accelerator. Mahendra Ramsinghani is an investor and entrepreneur who has led investments in more than 50 seed-stage companies.

The book contains just about everything an entrepreneur needs to know to set up and manage a board. The early chapters deal with critical issues such as structuring and managing a board, dealing with board dynamics and conflicts and many others. There is also a good chapter on advisory boards, how they differ from formal boards and how they can be useful in the early stages of a company.

Later chapters look at the basics of board management, including how to run a meeting, motions, legal issues and more. There are also chapters on the responsibilities of boards in CEO transitions, going public and going out of business. There are lots of checklists provided for managing an effective board.

I found the early chapters on creating your board and recruiting board members to be especially valuable, since this is where startups typically go off the rails early on.

Startup book

The book provides great advice on how to choose the right director. According to the authors, the mistake many startups make is to populate their boards with friends and family who have no ability to address the challenges that the company faces or make decisions in its interest.

They argue that recruiting a director should be done the same way a company builds its core management team. Founders should look for a diverse set of experiences, such as product development, business strategy, financial expertise and general management skills, network and others. They should focus on the right personalities and chemistry.

The authors also offer some excellent advice on what to look for in a venture capital board member and how to evaluate venture capitalists in terms of their ability to contribute to your company. Too often, they argue, entrepreneurs raise money from investors without considering their competencies and the strategic value they can add to the startup.  

They also point to the need for entrepreneurs to understand the conflicts that venture capitalists can bring as board members. In particular, venture capital investors will often face conflicts between a fiduciary relationship with their own investors and a legal duty to a company on whose board they sit. In these cases, their fiduciary responsibility to their investors will often take precedence, causing them to push for decisions that are in the best interest of themselves but often not ideal for the startup. Entrepreneurs need to understand and deal with this issue up front and carefully manage it as the company evolves.

Overall, this is a very useful book containing almost everything you need to know to create and manage an effective board.

Micheal Kelly is Dean of the Lazaridis School of Business and Economics and founder of the Lazaridis Institute for the management of Technology Enterprises.