Managing Director of Avalon Ventures, Brady Bohrmann, shares powerful insights to build an effective board of directors, how to choose your board members, how to run an effective meeting and more.
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How To Build An Effective Board of Directors
1. How to Build Your
Board
by Brady Bohrmann,
Partner at Avalon Ventures
2. About Brady Bohrmann
Brady has over 20 years of experience as a venture capitalist and
operating executive in both information technology and biotech. His
focus is on early-stage investments and backing talented entrepreneurs.
Throughout his venture capital career, he has worked with over 75
companies. He currently is a director or observer of many Avalon
portfolio companies, including Backupify, Chart.io, Cloudant, Inc., Conjur,
Indix, Juliet Marine Systems, Kaltura, Kinvey, Memrise, Nanigans, Pingup,
Redbooth, Selectable Media, Simulmedia, The Happy Cloud, Twinstrata
and Vook.
3. Expert observations and tips
on building an effective board:
• What is the purpose of the board?
• How do you compose your board?
• What you can expect from your investors?
• What makes for a great meeting?
4. 1. Understanding the
Purpose of Your Board
In its simplest form, the board of directors is a group
of elected or appointed members charged with the
responsibility of overseeing your company’s
activities.
5. The Structure of Your Board
The structure of the board is spelled out in the
company’s bylaws and typically includes:
• The number of directors
• How each director is appointed
• The minimum number of times per year the board
must meet
6. The Primary Responsibility
The primary responsibility of your board members is
to represent all shareholders—not merely their
individual interests. You will often hear this described
as a fiduciary obligation.
7. The Fiduciary Obligation
A fiduciary obligation is composed of the three legal concepts:
• Good Faith: The presumption that all directors will deal
honestly and fairly when making decisions, regardless of the
outcome.
• Loyalty: Directors must put the interests of the company
ahead of their personal interests.
• Duty of Care: Attempts to define a standard, often referred
to as the business judgment rule, whereby a director owes a
duty to exercise the judgment an ordinary person would use
under similar circumstances.
8. Investor Board Members
For venture-backed companies, investors will
typically exercise control over their investment by
requiring:
• One or more board seats
• A series of protective provisions
• Special voting rights spelled out in the investment
documents
9. an example:
The sale of a business may require your investors’
consent.
A subtle (and often misunderstood) distinction is that
it is perfectly acceptable for your investors to vote in
favor of something as board members, but block the
very same activity by exercising their voting rights or
control provisions.
10. The Foundation of Your Board
The concepts of fiduciary obligations and voting
rights may seem foreign at first (or even like overkill
for an early stage company).
If properly observed, they form the very foundation
of your relationship with the board—and through it,
with your stakeholders.
11. an example:
There will be times (e.g. when raising capital, selling
the company, or taking it public) when your
stakeholders may question if you have properly
fulfilled your obligations to them, so developing,
understanding, and acting on these basic
principles will serve you well.
12. 2. How to Compose
Your Board
Some of the first—and most
important—decisions you will
make when raising venture
capital involve negotiating the
size and composition of your
board.
13. The Ingredients
Typically, your board will consist of:
• Representatives from the holders of the
common stock (i.e., founders)
• Holders of preferred stock (i.e., investors)
• The CEO
• One or more independent directors
In the early stage, usually the founders are the
largest holders of common stock and will control
the board seats for the common shareholders and
the CEO.
14. The Size of Your Board
For early stage companies, we suggest a
small and “balanced” board consisting
of no more than five members:
• Two representing the common
shareholders (including the CEO
seat)
• Two from the preferred investors
• One independent director
recommended by the founders.
15. Defining the Investor
Director
Avoid rushing to appoint the
independent director. Instead, wait until
you can define the ideal candidate.
It’s important to take the time to find
someone passionate about your
business and willing to leverage their
network and expertise on your behalf.
16. When to Keep it Small
If the amount of capital you are raising is relatively
small, or structured as a convertible note, it is
becoming common to reduce the size of the board to
three members composed of:
• Two common representatives
• One investor
This is a practice we generally support.
17. Board Meeting Frequency
In an early stage venture-backed company, you
actually need only a few meetings each year to
meet your fiduciary and governance obligations.
18. Board Meeting Content
Most official board business is limited to operating
matters, company performance and strategy:
• Approving the annual operating plan
• Issuing employee options
• Larger events such as authorizing funding,
partnership agreements, or acquisitions
20. Management and investors alike begin to rely on the
board meeting as the preferred method of
communicating with one another.
The meeting then devolves into a parade of scripted
departmental updates and forced strategy sessions, all
crammed into a three-to-four-hour window.
The Communication
Conundrum trap:
21. A board meeting is arguably the worst venue for
productive conversation, and too much time is
spent looking in the rearview mirror while too little
time is focused on teasing out key problems and
opportunities.
The group dynamic of a board often reduces
conversations to the least common denominator,
inhibiting an efficient and productive transfer of ideas.
The Communication
Conundrum (cont.)
22. Resolving the
Communication Conundrum
At Avalon Ventures, we prefer to spend most of the
time working with management outside the board
meeting, in a series of informal, and often open-
ended, get-togethers.
23. 3. Setting Expectations for
Investor Directors
You should expect the same from an investor whether
or not he/she is a member of your board.
24. Defining an Investor Director
In my experience, investor board members tend to
fall somewhere on a scale ranging from:
• Those that think you work for them (avoid this type)
• Those who understand that the best results occur
when they work in partnership with you (find more
of these!)
25. A Good Investor Director
A good director will make you a better CEO by
knowing:
• How and when to challenge you
• How to avoid undermining you
They will publicly support your decisions, even if they
don’t fully agree with the choices you make.
26. A Good Investor Director
Your company will experience
tough times. You will want (and
deserve) investors that will dig in,
work hard, support you when
things aren’t going well, and not
run at the first sight of blood.
27. Vet Your Investors
Do your homework before choosing a venture fund by
talking to as many people as you can to learn as
much as you can about the person(s) with whom you
will share the ups and downs of building your
company.
29. The Dictator
This is the person who mistakenly believes that by
taking their fund’s money, you work for them.
Board meetings break apart into power struggles,
often to the point of the CEO seeking ways to work
around the dictator.
30. The Drive-by Director
This person consistently misses meetings, sends an
associate in his place, or worse, uses the meeting as
an update session to educate themselves about the
company or the industry.
Valuable time is wasted on justifying past actions or
conveying information your investor should already
know.
31. The Stage Hog
These are the talkers and the agenda usurpers who
view the board meeting as their personal stage.
They stifle productive conversation by consuming
valuable airtime in an effort to prove their knowledge
and worth.
32. The Patronizer
Typically designated by the founder or CEO, this
person tends to be passive and unwilling to disagree
with you, which would risk his relationship or his seat
on the board.
A board full of these types is a ticket on a high-speed
train to mediocrity.
33. The Meddler
This person would rather have your job than be a
director. They thinks they can run the company better
than you can.
At the very least, they are an eye-rolling distraction
and someone to weed out at the earliest
opportunity.
34. The Academic
A person who lacks real-world company-building
experience and approaches the boardroom as a
living laboratory.
Though they’re often charming and articulate, it’s best
to let them experiment with someone else’s
company.
35. The Often Wrong (but never
in doubt) Investor
Typically, this is an investor director who is quick to
pull the trigger on advice by drawing from the
playbook they used in previous companies instead
of critically thinking about your company.
Experience is a great teacher, but it’s dangerous if
used indiscriminately.
36. from experience:
Over the years we’ve had the pleasure of working with some
great investor directors and observed how a bad director can
single-handedly poison the culture and derail a company.
The very best are great listeners and have an intuitive
understanding of how to adjust their style to the needs of
the CEO:
• One CEO may benefit from a softer touch and Socratic
style of leadership
• Another may prefer a no-nonsense and right-to-the
point relationship.
37. 4. How to Run a Great Board
Meeting
There are many ways to run a great board meeting.
Choose the approach that is right for you.
38. Finding the right approach
• Talk to other CEOs: see what’s worked for them.
• Consult with your board: find out their preferences.
• Remain fluid: the frequency and structure of your
board meetings will need to evolve as the business
grows.
39. .
Here are 6 tips
to get you started on
the right track.
40. 1. Don’t let the inmates run
the prison.
• As CEO, you have the responsibility AND the authority
to run the company.
• Your directors will counsel you and sometimes strongly
disagree with you, but can’t make decisions for you.
• As the leader, you must fight for what you believe in.
• Many times we’ve offered different points of view to a
CEO and ultimately accepted and supported their
decision.
41. 2. Corporation vs. Kingdom
• It is very difficult to make the adjustment
from sole decision maker to being held
accountable by your board.
• There are many highly successful
founders who have maintained leadership
positions in their companies (e.g. Jeff
Bezos, Larry Ellison, Mark Zuckerberg).
• Remember and observe the fiduciary
obligations you have to your stakeholders
and always keep in mind the company is
bigger than any one person, including
you.
42. 3. Keep it simple
• You can’t cover everything in one meeting.
• Provide your board with a well-prepared board
package that covers all the information it needs.
• Pick one or two key topics and plan to devote most
of the meeting to discussing them.
43. 4. Keep it short
• Keep the meeting no longer than two or three
hours.
• Keep it sharp and to the point. A high-intensity
and focused exchange of ideas is far more
valuable than a low-tempo, meandering discussion.
• Clear the formal board business first, and be
prepared to take important (but not immediately
vital) discussions offline.
44. 5. Solo artist vs. frontman
• Some CEOs play it close to the vest and tightly
control the directors’ access to management.
• Others encourage direct relationships between
directors and key members of the team.
• Either approach can work.
• We prefer to get to know the team inside and
outside of board meetings; this gives us a better
feel for the company and the people managing it.
45. 6. Use your attorney
• Ask your corporate attorney to attend all board
meetings to take notes and prepare the minutes.
• Keeping accurate and up-to-date records is a
good habit and will pay dividends down the road
when you sell the company or take it public.
• Poor record keeping slow downs or jeopardizes the
sale of a company, and buyers will use it as a
way to chip away at price.
46. The Takeaway
• Understand your responsibilities
as CEO
• Know how to structure and build a
great board
• Learn how to run a productive
meeting
• This will lead to a fun and
rewarding journey