Somewhere between your startup’s first funding round—Seed, Seed extension, or bridge—and your Series A financing, I recommend that you stand up your company’s board of directors in a more formal way. That starts with adding your first additional board member. This person is usually known as an independent director: someone not affiliated with the company or the principal investors, who can represent the remainder of your other investors.
Your main investor may well tell you it’s too soon. (Remember, they have a ton of other board meetings to attend, and it’s much easier to just hop on the phone with you 1:1.)
But formalizing your board meetings is an important step in the maturation of your company and your development as a CEO. Plus, adding an independent to the board can make your board more valuable to you as a CEO.
Your Board’s Responsibilities
What value does your board provide? First, note that boards have two jobs:
- Job #1: To monitor the company’s activities that will lead to the financial outcomes all investors want. This means reviewing materials that will affect financial outcomes like strategy, budgets, and results, as well as monitoring risk and general ethics on behalf of all investors.
- (Note: The SEC and other regulatory and advisory organizations dictate standards in this area for public companies. As a startup, you don’t have to worry about those things just yet, but you still need to care about who you pull together and what you have them do.)
- Job #2: To provide advice, feedback, and guidance as you face challenges and make top-level critical decisions for the company.
If they have business oversight experience, many qualified directors will understand their fiduciary responsibilities and can execute job #1.
But for job #2, the right person can make a huge difference: making introductions, helping you see new risks or opportunities, mediating differences of opinion between you and your investors, and much more.
So even if your investors don’t recommend adding an independent, push for it. But make sure to go about it in the right way.
How NOT to Add an Independent Director
That means NOT doing either of the following, which I have seen in practice. They don’t work out well:
- Your main investor says, “No worries, we’ve got someone great for you.” You say, “Um, OK.”
- You tell your investor, “I’ve got someone great in mind.” They just say, “OK.” (Although they probably wouldn’t do this anyway.)
This is a potentially pivotal moment in your company’s development, and it deserves some careful thought and equally careful execution. That starts with understanding what skills and experiences you need on your board.
The Skills Needed Across a Board
Given the duties listed above, aim to balance your board’s overall inventory of skills across all members. But don’t look for the same skills in every member.
In total, you typically want to have:
- Financial Expertise: Someone who has financial operational experience with P&Ls, cash flows, and balance sheets.
- Investment Experience: Someone who has experience with financing, pricing rounds, prior exits, M&A—and has a network of investors.
- Customer Insight: Someone with customer-sector expertise—usually as the kind of customer you have or want. Are you a real estate software play? Look for commercial real estate experience. Consumer health play? Find someone who leads health programs at a university or hospital.
- Operational Leadership: Unless you’ve done the CEO gig before, and regardless of whether you’re working with a CEO coach, it’s tremendously helpful to have a board member who has been a CEO, whether it’s in the same industry or not. They will catch things both you and your investors might overlook around people, operations, and scaling.
- Unique Differentiator: Someone who adds other skills related to the uniqueness of your play. Are you reinventing the sales process for something? Look for a former head of sales. A new way to market something? Get a current or former CMO.
- Celebrity: Some investors may recommend adding a “big name” to the board, helping lift your venture’s credibility in the eyes of potential future investors. However, this can be an expensive use of a board seat. If you encounter that suggestion, you could say, “Let’s get the right talent to help us be attractive all by ourselves.”
How to Find the Right Independent Director
Once your investor(s) agree that it’s time to add an independent director, here’s how to find the right candidate. This process could take anywhere from a few weeks to a few months:
1. Assess Existing Skill Sets
Start by inventorying the skills and experiences of your key investors and co-founders. Think through:
- Which items from the above list do you need? What else?
- What do you already have in decent supply? Avoid duplicating skills so you can focus on adding the skills you don’t have at that level.
2. Think About Future Deficits
Imagine how your business will grow over the next two to five years. What skill deficits might you need to fill? Propose these priorities to your primary investor(s). “Here’s what I think we’ll need on the board as we grow: A, B, and C. Do you agree? What’s missing, in your view?” Strive to reach a general agreement on the types of attributes you might look for.
Note: Don’t bother discussing or meeting any potential candidates until you’ve done this. You must first agree on the problem you’re solving.
3. Agree on the Number of Roles You’ll Create
This is probably already defined in your charter; if you’re going to have regular meetings, you don’t want fewer than three board members, but more than six to seven would be unusual for a startup.
For the first board of a pre-Series A startup, three is fine: your main investor, you, and one independent director. (This doesn’t count anyone with “board observer” status since, while they may join the meetings and be very useful in them, they don’t count against your board member totals.)
4. Determine Your Meeting Frequency
Any decent potential board member should want to know the time commitment, so agree with your main investor on meeting frequency. Bi-monthly or every six weeks is typical for startups.
While monthly is not uncommon, I do not recommend this cadence. IMHO, the big picture doesn’t tend to change much at that frequency (unless you’re in the middle of a rough patch). And since meetings make a lot of work for you and your team, it can be better to provide written updates on critical items between less frequent board meetings.
5. Outline Compensation
Agree with your primary investor on the compensation you can offer an independent director. This is usually stock options of some kind, typically ranging from 0.25% to 1.0%, with vesting that matches the length of the first appointment (e.g., two years on the board, two-year vesting).
Sometimes, travel and other expenses are reimbursed. Other times, there is a small cash retainer paid either per meeting or annually, e.g., $1,000 per meeting or $5,000 to $10,000 per year. As a startup, you’d hope to avoid cash outlays entirely; however, cash may be necessary if you need a particular person or an in-demand skill set.
6. Get the Word Out
Now it’s time to get the word out. And remember, you’re selling this opportunity!
- Send out an informal email to your network that recaps three great things about your business (because you’re selling!) and includes the shortlist of traits you’re looking for in an independent.
- Ask your primary investors to share a similar note with their networks.
- Start building a list of potential candidates. Keep your investors up to date on how this list builds.
- Do a preliminary phone call with each potential candidate. Share with them a simple overview deck about the business. What are you? Where are you in your growth path? What are your ambitions over the next two to five years? What skills and experiences do you hope to gain from your board? How could they help make a difference?
7. Conduct Interviews
If possible, meet in person for an actual interview. Make a list of the things you want in that role, then intentionally probe for how the candidate might help you with them. See here for how to conduct a board interview.
Afterward, if you’re feeling positive, ask your investors to meet them as well, and share your thoughts in advance on why they might be a potential fit.
Above all, manage the process to respect the potential directors’ interests, time, and reputations. It’s a small world, and you never know when you’ll run into these folks again—or when someone else might ask them if they know you or your company.
8. Make and Communicate Your Decision
When you’ve finished interviews, make a thoughtful decision in partnership with your main investor(s). For anyone who isn’t a fit, be gracious and let them know!
Once you officially ask your preferred candidate to join the board, share all the background material you can to bring them up to speed. Invite them to meet key leaders at your company. Make your independent director feel like part of your team.
9. Hold up Your End of the Deal
Make your new directors proud of the board they’ve committed to, and happy to participate, by running well-planned meetings with crisp pre-reads, thoughtful discussions, and great follow-through.