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Best Practices for Angel |
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Board Composition and Director Criteria
Size
A good size for an early-stage company board is five people. In the very early days, three can suffice. Even for a larger, mid-sized company, seven is a practical maximum.
Independence
Except in very unusual circumstances, the only member of management who should be on the board is the CEO. In Europe, it is increasingly common that even the CEO not sit on the board because of the fundamental conflict.
Except for the CEO, the other board members should be truly independent. The definition of independent is evolving. The securities regulators and governance experts around the world are developing new regulations and guidelines. Many agree that independence is similar to what that judge said about pornography many years ago: "While it may be hard to precisely define, I know it when I see it".
Able to make a valuable contribution and mentor the CEO
Most importantly, directors must be able to make a significant contribution. Mentoring the CEO is always a big part of the job on a young company board. To do that, they have to really understand the challenges of growing a similar company.
For every young company's board, it should be a formal part of every director job description that any prospective director has spent sleepless nights worry about how to meet payroll.
In an entrepreneurial company, prospective directors should have been successful entrepreneurs. Ideally, they should have been the CEO, COO or CFO of a successful similar company that grew to be much larger.
Experience on Boards
It is essential that all prospective directors have many years of experience on other boards. Even one inexperienced director can be very damaging to a young company.
Not just 'look good'
Directors who spent their careers in senior jobs at a very large companies, or in universities, might look impressive on a website, or in a press release, but are rarely good choices for a young company board. Their experiences inside large companies or academia are so different that their instinctive reactions are often the exact opposite of what a young company needs.
Time Commitment
The majority of individuals who would be good directors, do not have the time required to do the job. Today, the time commitment is much greater than it was in the late 1990's.
Every director must make a meaningful investment
It is essential that every board member have made a meaningful investment in the company. Board members have only one job - to represent the shareholders. If they have not made a meaningful investment, it is much less likely that they will be able to truly think like, and effectively represent, the other shareholders.
Meaningful must be taken in context. If an individual has a $50 million net worth, then a $500,000 investment is probably too small to be meaningful. But a $25,000 investment from a younger person, or someone from academia, may be very meaningful.
There is lots of quantitative evidence showing that higher levels of director investment is correlated to better corporate performance. This page has a few references on how much better companies perform when they have directors who have made a meaningful investment.
Summary
To have the experience, investment capability and time availability, most directors will be ex C level executives who have sold a similar company. To have done that, it means that most directors will be in their later 40's or older.
Warning
Recruiting a good board is always challenging. The criteria above make limits the number of potential candidates small. The problem is compounded by the other challenges that make directors harder to recruit. It takes many hours of the Chairman's and CEO's time.
Under the pressure of an upcoming financing, its often tempting to think 'this candidate is good enough.' This temptation must be avoided at all costs. Even one poor director can be fatal to a company. This may not seem obvious and there is no way to prove it. But if you can find one of those rare veteran directors, someone with fifty or a hundred years of accumulated board experience (on 10 to 20 different boards for 5 years each) ask them.
