Board Composition and Director Criteria
A good size for an early-stage company board is five people. In a startup, three can suffice. Even for a mid-sized company, seven is a practical maximum.
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 the CEO not sit on the board because of the fundamental conflict.
Except for the CEO, board members should be truly independent. The definition of independent is evolving. 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 be an effective mentor, directors really need to understand the challenges of growing a similar company.
For young companies, I think it should be a formal requirement that any prospective director has spent sleepless nights worrying about how they'll 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
Ideally, all prospective directors should have many years of experience on other boards. Even one inexperienced director can be damaging to a young company.
Of course, this creates a paradox for aspiring, new directors. In most cases, the best practice is to let them get their experience in someone else's company.
Directors that 'look good'
Directors who've spent their careers in senior jobs at 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 these large organizaitons are so different that their instinctive reactions are often the exact opposite of what a young company needs.
Most experienced investors will avoid companies with more than one 'looks good' director.
The majority of individuals who could be good directors just don't have the time available. Today, the time commitment is much greater than it was in the late 1990s. Before you nominate a prospective director, you should be sure they really have the time available.
Every director must make a meaningful investment
It is essential every board member makes a meaningful investment in the company. Board members represent the shareholders. If they have not made a meaningful investment, it is unlikely 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 someone with a $250,000 portfolio will be very meaningful.
There is a growing body of quantitative evidence showing higher levels of director investment correlates with 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.
To have the experience, investment capability and time availability, most directors will be ex C-level executives who have sold a similar company. This means that most directors will be in their later 40's or older.
Warning - don't accept 'good enough'
These criteria and other factors are making directors harder to recruit. Board recruiting will consume many hours of the Chairman's and CEO's time.
Under the pressure of an upcoming financing, it's often tempting to think 'this candidate is good enough.' This temptation must be avoided at all costs. Even one poor director can be very detrimental.