Mistakes startups make when building boards

Many years of advising, working with and working in startups has helped me identify some common mistakes startup founders make when they seek to build boards and build good governance for their companies.

Not knowing what skills are needed

The early board of the then-celebrated-now-maligned startup Theranos, which assembled “three former cabinet secretaries, two former senators, and retired military brass“, is a prime example where the skills required on the board have not been thought through and there was a focus on the star quality rather than the active contribution of the board directors. None of the board directors seems to have understood the company or its technology, nor does the founder seem to have encountered — or sought — much challenge or oversight.

The skills needed by a startup change rapidly as the startup grows through very early stage chaos, to laying the foundations for growth, to actual growth. Founders need to be aware of the life stage the company is in and, just as they seek these skills in their hires, should seek different skills for their boards as the company grows up.

Not knowing where to look for candidates

This is a common occurrence especially among young founders. They may not look beyond their immediate network or cast their net wide enough. Some give up, some end up with less good fits.

My conversations suggest this is possibly due to a mix of reticence towards seeking help and sometimes not thinking creatively about asking people for help. To most such founders, I say that if you cannot hustle to get people on side for your idea, you may have a slim chance succeeding at the hustle needed to build that idea into a flourishing business.

Not knowing how to assess a board director candidate’s skills and experience

Interviewing is hard at the best of times. Founders pressed for time may feel added stress while picking an independent board director.

On paper, many people look good. It is easy to be impressed by elite institutions and blue chip names on someone’s CV. But are their skills relevant or transferable? Do they have a relevant network? Is their network useful for the startup? Are they willing to make introductions and put effort behind working them?

The real test of a board director’s worth is not when everything is working well but when things are going south. How to probe for true character under adversity? My super revealing interview question may be helpful.

Without investing a lot of time, it is also hard to assess if the board director candidate has the right appetite for the risks, the uncertainty, the entrepreneurial focus, and the emotional rollercoaster that a startup presents.

And finally reference-checking. In a litigious environment, few people will say anything negative outright about anyone. Listening to things not being said amid anodyne clichés is a key skill.

Giving away a board seat under pressure or out of fear to someone utterly unsuitable or unwilling to do the necessary work

I recently advised a non-profit-in-formation on how to build their board. Their celebrity co-founder is unwilling to relinquish creative control and does not seem to understand that being either CEO or the Board Chair will require a lot of work and active involvement, which is something she is unable or unwilling to put in.

Needless to say this is a situation where trouble is brewing even before things have taken off. I advised the two co-founders to have a clear conversation now about expectations and scope of engagement, to avoid problems later.

Choosing board directors to be passive push-overs or to rubber-stamp the founder’s decisions or otherwise not demand good governance

This is a regrettably common dream of founders or dominant shareholder led companies. It gained some encouragement from one of the world’s highest paid CEOs*. Theranos and Satyam, corporate governance fiascos of sizeable proportions, both showcased this error.

Indeed a couple years ago, a friend introduced me to a London VC who asked for my director fees for effectively rubber-stamping their investment decisions. I said I don’t do rubber-stamping and will examine what is brought to me to review. I never heard back from him.

(*The said CEO left his company following “a board investigation into an allegation made by a whistleblower relating to Sir Martin’s personal conduct and use of company money”. In other words, over an issue of good governance.)

Recruiting the entire board in one go

This is related to the first point – not knowing what skills are needed. As the startup grows, its needs change. Building a board in one go, then finding some directors do not serve the needs of the company at a given stage of its growth will inevitably need conversations to ask such directors to step down. It is never easy and at any rate it takes time which is best spent on more important things.

Not knowing how to compensate independent directors

A startup’s board of directors is normally made of founders, investor directors, and independent non-executive directors.

Independent directors may be compensated through director fees (less common), stock options or stock grant with a vesting schedule (more common), or a mix of the two (most common because it is a mix of short and long term incentives).

Some negotiating is inevitable. Founders must have their ground rules in place beforehand and those rules should be made keeping the strategic vision in focus.

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If you are a founder, there is no need to be disheartened reading all this. If you catch yourself making these mistakes, you can stop yourself making these mistakes.

And don’t hesitate to ask for help.

(Disclaimer: These are my own views and do not reflect the views of the boards of JP Morgan US Smaller Co.s Investment Trust or Temple Bar Investment Trust or London Metropolitan University, where I serve as a non-exec director, nor of Ditto AI, where I am an exec director.)