The Board

Fred Wilson wrote a post about convertible notes and SAFEs the other day.  I agree with what he posted 100%.  It’s always better to do a priced equity round than a squishy round.  I understand why squishy rounds happen, and have participated in them.  But, prefer equity.

One of the principles we are acting on at West Loop Ventures is to drive valuation at seed.  Our goal is to lead the seed deal and help the CEO assemble the round.

One of the things that Fred doesn’t talk about in his post is that if you do an equity round, you have to form a board of directors.  This gives the company needed structure at an early stage.  Giving the company structure is very important.  It helps set course.  It helps set culture.  Furthermore, a good board gives the CEO support.  Being CEO is a lonely job.

At seed, it’s virtually impossible to switch out the CEO.  It’s probably stupid to do it since the CEO is most likely the founder.  The only reason to do it is malfeasance.  Boards are not there to serve as arbiters and disciplinarians.  They are there to help CEO’s strategize, budget, and build.

At early stages, independent directors on boards should bring a few things to the table.  First is credibility.  Having a higher profile board member with a good reputation in the industry doesn’t hurt.  Caveat; that board member actually pays attention and has the time to devote to the company.  The second thing they need to bring is strategy, network and expertise.  Independent directors need to be active to help the company grow and get ahead.  The requirements change when you get later in the cycle.

Over time, the board needs to change.  The seed board won’t look like the Series D board.  It is important that early investors keep their egos out of being on the board.  They need to know when it is appropriate to step back.  Boards should change with up rounds and down rounds.  Of course, we are seeing more down rounds today.  In a down round, often company personnel changes and the board composition should change too.

In our case, we want to be on the board at seed if we can.  However, it gets less meaningful for us at Series A.  We might be on the board and we might not.  At Series B and beyond, we don’t envision being on the board at all.

When it comes to board composition, egos are involved.  If a founder isn’t an integral part of the business anymore, they probably shouldn’t be on the board.  If an investor goes from a major to minority investor, they probably shouldn’t be on the board.  If you start out as a minority investor, unless you have a special skill that the company can use, you probably shouldn’t be anywhere close to the board room.

Investors need to understand their role.  The best thing they can do is find customers and create opportunities for the company.  They aren’t operators and they aren’t a judge and jury.  If things change, investors should have the presence of mind to proactively tell the CEO that they can’t fulfill their responsibilities and help the CEO find a new board member.

What’s the ideal number of board members?  In an early seed deal, 3 is recommended.  Why?  You need an odd number to vote. Even number boards potentially can be deadlocked.  Most votes at an early stage are not controversial.  The other reason is communication.  The board sees material that other people shouldn’t see.  Brad Feld has advocated sharing a cleaned up board deck with employees and outside investors.  I agree with that.  But, not everyone should see the detailed numbers.  Having a smaller board keeps communication tight and makes life easier for the CEO.  At an early stage, I am all about making life easy for the CEO.  They have enough to worry about without lots of board members demanding time with them.

There are businesses that are heavily regulated where some board composition is outlined in an agency regulatory structure.  The one area I know is in finance.  At a public exchange, the SEC and CFTC have an independent outside director requirement.

What about post seed?  At Series A and beyond, five is probably the best number of board members for a startup firm.  I’d keep five as long as I possibly could.  If you set good cultural practices with your board in the seed round, you will carry that through to later rounds.  You should be able to appease all the egos and have a board that supports the CEO.



  • Jeffrey, Jeffrey, Jeffrey. You certainly *can* have an even number of directors. A vote which requires a simple majority to pass will fail with an even number of yea and nay votes because it did not achieve a simple majority: the motion fails.

  • JLM

    The world is essentially divided into those who provide capital (VCs, et al), those who use capital (entrepreneurs, founders) and the poets & ballerinas.

    You may disregard the poets & ballerinas for this discussion.

    Jeff Carter — experienced, articulate, knowledgeable, sincere, hoopster, all around good guy with a lovely family — speaks from the perspective of the providers of capital. No sooner does he write a check than he begins to gesticulate about a bunch of topics which have at their root CONTROL.

    As a user of capital for my entire business career, including 33 years as a CEO of public and private companies and the founding of seven enterprises, I caution entrepreneurs and founders not to give up any control they do not have to.

    If an angel or a seed investor funds what is a 20% share of your equity, then give them 20% control wherever that may lie — the Board of Directors? Twenty percent of the seats. No more.

    In my CEO coaching, I cannot tell you the number of times I have seen VCs seek far greater control than they have funded. Every single time I have advised founders to take a hard line. Every single time the founder has prevailed.

    Own 20%. Get 20%.

    Where a VC wants a founder to bring on independent directors, I suggest bringing on your best friend from grad school and someone who comes to your Christmas parties.

    Know this — the board is the people who will fire you. You may need firing, but you didn’t start your company to be fired. Do not make it easy for them. Sort of makes sense, no?

    You can and will learn. Do so. But do not give up your life’s work for a pocketful of beans.

    Having run a public company, I can say with authority that applying SEC requirements to a startup is silly. Know them. Trend toward them, but don’t over analyze and over structure your company in the cradle or you will never emerge.

    Crawl, walk, run in all things and don’t ever give up control.

    The other side of the mirror. Hail all Jeffs.


    • I wouldn’t give them 20% if they owned 20%. One seat at the table. If they owned 20%, they should have input on up to 20%, but it’s a good idea to have diversity of opinion in a board room.

      • JLM

        I am sure I am missing something.

        If a VC owns 20% of the equity and the board is 5 persons, then he gets one seat?

        Diversity of thought and experience is essential to doing anything. It does not have to come at the expense of the entrepreneur or his control of the board, his company, or his own fate.

        A smart CEO receives direct peer thinking (YPO, TAB, Vista) and develops a network of smart guys like you.


        • was thinking about a bigger, and smaller board. didn’t make myself clear. I also think that not EVERY investor deserves a seat at the table, nor the information rights that go along with it

          • JLM

            Any shareholder is entitled to sufficient information to establish the “pecuniary value” of the securities held.

            This is codified in Del law as Sec 220 and it is representative of most jurisdictions. People don’t exercise their rights to know.

            A company must be forthcoming with their books and records — not everything, just books and records.

            Boards deal with “material non-public” information which creates a myriad of problems — in particular, the prohibition of any shareholder possessing more information than others.

            In public companies and companies under SEC oversight, this is the implication of Reg FD (fair disclosure).

            The safe harbor is always to reveal more rather than less with an eye toward allowing sunlight be the big antiseptic.

            Boards also have a particular duty to ensure the information is dispersed amongst the board itself.

            Very few boards function at the appropriate level of disclosure as they don’t ever spend any time reviewing it.

            When they do, they do a great job of it.

            Go Heels!


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