Bringing a director to a public company is well understood. They are mostly independent (the only exception is when an activist hedge fund manager takes a board seat to make a quick buck), their objective is well defined as the guardian of the interests of the shareholders, their roles are well defined (audit, compensation, nomination and governance committees), their schedule for five to six meetings in a year is published well in advance, they are experts in running governance and committees and their compensation is not directly tied to the performance of the company.
But, when it comes to an independent director for a startup, it is an entirely different ball game. Rarely do public company board members make good board members of a startup. Here’s why:
- The objective is different. The independent director is aligned with the best interests of the startup, which at times may be at odds with the interests of the investors.
- The role is different. An independent director is a coach, a mentor, a soundboard, a helper to the CEO and the management team.
- The schedule is different. Independent directors are available whenever they are needed and sometimes they will even show up unannounced.
And as a result, the skill set and the profile is very different for an independent director of a startup.
Why should you bring an independent director to your startup’s board?
I once heard that “A bad independent director is an albatross around your neck and a good independent director is the wind beneath your wings.” An independent board member could be a huge asset or a huge liability.
So, what should you do to make sure that you end up with an asset and not a liability? Well, the first thing to do is to ask yourself, “Why do I want to bring in an independent director to my board?”
There are many reasons that may come to your mind. You may want to bring a big-name guy, thinking that he will bring your company some credibility. You may want to bring a wheeler-dealer, thinking that he will get you funded when you need the next round of funding. You may want to bring in somebody who is very well connected in the industry, thinking that he can help you get some deals.
These are good reasons for selecting one venture capital firm over another, but none of them are good reasons for bringing in an independent director.
Think about it. If you bring somebody in as an independent director for their contacts, they know that too. They know that their asset is their contacts. So, obviously they are going to spend their asset very sparingly. So, you may get one or two introductions, and that will be all. And then you are stuck with that person for a long time.
The only right reason to bring in an independent director is to bring a partner that will get into a long-term relationship with you and will be there for you each step of the way as your company evolves. The director will be there to help you with product strategy, help you with the messaging, help you identify target buyers, help you recruit talent and help you with execution issues as and when they come up. And an independent director will be there to help balance the overwhelming influence of the venture capitalists on your decision making. The independent director will be the voice of reason on your board.
When should you bring an independent director to your board?
Ok, now that you have decided to bring in an independent board member for the right reason, the next thing to do is to ask yourself, “Is this the right time to bring an independent director to my board?”
The common belief is that you should bring an independent director when you are a late-stage company or you are about to go public or have a change of control. Once again, that belief is dead wrong.
Is there any time in your company’s growth when you could not use sound advice? Is there any time in your company’s journey that you could not use creative help? Is there any time in your company when you are not tuning your offering, your messaging and your target audience? Is there any time in your company that you do not have any execution issues?
The sooner you bring in an independent director, the better served you will be. So, the right time to bring an independent director is now.
Who should you bring as an independent director to your board?
Now ask yourself the hard question: “Who makes a good independent director?”
Here is the profile of people that make good independent directors for a startup:
- A good independent director understands the business of running a business. They are not just technologists, or just sales professionals, or just marketing professionals or just finance professionals. This model of individuals with expertise in one area works well for large public company boards where you have five to nine independent directors, each being an expert in an area. But it does not work in a startup, where you are likely to have one or maybe two independent directors.
- A good Independent director has run small and large businesses. After all, you are a startup now, but let us face it: you really want to become a big company really fast. So you need to bring in somebody who has been on both sides.
- A good Independent director has been through a number of companies. People who have been very successful in one business tend to know everything about that one business; but obviously your business is not that business. By being involved in a number of businesses, one learns to spot patterns that work and patterns that do not work. And only by being involved in many businesses can one learn to accurately extrapolate patterns that are visible in your business.
- A good Independent director is financially independent and does not need to be a director. They are doing it for fun and they are doing it to help out the next generation of entrepreneurs. If somebody needs to be a director, it means that the job of being an independent director is the highlight in that person’s career. So, he or she will want to protect that job. Guess who he or she will align with? Somebody who can fire him or her! And who is that? The venture capitalist on your board. So, will this independent director really be independent and align with the business and only with the business?
- A good independent director has time for you and should spend close to 200 hours a year helping your company. If somebody is currently in an active execution role, where will the person find that kind of time? And if somebody is on 10 boards, where will the person find the time to help you when you need help?
- A good independent director has walked in your shoes and will be your friend and confidant. Being a CEO is a very lonely job. The independent director is the one that you go and talk to when you are feeling weak and need help. And trust me, there will be times when you will feel that way. . . You clearly can’t express your feelings of weakness to your employees, and heaven help you if you show weakness to your investors.
- A good Independent director has a strong ego — but not a big ego. This is a subtle but very important difference. People with a strong ego have a good sense of their self worth and are comfortable in their skin. People with a big ego are narcissistic. An independent director should act as your helper and be part of your team. He or she should roll up sleeves and get hands dirty. A person with a big ego will never be part of your team. He or she will show up in the board meetings and tell you how stupid you are for making the mistakes that you are bound to make. How will that be helpful to you? Trust me; I have seen my fair share of these people on boards, and it is no fun.
What should you pay an independent director?
So, now that you have decided to bring somebody on for the right reason and you have found the right person, the next thing you have to deal with is how much to pay an independent director to attract the right person.
There are a lot of studies and data available on this issue. And once again it is wrong. The data is all about averages. But you are not looking for an average person, are you? The right way to think about this is to consider how much more your company will be worth by having this person on your team. Can his or her involvement make your company at least 10 percent more valuable? If the answer is no, do not bother hiring the person. If the answer is yes, it is easy to share a part of the extra value that the person will bring to your company.
Now that you are clear about why you are bringing an independent director to your company and what kind of person will make a good independent director, go out and find that unicorn.
Seek and thou shall find!
Ram Gupta is an independent director on the boards of Progress Software and FusionOps. He also served as independent director at S1 Corp, Platform Computing, CastIron Systems, Persistent Systems, Accruent, Plateau Systems and GeekNet. While he was the CEO of Cast Iron (acquired by IBM), the company became the largest vendor of integration in the cloud. He served as EVP at PeopleSoft, was SVP at WebMD and held leadership positions at Silicon Graphics and IBM.