July 17, 2023


The Startup Playbook: No. 2

Building a Board

Building a board isn’t easy. It takes time to find the right members, recruit them, and establish relationships with them. Moreover, board building is a procrastinator’s dream. It feels like one of those things you can put off or, at the very least, a group of people who can get in your way. So why have them there?

Board building is one of the most consequential things you can do as an entrepreneur. You’ll need them, you’ll want them, and you’ll want them to want you. The board is the CEO’s boss, after all!

Let’s dig in and discuss what it takes and why it is crucial to build a board starting at the seed stage of a climate tech company.

Not a Nice-to-Have, but a Need-to-Have

If your company is a corporation, you need a board of directors. The board serves as a fiduciary representing the interests of the shareholders and is a requirement of state law (all corporations are creatures of state law, and most of those creatures reside in Delaware). The last thing you want to do as a young corporation is flaunt the corporate formalities. Suddenly corporate veils are getting pierced, lawyers are asking many questions, and you’re spending time on things you don’t want to.

Be Proactive: If You Don’t Build It, Then Someone Else Will

Okay, so your startup is a Delaware C-Corp, as most startups are (and should be), and you are legally required to establish a board of directors. Now, you must build one. When starting as a founder, making yourself the officer, director, and shareholder is easy. You’re often the only one, and nothing prevents you from serving multiple roles, especially if you’ve adopted bylaws that allow the board to have one member.

Once you’ve established your Board of One, it is easy to stop there and say, “My board is formed, and I’m good to go.” But, once you’ve raised a meaningful pre-seed round and are preparing to raise a seven-figure seed round, I’d argue that now is the time to build a board and create a long-term board strategy.

Why? Because if you don’t do it, someone else will. And by “someone else,” I mean the investors writing checks in your Seed and Series A round.

Your Seed and Series A investors will dig into your data room, ask who’s on your board, and immediately see an opportunity if you are a board of one. Maybe the high-flying rocket ship of a startup will get away with a board of one, but most climate tech startups, facing a more challenging march to scale, will not.

What will potential investors see? A lack of control that needs to be solved with their help. They can put themselves on the board and garner valuable decision-making power.

Next thing you know, you’ll see term sheets requiring a board seat and stockholder agreements redlined with contractually mandated board seats. Before you know it, investors you want on your cap table but not on your board may be sitting next to you in a quarterly board meeting!

What can you do? Build the board your way. Start with yourself and perhaps a co-founder. Add investors, mentors, or close advisors you want. Head into your seed round with at least a three-person board, then plan to add one investor at Seed and maybe a key strategic board member (i.e., a seasoned executive with ties in your sector). Now armed with a five-person board, you can aim to add two at Series A, likely a lead and key follow-on investor. Now you leave your Series A round with a seven-person board built by you, anchored by a majority that will provide transparent, honest, objective advice but remains in your corner through the tough times to come.  

What if other investors ask for board seats? You can offer board observation and information rights, which can be memorialized in the stockholder’s agreement and side letter agreements with individual investors. You can also use your stockholder’s agreement and cap table to establish a high ownership threshold for board seats, requiring investors to invest significant sums before they are awarded board seats.

A board with too few is a problem, but so is a board with too many. Use all the tools at your disposal and stick to your plan.

Build Strong Relationships

Creating a board is an opportunity to build relationships with intelligent folks committed to your company’s success (they did sign on to the board, after all!). The board is the CEO’s boss, and you want to make sure the board understands your strengths and weaknesses so they can help you. Likewise, a good board will have diverse thoughts and experience and provide guidance upon which the executive team can rely.

That last point is worth reaffirming. Building a climate tech company is hard. Really hard. For many climate tech companies, the reality is you’re moving atoms and bits in a physical product that needs to be deployed in the built environment and has the potential to unsettle a deeply established incumbent, all the while requiring significant sums of capital expenditures in a highly regulated sector for which venture capital isn’t always well suited. Yikes! Good board members, especially ones that have sector experience or professional experience, can be invaluable to you. Don’t run from these folks. Run towards them!

The bottom line is strong relationships matter. You’re not just filling a position or checking a box. You’re building a team of folks with whom you will work. And if you do great work together, the board will be an excellent resource for your rapidly scaling company.

Establish Good Governance

Building strong relationships matters because it should translate into doing good work together. And what does that work entail?

It is the work of governance of the corporation: ensuring the board exercises its fiduciary duty in protecting the shareholders’ interests and overseeing the company’s operations and management.

What’s the role of the CEO here? First, you want to establish routine reporting to the board. Get quarterly meetings on the calendar, select the habit of sending a monthly update to the board to keep them apprised of your progress, and have pre-meeting calls with key directors (i.e., board chair and committee chairs) before the board meeting, all of which should help eliminate surprises at the actual meeting. This is a great experience for the CEO as you learn to manage effectively.

Second, you want to be clear with the board about the line between governance (the board’s job) and management (the CEO’s job). Good reporting helps here because it gets the board focused on their role of oversight. A board with limited information will naturally start delving into various managerial areas. Robust, routine reporting with a consistent format every board meeting allows the board to digest information and validate your management if actuals are meeting or exceeding forecast. Risks and challenges in management can be framed in a way to solicit advice from board members. And once those discussions are completed, the board can focus on strategic direction and longer-term planning.

Third, in establishing the line between governance and management, it is helpful to be clear about what exactly will require the board’s approval versus what can be completed solely with management’s approval. It is worth having this conversation to set expectations and manage the availability of board members. Opening bank accounts, signing leases, and encumbering the company with debt are all examples of actions that could require board approval. In addition, equity financing (i.e., selling new shares of your company’s stock), stock option grants to employees, and adding board members are actions that almost certainly require board approval, which means it is worth understanding the contours of your company’s charter, stockholder agreement, and bylaws and the general availability of your board members to give their approval!

Get the Board Working for You

All right, you’ve got a board of directors, built good relationships, and put the work in to establish parameters of good governance.

One of the critical elements of good governance is establishing board committees, which creates an opportunity to put your board members to work. In due course, you’ll want to develop a board chair and form three committees: finance, compensation, nominating, and governance.

In the short term, you’ll want to use your board to establish one committee: finance.

The finance committee will help review your financial model, establish financial controls, approve the annual budget, select and work with an auditor, and ultimately help you hire a CFO. The amount of finance work needed here, especially for a well-funded, highly technical, high-burn startup, can be intense. A finance committee can be a valuable resource without a full-time CFO on board. If there’s one place where board members, especially those armed with experience, can lean into the managerial side of things, it’s around finance.

Establishing the compensation, nominating, and governance committees will be necessary in the long term. The former will evaluate and verify executives’ compensation (don’t be surprised if they hire a compensation consultant), while the latter will help build a pipeline of future board members (valuable as you need more independents if the public markets are a goal).

Other committees may be helpful. But be careful not to overburden your board members or establish committees that interfere too much with management. As too many board members can be a problem, so can too many committees.

Map Out a Growth Plan

As your company grows, your board will grow, too. So, at the Seed / Series A stage for a startup, it is wise to map out a growth plan for how your board will grow over time. It will help you build your board during your current fundraisings and give you a playbook for where you would like to take it by the time you get to Series C and D.

Determine how many seats you may ultimately want, where the pipeline will come for those new directors (new investors, top-level executives in your industry, academics, key finance, marketing or operational experts, etc.), and what compensation they may need. Remember that as you build a board, you will need to consider compensating board members, especially those who are not investors with carry, non-qualified stock options, or cash. You will also need to alleviate concerns of risk exposure for board members by securing Directors & Officers Insurance, often referred to as D&O, for the company.

Don’t lose sight of your vote count when mapping out the growth plan. As much as good governance should reduce the risks of disagreement, such dissension can still arise, and you’ll want to ensure you have the votes to navigate such challenges.

A strong growth plan for the board can also make it easier for the company to grow. Board members can be helpful in future fundraising rounds by investing in the company themselves, referring new investors to the company, or serving as references. In addition, board members can help recruit C-level candidates (see above, hiring the CFO). An experienced executive joining a high-risk startup will take comfort in meeting and hearing from experienced board members.

Bottom line there’s no reason to get bored with board building. The benefits of a strong board are significant, especially to climate tech startups navigating complex markets!

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