Most Startups Add Independent Board Members Too Late To Make A Real Difference. Here’s Why.
Think Of Your First Non-Investor Board Member As a Senior Hire, And Not Your IPO Board
Being a CEO and running a startup is hard! So you’d think that founders would take advantage of every resource available to help them out. And for the most part they do. But one gap I see too often is leaving the Independent Board member seat unfilled for long periods of time. Often because it’s scoped as requiring a Director who will be with the company until its exit. When instead it should be thought of initially as “who is a senior outside voice who for the next three years or so can help advise this company’s leadership team.”
Before I make my case for a reframing of the Independent Director, I’ll back up and explain. Every company has a Board of Directors, whether it takes financing or not. Initially it’s often just the founders or executives of the company, but as they take outside financing, some classes of investors negotiate Board seats, meant to ensure there’s input into the company’s pivotal decisions which represent interests of all shareholders. So with a typical venture financing, a three person Board will be established (two ‘common’ seats — often the founders and one investor seat). Then as more capital is raised, the next expansion is often to a five person Board — the two founders, two investors and an open seat. This open seat is usually designated as ‘Independent’ meaning it’s not an officer or employee of the company nor a major investor. Rather it’s someone with perspective, gravitas, expertise, a personal brand, whatever, who adds value to the discussion and can be a steward of the company.
This Independent seat usually sits vacant for quite a while, there are other priorities at a startup! But it exists to ensure the Board is an odd number of votes, and while unfilled, it’s usually assumed that the founder/CEO will be its proxy. As a result, sometimes filling it can be seen as ‘giving up control’ since the vote will shift to an actual human being, who theoretically is weighing in on what’s best for the company, not necessarily the CEO (with the hope being those are aligned of course).