Rethinking the BoardBy: Joe Mandato | December 1, 2014
Young, bootstrapped companies, need to view boards of directors not as overseers but as strategic partners.
It is critical to recruit your board members with a specific purpose in mind. Bootstrapped companies frequently make two major governance mistakes, both avoidable, at critical stages in their company growth.
First, without a catalyst (e.g. taking outside capital), many neglect to create a board of directors. Second, when they do finally take steps to create a board, they bring the wrong people to the proverbial table. By doing so, they may squander the opportunity to recruit the best advisors for helping their company reach its goals and, perhaps more importantly, avoid pitfalls along the way.
In fact, effective boards can play an even more crucial role at smaller companies than they do at more established entities. The stakes are higher when an organization has finite amounts of cash, and its management often has less experience or breadth of expertise. Some of the key benefits of having a board include: creating a strategic sounding board for your management team, bringing in new perspectives on the business and creating discipline around KPI’s and reporting. It’s important to recruit board members who will deliver value in these and other areas.
There are several reasons entrepreneurs defer establishing a board, not the least of which is the time it takes to identify and recruit the right people. Another common refrain from business owners is the desire to maintain control. In fact, a good board can provide a founder with more control. By bringing in the right group of advisors, you’re taking steps to safeguard the very enterprise you have worked so hard to build.
For some companies, cost is the hindrance. The best board members won’t be motivated solely by compensation; the excitement for the company and its prospects should be the primary incentive. Still, outside directors should be compensated appropriately, both in terms of equity and cash compensation. The standards vary by industry and situation, but a typical equity stake for a board member ranges from one quarter to a half percent, while cash compensation should be on par with the hourly fee you’d pay an attorney or other senior professional.
Proper compensation for high-caliber board members isn’t a frivolous expense. It’s an investment in advisors who, if chosen prudently, can help you navigate your company into the next stage of growth and beyond.
Identifying the Right People for Role
The success of a board of directors pivots on recruiting the right people for the job. Unfortunately, many small companies are cavalier about this critical decision. Here is a common misguided approach to creating a board: The CEO, at some point, realizes that it would be good to get some outside advice and counsel. Rather than search for individuals with specific expertise, he or she turns to people already in their network. The result is a group of people who often have overlapping experience, professional contacts and points of view.
Here’s a more effective approach:
START WITH THE COMPANY VISION AND GOALS
Your board of directors should ultimately be a dream team of advisors who have credibility, skills, industry experience and a network to help get you to the goal.
As one example of building a dream team aligned with your company’s vision and goals, Mainsail helped portfolio company Paylease recruit Charlie Fote to the board. Paylease is an electronic payment solution for property management companies with a vision to build a large payment platform business. As the former CEO, Charlie helped build First Data into a multi-billion dollar powerhouse in the electronic payments industry. His experience scaling a massive sales-driven organization and his powerful network made him invaluable for the team at Paylease. Charlie’s strategic guidance and network contacts have been instrumental in helping Paylease to stay focused, scale quickly and achieve the management team’s vision of being the leading payments processor for property management companies and homeowners associations.
TAKE STOCK OF WHAT YOU ALREADY HAVE
As a small company, you should keep the size of your board reasonable; for many companies, three or five is a good starting point. Odd numbers are good for when things come to a vote. The company CEO will typically take one seat, leaving the others to offer outside perspectives. In thinking about what else you need, consider what functional skills or industry experience is lacking in your current management. It’s always good to include one person with a finance background who can bring a strong focus on the numbers.
Take for example Netchemia, a SaaS company in the education space in which Mainsail recently invested. The company was looking for a very specific set of skills and Mainsail and Netchemia were fortunate to recruit the CMO of Marketo, Sanjay Dholakia, to the board. Sanjay not only has the experience marketing SaaS products, but also has a passion for education, which makes him a perfect complement to the rest of the 5-person board. Don’t overlook the importance of cultural fit when filling in your board.
CREATE DETAILED “JOB” DESCRIPTIONS
Outline the specific criteria you’re looking for in each board member. You don’t want to overload the board with marketing or financial experts. Personality may also be a factor. You want directors who will take a stance when needed, but be careful about bringing in too many egos. The ideal candidates have had previous professional success and won’t let their own ambitions influence important decisions. Mainsail spends significant time in the beginning of the process working with our CEO’s to ensure clarity and alignment in the recruiting process, using a scorecard to establish and then measure against the agreed upon criteria.
OUTLINE YOUR TERMS AND, OF COURSE, YOUR EXPECTATIONS
In thinking about candidates, keep in mind the time commitment you’ll be asking of your directors and what you are able to offer them in return. Time commitment varies in each situation, but the minimal commitment a small company should expect from an independent board member is 2-3 hours per month and typically 2X that amount during the months board meetings take place.
CAST A WIDE NET IN YOUR SEARCH
It’s tempting to look in your own backyard, in part because it simplifies the cost and logistics. Depending on the size of your backyard, this may not be a bad option. If you run a high-growth company that is national or international in scope, ideally your board should reflect that. Many companies work with recruiters to find their board members, but lawyers, consultants, bankers and clients are all resources. An additional non-paying source can be recruiters with whom the company has worked to fill other positions. They often willingly share names of people with whom they have worked in the past who might make great directors and are looking for their first board experience. The CEO should take the initiative to lead this effort.
The saying, “it can be lonely at the top”, holds especially true for CEO’s of bootstrapped companies. Building an effective board can provide the CEO and management team with experience and access to a network they wouldn’t have otherwise. Finding the right people is an important first step to building an effective board. Approach this process as an opportunity to surround yourself with strategic advisers who complement your strengths and weaknesses and you’ll be much more successful in creating a board that adds meaningful value.
Written by Joe Mandato – Joe, a senior advisor at Mainsail Partners, has been CEO of six high-growth companies and sits on the boards of private and public companies. He completed his doctorate degree at Case Western Reserve University where his research focused on the evolving role of boards of directors in ensuring effective enterprise governance.