Board Seat For Sale

I had lunch recently with a founder. We were talking about current and future board configuration for his company and he said “Up until this point, all my board seats were simply for sale. Whenever a new investor showed up, they wanted – and got – a board seat.”

I loved the phrase “board seat for sale.” It’s exactly the opposite of how I think about how to configure a board of directors, but I recognize that it’s a default case for many VCs and, subsequently for many entrepreneurs and companies.

It’s a bad default that needs to be reset.

I wrote about this a lot in my book Startup Boards: Getting the Most Out of Your Board of Directors.

In the past few years there have been some interesting changes. In pre-seed and seed stage companies, there’s been a trend against having board of directors. Instead, there is no formal board, or no formalism around the board, so it’s just a free for all between the collection of early investors (angels and pre-seed/seed VCs) and the founders. This can be fine, but often isn’t when there are challenging issues that involve founders, financing, execution, or conflicts. And, when things stall out, figuring out what to do is often harder for the founders because of the communication dynamics – or non-communication dynamics – that ensue.

Post seed boards tend to be founder and investor-centric. This is the norm that I’ve seen over the past 20 years. With each round, the new lead investor gets a board seat and all of the other significant investors get either a board seat or an observer seat. The board quickly ends up becoming VC heavy and the board room expands to have a bunch of investors in it since they all have observation rights. Having been in plenty of board meetings with over 20 people in the room, I can assure you that these meetings are ineffective at best and often trend toward useless.

One approach to this is the pre-board meeting, where only the board members meet with the CEO prior to the board meeting (similar to an executive session of the board.) This is an effective way to deal with part of the problem, but it then makes the board meeting, in the words of a good friend and fellow VC, kabuki theater.

I prefer dealing with reality. I have a deeply held belief that as long as I support the CEO, I work for her. Yes, I do have some formal governance responsibilities as a board member which I take seriously and am deliberate around them. But most of my activity with a company is in support of the CEO. When I find myself in a position where I don’t support the CEO, it’s my job to do something about that, which does not mean “fire the CEO.” Instead, I have to confront what is going on, first with myself, then with the CEO, and finally with the rest of the board, in an effort to get back to a good and aligned place with the CEO.

As a result, especially for early stage and high growth companies, I think the CEO and founders should be deliberate about the board configuration. I like to have outside directors on the board early as it helps the CEO and founders learn how to recruit and engage non-investor directors. The CEO can learn how to build and manage the board and get value out of board members beyond the classical dynamics around an investor board member.

Most of all, I hate the notion of board seats for sale. I get that many investors want board seats as part of their investment. I appreciate that some now have strategies of never taking board seats. But too few VCs think hard about what the right board configuration is at the point in time that a company is doing a new financing. I think that’s a miss on the part of VCs and I encourage CEOs to think harder about this.

Also published on Medium.

  • Ryan D

    Thanks for your insight Brad.
    After I read your book, Startup Boards, I soon had an opportunity to join the board of a local non profit. I remembered your advice on the book suggesting that founders join other organization’s boards to learn more and gain a different perspective.
    I’m curious, do you think that that pertains to non-profit boards as well? I know it’s not quite the same dynamic, but over the last 10 months, I’ve enjoyed the meetings and have learned quite a bit.
    Just curious. Sometimes feel as if I should do more.
    Thanks again.

  • My problem is i keep buying board seats on Craigslist and eBay.

  • Great points. I don’t think that founders should look at it that way. If the seed firm that they decide to take money from truly adds value and isn’t commodity money, then it’s not for sale. Additionally, I think it is up to the seed investors that sit on a board to realize there may be a point when they need to get off the board as the company matures. Having the self awareness to tell the CEO, “Hey, it’s time for the board to change to fit the way the company is going” is good.

  • Jason Randell

    What are the key questions EVERY CEO should ask of her board?

  • Seems to be the way of things. You go through round one and you’ve got a couple investors on the board (and a lot less of the company). You go through round two, three, etc. More (typically) VCs on your board and less company in you’re pocket. By that time, you have no control left and your motivation is also being sapped since nothing belongs to you anymore. Just another example of how expensive VC money REALLY is…

    • Jason Randell

      Why put rocket fuel in your scooter Frank?