Board members bring a mix of experience, skills, and connections to your company. They may have worked in your industry and certainly see the value in your idea. It’s possible they worked for a competitor or potential partner and can offer you industry insight, giving you a market advantage. Who they know is an important factor; board members should be able to connect you with other investors, advisors, and resources to support your business.
What is an Independent Director?
Once funded, entrepreneurs often assemble a five-member Board of Directors. In the five-member scenario, two directors are typically your “investor directors,” the venture capitalists and/or seed investors who, as part of their investment agreement with the company, control the designation of those seats. The third director is usually one of the founders—the CEO. The last two directors are generally referred to as “independent directors.” They are not typically institutional investors, but, when chosen wisely, their value can far outweigh any financial investment.
The role of the independent directors is the same as that of the other members of the Board. Their vote counts the same (typically), and they have the same fiduciary and governance responsibilities under State law, including approving stock grants, equity issuances, executive compensation, and electing the company’s corporate officers, including the CEO. However, the relationship you have with your independent directors relative to your investor directors can be very different.
Investor Directors versus Independent Directors
Remember, as managers of venture capital or other funds, your investor directors have specific legal and contractual duties and obligations to the limited partners who invest in those funds. These duties and obligations can sometimes conflict with what’s “best” for the business and can make the relationship between management and investor directors complicated. For example, as the founder-CEO it can be difficult to challenge your investor directors if they are resistant to support major decisions about the company's focus or direction, especially if your current proposed changes run counter to the strategy you pitched when they originally invested. In those prickly situations, it is important to have a strong voice behind you, even speaking for you.
Your independent directors can advocate for you in those situations, present the difficult topics from a different perspective, and help mediate when you end up at odds with your investor directors. Similarly, executive compensation discussions are often awkward. As the founder-CEO, you may have been working on your product for little to no salary for some time. Now you’re funded and your product is showing traction—time to get paid like an adult! Your independent directors often influence and make recommendations regarding executive compensation. Having those conversations with someone who can advocate for you can be a big advantage.
Choosing an Independent Director
So now that you see the value of independent directors, how do you choose them?
Look at the Director’s Skills and Experience
Typically, your investor directors will have the right to approve your independent director selections. Sometimes the independent directors are mutually known, or the investors may identify an independent director to complement skills currently represented on the Board or amongst management. It is important that you think critically about the help you need and understand which skills and experiences an independent director brings to the table. For example:
- What is your biggest developmental challenge?
- Do you need an anchor enterprise customer?
- Are you having trouble making key hires or attracting talent?
- Are you looking for that first game-changing partner?
Find an Independent Director Who Has Done it All Before
It is also helpful to have an independent director on your side who has “been there,” either as an entrepreneur or on a board where maybe things didn’t go so smoothly. That experience counts not only as they help you face difficult times, but lends credibility when they are advocating on your behalf. Will he or she be your ally on the Board when:
- Looking at a down-round financing and negotiating terms with your existing investors?
- Managing a reduction in force and asking for a reasonable severance package for your staff?
- You’ve proven your technology and the market and other Board members are looking to bring in that “experienced CEO?”
Can They Herd Cats?
Lastly, there are some very practical situations where an independent director can be extremely valuable:
- Managing a Board is often an exercise in herding cats; your independent director is often the best person to do the herding.
- As your business matures, your Board will form committees, typically Compensation and Audit Committees. Your independent directors are always on one or more of these committees and, in these roles, can have a fair bit of influence.
- Independent directors are essential for Board approval of “interested transactions” (e.g. an insider-led financing).
Ultimately, your independent director will be the person you turn to for honest conversations, sharing hard truths, and working together to find creative ways to address the concerns expressed by other members of the Board. Choose wisely, capitalize on what they have to offer, and you will find your independent director to be a powerful ally and partner to help you and your business succeed.
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