Good Early Stage Board Governance

This is a topic of passion for me – as a venture capitalist, how do I improve the governance function I perform for the early stage companies for which I serve as a director?

This post was sparked by an article in yesterday’s WSJ by John Brennan entitled, “Improving Corporate Governance: A Memo to The Board” (link good through 2010-05-18). I thought I should use the several suggestions in the article as a starting point to discuss the differences with early stage governance, and some of the early best practices I have adopted:

1) Know that you are the shareholder’s first line of defense. In most cases, early stage VCs are the only other shareholders in a startup, but often, as directors, we protect the rights of other holders of preferred and common stock, such as non-working founders and angels. There is no other line of defense in the risk-filled world of startups, so it is important to understand that if you don’t give good counsel, then likely nobody is.

2) Build value through mutual respect. I have seen tempers flare and differences of opinion develop, but it is important that everyone keep their heads. There is no room for lack of graciousness or civility in the small group that is typically occupied by 4-5 directors. There will always be differences of opinion, and if you believe in the power of teams, you will weigh everyone’s input – there are usually very few dummies let through the door at this point.

3) Communicate. I would move this to #1 on the list of important items. Regular communication is extremely important, both verbal (over the phone) and face-to-face. I have a weekly half-hour call scheduled with all my CEOs as well as the regular once a quarter board meetings. I am implementing a ~2-hour board call (but not a formal board meeting) that happens at the half-way point in time between official quarterly board meetings. But more important than the regularity of communication is what is communicated. It is important to discuss strategy, revenue, and cash position so that, as a director, I can get a full picture of how the company is being run.

4) Measure your success. “If you don’t measure it, you can’t improve it,” someone smart once said. It is important to have a set of success metrics that you hold your management to, and measure them against. At Meakem Becker, we call this the Committed Operating Plan (COP), and we are very serious about establishing this annually and sticking to it.

5) Compensate yourselves with equity. Obviously, this is just about the only way VCs get “paid” to sit on boards – if you entrepreneurs are hearing any VCs or angels that demand cash compensation for directorship, you should likely run away.

6) Share your metrics. Transparency within the VC partnership and the limited partners (LPs) that make up the VC fund is important; just as important is that management of startups are transparent with their startup team members. A company that shares information does right by its team members – everyone can look up at the scoreboard, see the score, and know whether as a team they are winning or losing.

7) Hold yourselves accountable. Admit your mistakes early, and don’t allow your startup team to follow strategy that isn’t working. Don’t be stubborn in the face of market resistance, but be willing to tack back and forth depending on the direction of the wind.

Establish an “owner’s relations committee”. While I think this sort of committee makes sense in a larger company with distributed ownership, more important in early stage companies is for directors to get the sense of how the startup is being run from several key employees. Management By Walking Around is very important, and this is why face time with the company is important. Talking with non-management team members is a very important way to keep your finger on the pulse of how the startup is doing, both as a business and as a culture.

This is a very important topic, and hope some of you weigh in on other important thoughts I may have missed.

Keeping Your Investors Updated In Between Board Meetings (readwriteweb.com)

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