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I had lunch with Mark Suster last week. We exchanged a bunch of war stories and ideas on early stage company building and our roles as investors/mentors.  Most of what we talked about you can find in our blogs. But the two thoughts that stuck in my mind were around the role of independent board members and board observers.

According to Mark, independent board members should invest their own money into the companies they join. I’m a huge fan of recruiting independent board members and have written about it in the past. I love this idea of having the independent put up their own money, and I plan to push that point going forward.

The idea is that independents will have a completely different mindset in engaging the company when they have their own money at stake. While stock options theoretically provide an incentive to act as a shareholder, options tend to be too “theoretical.” There’s nothing like one’s own real money being on the line. The amount of the investment doesn’t matter as much as the percentage of net worth it represents.  Put another way, the independent needs to have real skin in the game. That’s the only way to get the independent to make the hard decisions that real investors make when things don’t go to plan.

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According to Mark, companies should not have board observers. His point is that observers behave as full board members regardless of their status. This is because early stage company boards often are run as operational review meetings.

The real board part of the meeting (approving options, approving minutes, etc.) is no more than a half-hour to hour of a 3-6 hour meeting. In that ops review portion, discussions tend to be dynamic and all attendees tend to have a loud voice (should they choose to be loud). So the observer status doesn’t mean much if the observer decides to be really engaged. Now if there is value in the observer being engaged (value adding person), then why not just make him/her a full-fledged board member? On the flip side, if the observer is a distracting/obstructionist (non-value adding), then why have him/her in the room at all?

For more, here’s some links to my older posts on boards and board meetings:

Happy reading…

Firas Raouf is a founding member of OpenView Venture Partners. He is a mentor to OpenView’s Portfolio, an
engaged board member, and plays an active role in investments. Connect with him on Twitter @fraouf.

  • http://bit.ly/vipulrawal Vipul Rawal

    But then would you still call them independent board members if you have them put in their own money? Doesn’t independent by definition mean someone who has no material interest in the company? http://www.ehow.com/about_6331899_definition-independent-board-directors.html

  • DeRoy Taylor

    I think that the main point of this article is stated in the following quote: “The idea is that independents will have a completely different mindset
    in engaging the company when they have their own money at stake. While
    stock options theoretically provide an incentive to act as a
    shareholder, options tend to be too ‘theoretical.’ There’s nothing like
    one’s own real money being on the line.” People act differently when they have something of real value to lose. Your reply is based on semantics. The article needs to describe board members in some way.
    If a board member needs to consult with others who have a stake in the investment, then you have a whole new can of worms to open. What type of stake those other members have in the investment could involve a discussion of a wide variety of topics that I suspect is way beyond the scope of this discussion.

    • http://bit.ly/1Gu8Ha Firas Raouf

      Yes, I was going for the state of mind of the independent board member here. The IBM putting his/her own money will change the mental dynamic and will get the IBM more closely aligned to the founders (who put in their money and time and passion) and investors (who put in their money and passion). 

      So is an independent still independent if she puts invests in the company? Sure she is… Its her own money that she invested independently of other stakeholders. The independence can be a bit compromised if the independent BM is investing alongside the VC investor in the same round/equity. But I still contend that having skin in the game overcomes the slight possibility of a reduction in the state of independence.

  • http://www.themusingsofthebigredcar.com/ JLM

    .

    Having run public and private companies for over 30 years, let me disagree as completely as is possible in the English language.

    There are no knee jerk pills to make a Board work well. It is a constant work in progress. It is both art and science with a side of constant change.

    Boards have to be constructed carefully, painstakingly and with a bit of guile and cleverness.

    If the only test is a bit of financial skin in the game, then one loses the opportunity to mine real expertise and wisdom.

    For a young company CEO, the very best Boardmember is a seasoned CEO who has walked in those same moccasins.

    That experience cannot be replaced by a check.

    It is like being a combat veteran. You can be as well trained as possible but until you have had to operate under the stress of combat, you really do not know your own capabilities.

    JLM
    .

    • http://bit.ly/1Gu8Ha Firas Raouf

      JLM,

      You leave no doubt as to how strongly you feel about your point. But I must say in my defense, I wasn’t in any way trying to imply or say that having an independent board member put money into the company relieves the need for that member from being operationally experienced enough to add value to the board and the company. My point was that when you find the ideal independent – one who is experienced, and would fit cohesively with the rest of the board – it would be an added benefit and motivation for that IBM to put some skin in the game.

      I do agree that the most ideal candidate is a former CEO who has lived through the early stage trials and tribulations. Pretty much most of the IBD that I have recruited into my companies meet that profile. The exception to that persona is when I’m recruiting a member to fill the CFO persona (i.e. a highly experienced former CFO joins the board to provide air-cover to the company’s CFO and provide leadership to the audit/committee functions of the board).

      • http://www.themusingsofthebigredcar.com/ JLM

        .

        Firas —

        Always remember in any discussion that folks have different views given their own experiences. Nobody is universally right but when ideas wrestle, better ideas are born.

        I am often approached by start up companies to advise them. I love doing it because I had lots of help when I was starting out and I enjoy business in general. And a lot of things that a young CEO is struggling with are things I have done hundreds of times.

        If I have to consider a financial investment, I am not particularly interested because if I were to invest in a company I would want to make a meaningful investment rather than a token investment. Also I would want to exert some less gentle hand on the business.

        If I make a meaningful investment, then I will have to conduct due diligence and ponder the investment carefully. It may be a great company but I may have better opportunities to deploy my capital.

        I have 33 years of experience, exemplars, contacts and other advantages — all of which I can put at the disposal of a company as a Boardmember or in some other advisory capacity.

        There is rarely an issue that I do not have some form of a standardized document that I have developed over the years (Engineer & MBA) that I can whip out to get the solution out of the cradle.

        When I share my views, please never take it as requiring you to “defend” yours — the truth of all things almost always lies in the middle.

        Your comments as it relates to a CFO persona are right on the money and public companies require the designation of a Financial Expert (SOx) to head the Audit Committee.

        Thank you.

        JLM
        .