At a startup, there are a few critical “must haves”. Funding cushion. A great management team. A product that customers care about and want to buy. Those are obvious list makers.
Additionally, I would definitely include a high quality outside board member (OBM), or if you are lucky, two of them, on the must have list. The value that an OBM can bring is huge. And that value comes in a variety of forms.
For clarity, an OBM is a person who is not an employee, founder or representative of a significant investor in the company. They might invest eventually to take advantage of an opportunity, but the investment amount would tend to be small (say $25,000 – $100,000). The OBM at a VC backed startup is usually compensated with equity. The OBM is someone from industry who has relevant operating experience, marketing knowhow, or other expertise that the company needs.
In a typical startup board configuration (post venture funding) you might have 5 board members, with 2 being founders, 2 being VC representatives and 1 being the OBM. There is no magic to this, and you might also have 6 board members, with 2 OBMs, or 3 board members (founder, VC and OBM). Note that an even number of board members bothers some people (as in “who will break a tie?”), but not me. I have rarely seen a significant board decision not be unanimous and have never seen a tie.
Back to the value of the OBM:
First, the OBM brings balance to the board. I strongly prefer that the founder/CEO source the OBM. That sense of empowerment is good. And, when it comes time for the OBM to make hard decisions later, the fact that the founder/CEO sourced him/her makes the overall decision making process feel more balanced all around. This is a particularly true if the OBM agrees with the VC board members on a given issue.
Second, an engaged OBM can really get things done. I have experience with an OMB who literally spends over 500 hours a year on company business. He is only compensated with equity (though his package is enhanced), he seems to know everyone in the industry, and he absolutely loves what this company is doing. We are lucky to have him involved. And I am pretty sure he feels lucky to be involved with the company.
Third, new potential investors will look favorably on high quality OBMs. They add legitimacy to the company by association. They can bring valuable insights that new potential investors might want to hear. Involve OBMs in your fund raising activities if they are willing.
Fourth, OBMs can be fabulous mentors to young CEOs and other management team members. Sure, VC board members can be excellent mentors too, but there is always the element of enhanced control rights lurking. OBM do not have that handicap. With that said, I have witnessed an OBM telling the full board that the then current CEO (who picked the OBM) needed to be replaced.
There are additional benefits, but they fall into the same theme: OBMs are incredible resources. Find them with deliberation, engage them with fair equity packages and get them as deeply involved in your business as they are willing.
Whose job is it to find the OBM? When it’s an industry you don’t have deep experience in (which is kind of the point), what are some ways to build the network you need to source the right candidates?
It is the whole board’s job, but I really like the founder/CEO to lead that charge, particularly for the empowerment issue. In terms of finding the OBM, industry conferences are great places to start. It is all about networking. Note that some expansion and later stage companies utilize search firms to find OBMs.