The Value of Outside/Independent Directors

Most startups as they mature get better and better people on their boards of directors.  In this context, “better and better” means people that can really help the company grow from a strategic and operational perspective.  Impartial, independent, outside directors.  They are independent from the founders, independent from the management team and independent from investors.   You can search “independent director” on Wikipedia if you like.  The definition is not a topic of controversy.  The terms “independent” and “outside” are used interchangeably.  And there is a ton of literature (from blog posts to books) about the value that good independent directors can and should bring to a startup.  Here is my take (and trust me, probably nothing I write here is new):

  1. Balance:  independent directors bring balance to a startup board.  Often there is inherent tension between professional investors (VCs) and founders.  This is unavoidable and happens all the time.  I am NOT talking about constant tension.  That would be a big problem.  I am talking about tension over particular issues (like salary adjustments, stock option grants, strategic direction, etc.).  Independent directors will bring balance to whatever the topic is that is causing the tension.  Good for the founders and good for the investors.  A good outside director will be happy to be in the middle and bring balance.
  2. Connections and Exits:  often independent directors have networks that can be incredibly helpful connecting the startup to others in the industry/sector.  Think of top level customer relationships.  Think of top level exit discussions.  These are just examples.  Independent directors are usually compensated (often with equity) so they are motivated to directly help.  I suggest looking for people that recently retired from key “company” relationships.  Make a list, track them down and recruit.
  3. Mentorship:  Independent directors ideally should be great mentors to the founders, and probably to a lesser extent, the startup’s investors.  What better person to bounce an idea off of than an independent director who does NOT hold any purse strings.
  4. Credibility:  Getting a decently well-known (in the sector) independent director can bring lots of credibility to the startup and its team.  This is common sense.  The benefits of the credibility boost are enormous.  Doors open, conversations are easier, business happens.

So, with just these 4 points above (and there are lots more – again, just google “independent director”) you might think that every startup would have at least one independent director! Well:

  1. Not that easy to find:  Good team members, be they management or directors, are not that easy to find.  In my experience it can easily take 6 months or more to find the right person.  BTW, investors often recommend people to be independent directors.  That is fine, but can upset the “balance” function that I explained above. I recommend that the founders source the independent.  Sure, the person will ultimately typically need to be mutually agreeable to the lead investor and founders but having the founders source the person strikes the right balance in my opinion.
  2. Founders are hesitant to find due to control issues:  this is unfortunate, but it happens often.  Yes, every time the board grows by one person there is inevitable decrease in “founder control” due to voting.  Each director gets one vote so the math is simple :)).  The key though is that “control” mentality signals insecurity.  Insecurity signals a lower chance of having positive high level strategic team building (so team building with the top executives and top board members).  Lack of top level strategic team building typically leads to sub-optimal exits.  The funny thing is that investors think very highly of founders who build great teams both in management and at the director level.  Control mentality gets in the way at both levels as “the best” hires might not be sought out.  Anyway, this is a very sensitive topic obviously.  But think about the best companies you know and then look at the management teams and boards.  The evidence is pretty compelling.

Have a great holiday season!