
Board Members - bhaumik
http://blog.samaltman.com/board-members
======
abalone
_> It’s a good idea to keep enough control so that investors can’t fire you
(there are a lot of different ways to do this)_

Can anyone elaborate?

Sam articulates several advantages to having a board (focus on execution,
thinking big, hiring executives) but none of them really require the board to
have voting control, i.e. the ability to override the founder.

More generally, I think most founders would be fine with and welcome an
outside board as long as there was a Zuckerberg-like voting agreement where
the founders retained control. But then again I don't really understand the
difference between that and a board of advisors.

Bottom line, why do investors care about control at the early stages? Do they
really expect that they'll need to override the founder in the nascent stages?
Is it just a security blanket? I would be wary of investors who really insist
on the ability to vote against the founders at the seed to series A stage.

~~~
minimax
I think you are misunderstanding the way corporations are organized. All
corporations must have a board of directors, and the board of directors is the
ultimate top level decision making entity within the corporation. The board is
always in control. Shareholders have the ability to periodically vote on
directors, but that is basically the extent of their power. Shareholders have
no right to influence day to day operations of the corporation. So, if you are
a founder and want to assure control of the board, you must maintain a
majority of voting class shares, otherwise large investors could vote in their
own directors who can do whatever they want (like replacing the founder as the
CEO).

~~~
stepstep
> All corporations must have a board of directors

It this a legal requirement, or is it just by convention? Has anyone ever
experimented with alternate company structures?

~~~
minimax
I'm not a lawyer, but I did just read a book† written by a lawyer†† about this
topic. I think it's possible that it can vary state to state, but in Delaware
(a very popular place to form corporations) the law††† says:

 _The business and affairs of every corporation organized under this chapter
shall be managed by or under the direction of a board of directors, except as
may be otherwise provided in this chapter or in its certificate of
incorporation._

† [http://www.amazon.com/The-Shareholder-Value-Myth-
Shareholder...](http://www.amazon.com/The-Shareholder-Value-Myth-
Shareholders/dp/1605098132)

††
[http://www.lawschool.cornell.edu/faculty/bio_lynn_stout.cfm](http://www.lawschool.cornell.edu/faculty/bio_lynn_stout.cfm)

†††
[http://delcode.delaware.gov/title8/c001/sc04/index.shtml](http://delcode.delaware.gov/title8/c001/sc04/index.shtml)

------
cperciva
This is slightly off-topic, but I've always wondered: How do startups with a
small number of founders set up their boards? I heard talk of boards with 2
founders, 2 VCs, and 1 outside board member; but with a single founder,
there's no way to avoid being outvoted. Would there be a "friend of the
founder who is trusted to always vote with her" seat to keep the board
balance?

~~~
sillysaurus3
While we're offtopic, may I ask why "board control" has been conflated with
"we need someone who will help the company"?

It seems like the value of a board member is their role with the company, not
their control over the company. Those seem like two distinct concepts, and you
only want to deal with the former.

Why can't founders give people equity stakes on par with what a "board member"
would receive, while giving them no voting power within the company? Is this a
case of "In theory that would work, but in practice you wouldn't get the
benefits an actual board member would bring"? If so, why is that?

Maybe there are few people who would actually bring enough value to your
company where it makes sense to offer them a board seat. If there are few,
then they can demand a board seat. And maybe that's why voting power goes
along with their positive effect: It's part of the deal. But I'm just wildly
guessing, and it'd be great to hear from someone with insights about the
actual reasons one can't simply give up an equity stake and expect to receive
help on par with an actual board member.

~~~
adventured
Board members typically don't get paid especially well, nor receive meaningful
equity positions in exchange for being on the board. If you're a sizable
investor in the company, obviously that's a different context.

In the Fortune 500, it's a prestige gig as much as anything. For many smaller
companies, agreeing to be on the board while not being a large investor, is
almost akin to being involved in a local govt board of economic development
for a town or county - it's sometimes done as a favor, out of quasi-charity to
help out, and or you know some of the people involved and want to see the
company succeed.

It can also be a great way to make more connections in business; one board
membership refers to the next - you can kind of move up an economic chain that
way if you go on a successful ride-along. People like to be associated with /
involved with successful enterprises.

The historical reason for connected board control, is at least two fold:
enabling trusted parties to oust the CEO without needing to hold a large vote
by shareholders (not an easy thing to do now, and more difficult a century
ago); and enabling direct major shareholder control without requiring a wider
shareholder vote (if you own 10,000 shares of Walmart along with a million
other investors, while technically those total shares have the same voting
value net as the hedge fund that owns 5% of the company - the 5% entity wants
a lot of influence due to the concentrated stake). Board control also enables
rapid action in cases of fraud or abuse by the top executive/s, in which case
time may be critical - that is, you don't want to wait months for a full
shareholder vote.

Also, who do you leave legal authority to, when it comes to deciding the
replacement for a CEO that has decided to retire or quit (or dies, or
whatever)? Certainly shareholders as a whole have legal control, but it's not
very practical to have thousands of shareholders trying to figure out who gets
to be the next CEO (most of those shareholders will have absolutely no idea
who would make a good candidate, or where to start, having typically zero
direct involvement in understand the business top to bottom, and most
shareholders will have no experience running a serious business). The only
entity that makes sense in that regard is a board of some sort.

~~~
foobarqux
> Board members typically don't get paid especially well... In the Fortune
> 500, it's a prestige gig as much as anything."

They get paid $100-250k for maybe 1 day a month of work and very little
responsibility most of the time. That's a lot of money in absolute terms but
maybe not relative to the total income of typical board members.

------
kurtle
This article articulates well that it's important to have good board members
and it's disasterous to have bad ones, but then doesn't really explain what to
look for in a board member besides experience.

I'd love to see some input here about what makes a good vs bad board member
and how to identify one when making a board.

~~~
foobarqux
Because it wasn't the topic of the essay.

~~~
metaphorm
it should have been. that's much more important than just saying "having a
good board is good".

------
will_brown
To clarify the corporate structure generally:

Shareholders: They are owners and elect the Board of Directors. There could be
different classes of shareholders, some with/without voting rights.

Board of Directors: They generally vote on the corporate officers and
authorize corporate action outside the day to day control/operation of the
business. Voting rights, powers, terms of directorships and the like are
typically defined in corporate documents, and if none exist, then generally
this is all defined by a given State statute/code.

Officers: Titles include President, CEO, COO, CFO, Treasurer, Secretary,
ect... These people are in control of the day to day operations of the
company. Again powers, terms and the like are typically defined in corporate
documents, and if none exist, generally are established by default by a given
State statute/code.

This is generally the default structure throughout all the states. All these
things can be modified/defined in greater detail through shareholder
agreements, by-laws, restrictive agreements, ect...

------
dude_abides
>> As a side note, bad board members are disastrous.

This is too important a point to be left as a side note; I'm sure this is the
primary reason founders prefer not to have external board members.

"How to choose an external board member" would be a great follow-up essay.

------
rattray
Where do people find "outside" board members? I assume the term "outside" here
implies someone who isn't longtime friends with either founders or investors,
but someone who does have the respect of both. If I was a founder who wanted
to build a board, how would I go about finding the right person?

~~~
frandroid
You would look for someone with experience in the area you want to operate in,
or maybe someone from a complementary sector. The role of the board is to look
at the company in the larger context, i.e. within its market at large, and
within its general industrial sector. You also want someone who has a good
track record hiring executives, so that they can broaden the circle of people
the CEO might hire from.

Your investors, by their virtue of having money, don't necessarily have
experience in your specific market, so it's good to bring outsiders that are
more interested in seeing the company succeed period, rather than maximizing
their own investment, as investors are.

~~~
terravion
This sounds right in term of what to look for. But what are the mechanics of
the search?

It seems like something really personal for the company--and yet founders are
often not likely to have great independent board candidates that they have
long histories with.

Investors are much more likely to know great independent board candidates--so
how do you structure a search so it yields the independents are 1) as good as
you need them to be and 2) not actually just more investor seats on the board?

~~~
frandroid
Unless you're already accomplished with a previous track record, you're
probably going to be looking for advisers before investors, so usually as a
founder you've already asked tons of people for advice. Or you should have,
anyway. :) When talking to such people, you have to keep in mind that you'll
want to recruit people for a board one day. It's really a socializing and
networking thing.

------
netcan
I no nothing about this sort of thing but.. what about employees on the board
of directors, advisory board or creating an employee board to fill this role?

I now that european labour socialism, unionism and some asian management
paradigms have included things like this in the past. Are there any useful
takeaways from those experiments?

I realize that the purpose of a board is to bring in a perspective less
tainted by the day-to-day, but there can often be a disconnect between day to
day and "horizon." Connecting the two is important. Assuming smart people,
who's to say that employees would not be as capable of bridging that gap then
some independent advisor with useful experience elsewhere, but not much
understanding of the company itself.

The few times that I have been privy to that kind of discussion boards and
advisors are supposed to be involved with (with real stakes involved), I
always thought they had a poor grasp on some important aspects. Big ideas need
to play to the strength of the company. Insiders have a distinct advantage
here. Ideas that employees really like, have a extra advantage.

------
sethbannon
Especially for first time founders, not inviting an investor to sit on your
board when you raise is a mistake. I can speak from personal experience here.
The many upsides of an outside board member (mentorship, a cadence to the
business, outside perspective, pattern recognition, real investor buy-in)
outweigh the few downsides (loss of control, investment of time in board
management).

It's an especially insidious mistake for founders, because not giving up
control (i.e. not giving up any board seats) seems like a victory during
fundraising, and you only see the downsides when things start to turn sour.

Here's another great post about the value of outside board members:
[http://allthingsd.com/20130927/the-value-of-a-board-at-
the-s...](http://allthingsd.com/20130927/the-value-of-a-board-at-the-seed-
stage/)

~~~
jacquesm
Loss of control _can_ be a huge downside though.

What's missing from this article is a way to distinguish bad board members
from good ones. The same goes for shareholders (founders, angel investors and
VCs). One bad one can cause you a ton of trouble and take attention away from
the day-to-day running of the business when it matters most.

------
softdev12
Having just finished the book Hatching Twitter by Nick Bilton, it seems that
the board is the crucial thing for founder control. This really surprised me
because I had assumed that the board worked for the shareholders and that if
you had the majority of the shares, technically you controlled the board via
proxy. But there must be some sort of legal maneuver that prevents this
(otherwise, a majority shareholder could call a special board meeting and
replace the board or expand it in their favor).

It was puzzling to me how Ev Williams basically got kicked out of Twitter by
the board (of which he was a member) when he was the largest shareholder.
Perhaps his percentage was diluted down during the previous rounds? The book
implied the board kicked Williams out against his own volition even though he
seemed to hand pick all the board members.

If a case like Twitter (and now Tinder) where the board sets the ultimate
agenda is the norm, choosing board members is something that should be given
more emphasis and the info in the post seems to be exceedingly helpful.

~~~
mathattack
I believe that Tinder was a fully, or majority, owned subsidiary. It's a
different case.

As for Twitter - by the time a company gets that big, it's rare for a founder
to have such a large stake. Google and Facebook are the exceptions, though
Twitter does deserve to be mentioned with them.

------
foobarqux
If the problem is really only guidance and outside input, wouldn't having
advisors (no voting rights) solve the problem described in the essay without
giving up any kind of control?

~~~
taylorwc
In theory, sure. The practical issue is that advisors often don't have as
great an incentive to be highly engaged.

~~~
foobarqux
What is the incentive of a formal board member and why can't it be replicated
with an advisor?

~~~
taylorwc
In the context of sama's post, the formal board member will have made a
financial investment. That means that s/he has committed either his/her own
money, or that of an LP; in a good board member, this creates alignment and
engagement--since the board member wants the company to succeed for financial
and reputational reasons.

~~~
foobarqux
Presumably the outside board members described by Sam Altman do not make a
financial investment but, regardless, someone who has made an investment
already has an incentive; they would be just an incentived with or without a
board seat.

~~~
taylorwc
I'd encourage you to reread Sam's post. The whole premise is that the typical
terms of a _Series A investment_ no longer include a board seat by default for
said investor. He does say that board members don't have to be investors, but
that " it’s very important to get an advisor with a significant equity
position that will play the role of a board member."

~~~
abalone
But advisors typically get equity. How much equity does a non-investor
outside/independent board member typically get?

If it's similar then I think the question still stands: how do outside board
members materially differ from advisors apart from voting power?

------
bjornsing
> But great board members, with a lot of experience _seeing companies get
> built_ , are the sort of people founders should want thinking about their
> companies every day.

That IMHO sets the right tone. You want board members that understand they're
on the sidelines, watching and evaluating. You don't want people who think
they're the captain(s) of the team, "experienced in building companies".

------
corin_
One small thought on the penultimate para:

> _The companies that have had the biggest impact and created the most value
> have had excellent board members (and executives). I don’t believe this is a
> coincidence._

It can of course go both ways. I'm not saying good boards don't improve their
companies, but good founders (likely to make good companies) probably also
pick better board members.

------
mathattack
_But great board members, with a lot of experience seeing companies get built,
are the sort of people founders should want thinking about their companies
every day._

This...

I believe that venture money on it's own is not worth the price. (VC's
expected rate of return is higher than most credit cards) Getting the right
golden advisor - all of a sudden the credit card looks cheap.

