A field guide for startup board members in an up-and-down market

Brad Feld, a venture capitalist of 25 years and author of several books, has just published a second edition of a book that was first published in 2013.

It is a field guide to building and leading an effective board of directors. With the public markets in turmoil, board members who may have gotten along swimmingly in the longest bull market in history may suddenly find themselves at odds with the management teams they've funded. After all, hard decisions are being made right now, and faced with very different financial pressures, many VCs are finding their jobs more challenging.

We talked with Feld last week about the book and the challenges facing startup boards, as well as a number of other issues, from the importance of having an odd number of directors to avoid gridlock, and why every startup board should have independent directors from nearly the get go. We hope you will find the excerpts below helpful and edited for length.

The book should be re-released and reworked. Why do startup's need it?

There have been a number of cases where bad governance has resulted in the collapse of companies in the past. There is a narrative among companies that they don't need boards, with more entrepreneurs not taking advantage of the benefit of a board.

The idea that a board can be helpful to a fast-growing company wasn't just lost but was being ignored.

Isn't that the fault of VCs who've been investing less in their board roles?

It's absolutely true. You had a lot of VC board members without a lot of board experience prior to jumping into VC, so they were overloading the boards.

Part of it is tied to founder controlled boards, where the founders don't really have a responsibility to a board. You had a bit of that.

There were a lot of investors who put big checks into companies but didn't take board seats.

Outside directors are the most important part of boards in fast-growing and mid-stage companies. I have experienced huge value from outside directors at early stages, especially with first-time entrepreneurs, but also with experienced entrepreneurs who can add to the expertise they lack with another CEO on their board. They hear things from that peer differently than they do from their investor.

Is it a good idea for startup founders to bring in independent directors?

He calls it the rule of one. He believes that if you add a VC to your board, you should also add an outside director. If you start with two founders and two board seats, then you should add an outside director at that point. You should add a second independent director if you do another round and another VC takes a seat. When I am investing in a company at a Series A stage and there is already a VC on the board, it blows my mind.

The founders don't know they should be doing this. They don't want them to add to the board too quickly.

Sometimes the VCs will structure the board so that there is an independent director. It is fairly common. No one pays attention to it. It is important in the type of cycle we are about to go through.

If you have situations where you have down rounds, you have recapitalizations, you have sales of companies below the liquidation preference, and you have an independent director on the board, that is positive governance.

It is a nice thing to have. If you don't have it, you create a problem for yourself in terms of the downstream legal dynamics around things like the business judgment rule, and what you can rely on in those kinds of financings.

When it comes to governance in a down round, there are a lot of challenges between the founders and investors, and you may have conflict between investors and investors. When emotions flare, when there is real tension, or when there is real animosity between people, if you have multiple people in independent seats, they can play different roles.

I know a lot of people who are great at that. Many VCs are good at that. Many VCs are not good at navigating it. Many more people are not good at that. It gets harder. A couple more people sitting around the board table who don't get wrapped up in all of those emotional dynamics can make for better discussion and better decisions.