Assembling a venture-backed company board: VC-backed companies need a board optimally composed, structured and incented for each stage of a fast-moving development cycle. There are unique challenges that have to be met.

• Author: H. Livingston, Mark
• Position: HEIDRICK & STRUGGLES GOVERNANCE LETTER

ESTABLISHING AND NIAIN.FAJNING an effective board requires skill and tact under even the most favorable circumstances. From exercising oversight, to balancing the competing interests of stakeholders, to addressing the many other issues that, broadly speaking, fall under governance, the challenges can be daunting. In the fast-forward world of venture capital, those familiar issues are greatly magnified by rapidly changing competitive markets for portfolio companies, explosive growth rates, succeeding rounds of investment, and potentially conflicting exit timing and strategy among the investor base.

Based on our experience helping VC firms build and maintain boards for their portfolio companies--and on a series of conversations we recently conducted with leading venture capitalists--the most intimidating of those challenges not only differ in degree from those faced by public companies, and even other private companies, but often differ in kind. While no perfect responses to these issues exists, understanding their dynamics and addressing them can help ensure that the board of a venture capital-backed company (VCBC) does what any effective board should: advance the interests of the enterprise with appropriate corporate governance, which, in the long run, advances the interests of the VC firm.

Board composition

The venture capitalists we spoke with agree that board composition bears careful thought at every stage of funding. At the Series A level, the VC will potentially find in place a very small board that might include a founder/CEO, an angel investor, and perhaps an independent director, all of whom could possibly be first-time directors. Filling out the board, ideally to a maximum of five members at this stage and no more than seven over all the rounds of financing, calls for a balance of expertise among members: operational, strategic, financial, and industry-specific.

However, Series A investors and later investors that come- in on subsequent rounds want to have their interests vigorously represented, which could possibly conflict with the aim of having the right mix of expertise on the board and a board that is aligned strategically. That basic tension--between the ability to raise capital and the desirability of having a fully functional board with the right mix of skills, which actively supports the successful development of the company--can be especially strong during the early stages of funding and the company's development. Further, there can be difficult sensitivities to manage with a founder who has chosen unqualified yet personally close directors to serve on the start-up board. The VC must balance the desire to upgrade the board with the potential for conflict in forcing the issue prior to or just after...