Getting it right, right from the start: many VC-backed boards experience dysfunctional behavior and often lack self-help tools to apply best practices in their governance.

• Author: Levensohn, Pascal
• Position: EARLY-STAGE BOARDS - Venture capital

MORE INEXPERIENCED corporate directors join venture capital-backed company (VCBC) boards than in any other industry. First-time entrepreneurs who become founding CEOs frequently become corporate directors even before they obtain their first institutional round of venture capital financing. While taking venture capital is always a choice, there is no opting out of the legal responsibilities of corporate directors.

Entrepreneurs are not alone on this maiden voyage. Many venture capitalists, particularly younger partners in larger firms, join founding CEOs as rookies on a VCBC board. Independent directors may also lack relevant board experience. While some independent directors are highly sought after for compliance reasons because of strong accounting backgrounds and others are recruited to VC companies for their relevant industry experience, they may arrive at that first board meeting with little or no VCBC board experience. In the current environment, regulators, institutional shareholders, and the courts are demanding greater oversight and sensitivity to governance requirements on the part of directors. To have a high-functioning, effective board, directors must be familiar and comfortable with board governance issues facing emerging companies throughout their life cycles.

VCBC boards are unique because of the challenges that are particular to emerging companies in rapidly changing competitive markets. The companies develop through four distinct stages: (1) seed funding and product/technology/service development; (2) early commercialization; (3) late-stage expansion; and (4) liquidity through either an acquisition or an initial public offering. Through this evolution, business processes become more complex, and VCBC boards are naturally exposed to various situations that raise inherent conflicts of interest among board members. As companies grow in size and invested capital, board sizes typically increase from three members to as many as seven. The composition of the board also changes to include more independent directors, particularly if the company wishes to go public.

Just as VCBCs must remain nimble and flexible in order to be successful as they grow, effective VCBC boards must adapt as they experience the normal process of maturation. The recommendations of our working group of 22 VC industry experts who collaborated on examining the challenges facing VCBC boards recognize that not all VCBC companies are the same, that boards are...