Ask the Wizard

Well, after a couple of introductory posts, it's time to throw caution to the wind and get contentious. One thing that I think most entrepreneurs worry about too much is control. They worry about valuation on an A round funding at the expense of other important terms (or at the expense of the right investor!), they worry about management team control, and they worry about board control. One area where an entrepreneur can really do themselves a favor is by adding one or more outside directors to the Board (where outside refers to somebody other than management team or investor). At FeedBurner, we added Return Path CEO Matt Blumberg to the board about a year ago, and I wish we'd had an outside Board member much sooner.

The CEO in a company is in a weird position because you're essentially at the center of an hourglass shaped reporting structure in which all the employees report up to you and then you report up to all the investors/shareholders (this is where everybody at FeedBurner is rolling their eyes thinking "oh boy, here comes the woe is me speech"). Since I have three cofounders, I still have people that I can talk to about assorted issues, but then again, cofounder and FeedBurner CTO Eric Lunt doesn't really give a damn if the board wants us to spend $25k to make sure we're in compliance with IRS section 409A; if I asked Eric about that, he would probably give me a blank stare and say, "I'm sorry, you seem to have me confused with somebody who cares about our taxes". Having another operating CEO on the board is a huge help. If you're a startup that's raised some money and has a board member that's the lead investor, I highly recommend adding an outside board member now, preferably another active CEO. No matter how much experience you have or how many deals you've done, you never fight the same war twice, and having another active CEO on your board will come in handy for the countless occasions when you have an organization, operations, or customer strategy point you're working through. Outside investors should generally welcome an outside director.

If you're negotiating terms with an investor on a financing and it's a condition of the financing that you add an outside board member, be sure that you negotiate for the right to nominate the director.