Outside Directors - How Outside?
Alexander Muse makes a great comment on the previous post about Outside Directors, and I was going to comment in response, but it's worth its own post. Andrew notes that FeedBurner's outside Director isn't really outside since we have some of the same investors. Indeed, Matt Blumberg and FeedBurner amazingly have three of the same investors. I actually think this has been a very good thing, although it's probably unlikely that you'll ever stumble into this same situation, and it certainly behooves you to be cautious about selecting folks where there are pre-existing relationships. Because Matt has pre-existing relationships with several of the other board members, there is a) an immediate level of respect for his opinion from day 1, b) an ability for Matt and I to communicate about investor dynamics and for our investors to communicate with me about company dynamics (eg, "you should talk to Matt about how he handled this at Return Path"). Andrew's point is important, because if you've got one investor and that investor suggests another CEO in their portfolio that you don't know, this could potentially be problematic should the outside Director prove to not be so outside.
Andrew's note also highlights a distinction that I didn't make in the previous post that it's worth making. When I say it's helpful to have an outside Director, I'm not saying this means you need to go find the most independent contrarian thinker you can find. I'm talking about companies in startup mode. You want bring in an operating CEO with whom you already have some comfort and familliarity, and preferably someone that has some understanding of your business. Matt and I knew each other prior to his joining the BoD at FeedBurner, and since he had instant credibility with three of our investors, knew the market, and operated a company in a similar but more mature market, he was a great choice for us.
Who are people I would NOT choose as outside directors in a startup? Executives from very large companies. Large companies and small companies think about things differently than small companies, and you want somebody that is intimately familiar with the tradeoffs of limited resources. You want somebody that gets the challenges of growing the company from an operating loss toward an operating profit, and you want somebody that isn't going to big company you to death. As a silly example, if you're discussing sales comp, it's not very helpful to have an SVP from Motorola sit across the table and say "well, we took the top 20 folks to Barbados for a week and that worked great!". I also don't think you want a noted academic that's not currently in an operating role. Many startups, frequently those launched by folks either still in school or just out, frequently bring in a noted professor in an advisory or Director role. I don't really think this is a great idea. Yes, it's helpful to have somebody in the room who's thinking big thoughts once in a while, but you don't want the professor of marketing sitting on the board of directors of your startup when it's time to talk about whether you should refresh the options pool. The person may be brilliant, helpful, and enthusiastic about what you're doing, but don't make them a Director. Get an operating CEO that knows all about the kinds of things you're dealing with and all about the kinds of things you're going to be dealing with.
And now, here come the emails from the academic community. Yes, I know there are a great number of academics sitting on the boards of some of the greatest companies. Google itself had the help of a trusted academic advisor in its early days. I am only referring to bringing in an outside Director onto a BoD for a startup in which the board dynamics are 100% different from the board dynamics of a large public company. You want somebody you can turn to in a meeting and say "How are you guys dealing with this IRS section 409A discussion" or any of the other 50 things that are only going to be addressable by somebody currently in an operating role.