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Understanding the Purpose of Your Board of Directors

This deck is for entrepreneurs as part of a series of observations and tips on building an effective board. This is Part 1. In its simplest form, the board of directors is a group of elected or appointed members charged with the responsibility of overseeing your company’s activities.

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Understanding the Purpose of Your Board of Directors

  1. 1. Understanding the Purpose of your Board of Directors by Brady Bohrmann, Partner at Avalon Ventures
  2. 2. About Brady Bohrmann Brady has over 20 years of experience as a venture capitalist and operating executive in both information technology and biotech. His focus is on early-stage investments and backing talented entrepreneurs. Throughout his venture capital career, he has worked with over 75 companies. He currently is a director or observer of many Avalon portfolio companies, including Backupify, Chart.io, Cloudant, Inc., Conjur, Indix, Juliet Marine Systems, Kaltura, Kinvey, Memrise, Nanigans, Pingup, Redbooth, Selectable Media, Simulmedia, The Happy Cloud, Twinstrata and Vook.
  3. 3. This topic is Part 1 of a four-part series by Avalon Ventures on how to build an effective board.
  4. 4. Two hours into a recent board meeting, my mind was fried.
  5. 5. My eyes were glazed and my thoughts were wandering randomly before settling on this question…
  6. 6. “Why do some board meetings leave me energized and others suck the very life out of me?” I did the math and came to the sobering conclusion that in the past 15 years, I’ve spent thousands of hours in meetings like that one.
  7. 7. In this deck I will give an overview of the purpose of your board and how to optimize its effectiveness for your company.
  8. 8. Understanding the Purpose of Your Board In its simplest form, the board of directors is a group of elected or appointed members charged with the responsibility of overseeing your company’s activities.
  9. 9. The Structure of Your Board The structure of the board is spelled out in the company’s bylaws and typically includes: • The number of directors • How each director is appointed • The minimum number of times per year the board must meet
  10. 10. The Primary Responsibility The primary responsibility of your board members is to represent all shareholders—not merely their individual interests. You will often hear this described as a fiduciary obligation.
  11. 11. The Fiduciary Obligation A fiduciary obligation is composed of the three legal concepts: • Good Faith: The presumption that all directors will deal honestly and fairly when making decisions, regardless of the outcome. • Loyalty: Directors must put the interests of the company ahead of their personal interests. • Duty of Care: Attempts to define a standard, often referred to as the business judgment rule, whereby a director owes a duty to exercise the judgment an ordinary person would use under similar circumstances.
  12. 12. Investor Board Members For venture-backed companies, investors will typically exercise control over their investment by requiring: • One or more board seats • A series of protective provisions • Special voting rights spelled out in the investment documents
  13. 13. an example: The sale of a business may require your investors’ consent. A subtle (and often misunderstood) distinction is that it is perfectly acceptable for your investors to vote in favor of something as board members, but block the very same activity by exercising their voting rights or control provisions.
  14. 14. The Foundation of Your Board The concepts of fiduciary obligations and voting rights may seem foreign at first (or even like overkill for an early stage company). If properly observed, they form the very foundation of your relationship with the board—and through it, with your stakeholders.
  15. 15. an example: There will be times (e.g. when raising capital, selling the company, or taking it public) when your stakeholders may question if you have properly fulfilled your obligations to them, so developing, understanding, and acting on these basic principles will serve you well.
  16. 16. The Next Area of Consideration The next area entrepreneurs should consider when building a board is how to best compose the board. See our next deck, The Entrepreneur’s Guide to Composing Your Board.
  17. 17. Learn more! Visit http://avalon-ventures.com/blog for more actionable advice on early stage startups, VC funding and other entrepreneurial tips.

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