The most important advisor a founder can have is the fifth board member. That person is very important. The typical board consists of the founder CEO and one other company officer, plus two venture capital partners, and a fifth board member. Number five should be experienced with startups, know a lot about your new market, and especially have put in a lot of time as a prior board member for other startups. That is a tall order to fill. They are rare, especially outside the United States. Such people are compensated with a cash monthly retainer and sizable stock option. People like myself selective participate as the fifth board person. It is a challenging responsibility that I take quite seriously as others I know also do.
The role is not about breaking ties in voting on disputed issues. The good boards of directors decide the difficult decisions before the board meeting – on the phone and in person – to iron out thorny issues. By the time the board meeting takes place, there is one hundred percent agreement. Number five often negotiates sensitive issues and strong differences of opinion on the board of directors.
In addition, the fifth board member typically fills the role as a mentor to a younger, less experienced CEO. He helps interpret meaning and intent of investors and management. And he makes suggestions on plans and execution decisions based on his industry and managerial experience. He will also bring competitive insight and strategic wisdom.
Picking number five carefully will add a great deal to the quality of decisions and leadership of the startup, especially during difficult times.
It is now expected that startups have several advisors who are not on the board of directors. I expect it will grow as startups continue the trend to outsource as much as possible while focusing on perfecting their special expertise. Groups of advisors are common in new enterprises these days. Life science startups perfected their use and it has spread to information science and Internet startups. Scientists expert in their specialties are gathered monthly for working sessions to discuss progress of the work of the technical staff. Internet e-commerce and gaming companies have retained experts from industrial and entertainment domains such as Hollywood and television. Like the fifth person on the board, they are paid with a retainer and stock option.
Managing all those non-employees is a lot of work. That is one of the key jobs of the CEO. It is not for the vice presidents to do. The objective is to obtain scarce expertise from a few very special people. Executing to achieve that objective often leaves the CEO at the end of his day feeling like he has been herding cats.
Tomorrow I'll start a series on the emotions of leading a startup.