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The Independent Board Member - Early Stage Startups

The document discusses the importance of independent board members for startups. It notes that founder ownership decreases with each funding round while investor ownership increases. By Series C, investors typically control the board. The best boards have independent directors who take a broader view than investors. However, only 40% of Series B companies have independent board members. The document recommends that founders add independent directors as early as the Series A round. An independent director can advise the CEO and build strong relationships between the CEO and board while serving as an impartial representative. Careful selection of independent board members is as important as hiring key executives.

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Confidential
WUNDERVC
The Independent Board Member
– Early Stage Startups
Christian Dahlen, July 2023
Confidential
WUNDERVC 2
Startup founder ownership decreases with each round and
investors frequently own the majority of shares at Series B
Stage Idea Series
Pre Seed
Series
Seed
Series
A
Series
B
Series
C
Founder ownership 100% 90% 75% 55% 35% 25%
Years since founding 0 2 3 4.5 6 8
EXAMPLE
Confidential
WUNDERVC 3
The board of directors is controlled by investors no later than
Series C and often earlier
Seed Stage
• 1 Seed investor
• 2 co-founders
Series A
• 1 Series A VC
• 1 Seed investor
• 2 co-founders
Series B
• 1 Series B VC
• 1 Series A VC
• 2 co-founders
Series C
• 1 Series C VC
• 1 Series B VC
• 1 Series A VC
• 1 to 2 co-founders
EXAMPLE
Confidential
WUNDERVC 4
Investors have their own set of interests, but the best boards
are independent
It is the rare investor who takes a broader
and more holistic view of the company. So
while investor directors are a necessary evil
in many companies, they should not
dominate or control the board.
An investor controlled board can be the
worst possible situation. Investors can have
a narrow set of interests that involve how
much money they are going to make (or
lose) on their investment.
Boards that are full of vested interests are
not good boards.
The founder should control the
board,
and independent directors should
control a board where the founder
does not control the company.
The more independent minded
the board becomes, the better it
usually serves all shareholders.
Confidential
WUNDERVC
Duty of loyalty is the most paramount fiduciary duty board
members have to their shareholders
5
1. Duty of Loyalty
You must place the interests of the organization /
shareholders above your own.
2. Duty of Care
You must act as a reasonable and prudent person would
under the same circumstances.
3. Duty of Candor
You must disclose material facts in a timely manner,
either about yourself or about the company.
4. Duty of Confidentiality
You must not disclose sensitive or confidential
information.
Confidential
WUNDERVC 6
Independent director positions are often left vacant
• The independent director is one of the most important
people the founder ‘hires’
• Shareholders Agreements often – but not always - provide
for an independent director as part of the board.
Unfortunately, this effort is often deferred, especially early
in the life of a company. The seat is often left empty due to
the excitement of the new relationship, the hurry to get the
product out, or the lack of understanding of the value of
an outside director
• Founders and investors should invest the time and effort to
identify the right independent board member and bring
them on board as soon as feasible

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The Independent Board Member - Early Stage Startups

  • 1. Confidential WUNDERVC The Independent Board Member – Early Stage Startups Christian Dahlen, July 2023
  • 2. Confidential WUNDERVC 2 Startup founder ownership decreases with each round and investors frequently own the majority of shares at Series B Stage Idea Series Pre Seed Series Seed Series A Series B Series C Founder ownership 100% 90% 75% 55% 35% 25% Years since founding 0 2 3 4.5 6 8 EXAMPLE
  • 3. Confidential WUNDERVC 3 The board of directors is controlled by investors no later than Series C and often earlier Seed Stage • 1 Seed investor • 2 co-founders Series A • 1 Series A VC • 1 Seed investor • 2 co-founders Series B • 1 Series B VC • 1 Series A VC • 2 co-founders Series C • 1 Series C VC • 1 Series B VC • 1 Series A VC • 1 to 2 co-founders EXAMPLE
  • 4. Confidential WUNDERVC 4 Investors have their own set of interests, but the best boards are independent It is the rare investor who takes a broader and more holistic view of the company. So while investor directors are a necessary evil in many companies, they should not dominate or control the board. An investor controlled board can be the worst possible situation. Investors can have a narrow set of interests that involve how much money they are going to make (or lose) on their investment. Boards that are full of vested interests are not good boards. The founder should control the board, and independent directors should control a board where the founder does not control the company. The more independent minded the board becomes, the better it usually serves all shareholders.
  • 5. Confidential WUNDERVC Duty of loyalty is the most paramount fiduciary duty board members have to their shareholders 5 1. Duty of Loyalty You must place the interests of the organization / shareholders above your own. 2. Duty of Care You must act as a reasonable and prudent person would under the same circumstances. 3. Duty of Candor You must disclose material facts in a timely manner, either about yourself or about the company. 4. Duty of Confidentiality You must not disclose sensitive or confidential information.
  • 6. Confidential WUNDERVC 6 Independent director positions are often left vacant • The independent director is one of the most important people the founder ‘hires’ • Shareholders Agreements often – but not always - provide for an independent director as part of the board. Unfortunately, this effort is often deferred, especially early in the life of a company. The seat is often left empty due to the excitement of the new relationship, the hurry to get the product out, or the lack of understanding of the value of an outside director • Founders and investors should invest the time and effort to identify the right independent board member and bring them on board as soon as feasible
  • 7. Confidential WUNDERVC 7 Only 40% of Series B boards have an independent director
  • 8. Confidential WUNDERVC 8 Founders should add external, independent directors as early as Series A Seed Stage • 1 Seed investor • 2 co-founders Series A • 1 Series A VC • 1 Seed investor • 2 co-founders Series B • 1 Series B VC • 1 Series A VC • 2 co-founders Series C • 1 Series C VC • 1 Series B VC • 1 Series A VC • 1 to 2 co-founders EXAMPLE 1 independent director 1 independent director 1-2 independent directors
  • 9. Confidential WUNDERVC 9 The CEO relationship is the basis for the independent director’s role First line adviser when things aren’t going well – ‘the first call’ Non-judgmental sounding board for early ideas Adviser to the CEO on HR issues Reviewer of initial compensation proposals for the management team
  • 10. Confidential WUNDERVC 10 An independent director helps build a strong relationship between the CEO and the board No other duties other than those to the company, its management team, and its shareholders since they are not big investors The independent director’s combination of independence and knowledge brings a different type of guidance to the startup’s team, but also helps to build a strong relationship between the CEO and board as a whole No limited partners to report back to or any other type of investment agenda, unlike the investors on the board Often the most operationally experienced board member =
  • 11. Confidential WUNDERVC 11 Independent directors facilitate boardroom communication First line of communication with the board outside the boardroom Overall feedback to the CEO on how a board meeting went and what should be changed for subsequent meetings Purveyor of information and decisions from the board to the management team and from the management team to the board Independent board members serve as a counterweight to the VC board members in a way that benefits the company, and hence also the VCs
  • 12. Confidential WUNDERVC 12 Great independent board members add relevant experience in addition to being ’neutral’
  • 13. Confidential WUNDERVC 13 Picking and appointing an independent board member is at least as important as hiring key startup executives Write a job spec -> Agree spec with your investors -> Create the list of options Get to know the potential board member Discuss key directions for the company Do they align with the vision and approach? Do they have key insights or interesting feedback? Explore goals and aspirations What do they want to do with their career or life? How does the role on the board impact this? Ask for help with the company Where will they pitch in? What are they good, or bad, at providing? Ask for something relevant to their experience Introduction to someone in their network, help on structuring a deal, advice on a current strategic issue? Check personal rapport and attitude -> Alignment of vision -> References
  • 14. Confidential WUNDERVC The best startup boards are independent and founders should add external, in dependent board members as early as Series A An independent director helps build a strong relationship between the CEO and the board and facilitates boardroom communication Picking and appointing an independent board member is at least as important as hiring key executives