In the past, I have discussed how to run board meetings effectively and how to work best with board observers. Continuing that conversation around best practices, this article is focused on a much overlooked but really critical part of board composition — the independent board member. The independent is (1) someone not beholden to either investors or the company, (2) who brings a unique value to the board and is also (3) often the power broker between their conflicting interests.
1) Not Beholden To Anyone
At least in theory. In practice, the independent is often appointed by management with consent from investors and tends to be more entrepreneur-friendly. Independent board members have the same fiduciary responsibilities as other board members ie governance, confidentiality and liability. Unlike other board members, they are often engaged in another business which means they have to be mindful of both commitment and conflicts of interest in taking the board seat. Also, whereas other board members are not usually compensated, startups often extend shares to an independent to keep them more engaged. Finally, an independent is in some ways also the least protected since a board could replace them at any time. Not to say other seats can’t change — management does occasionally shuffle (eg a founder gives way to a new CEO) as do investors (eg a smaller VC gives way to a newer, larger VC) — but an independent is typically the most fungible.
2) Brings A Unique Value
Do you need someone with deep scientific expertise? Or that has key relationships in your industry? Does the reputation of the independent significantly improve hiring and branding? For all of these reasons and many others, an independent can be a huge asset beyond just an impartial voice in the boardroom. When the stakes are high, say the startup is considering an IPO, the independent could be a CEO who took a similar company public and thus give much practical advice and strategic credence. There is also a class of very experienced retired or professional angel investors that specialize in being independent board members, make sure to consider them. Occasionally they are even tapped as the eventual CEO of a company, after all an independent who got to know a company well for many years is going to be more well informed than almost any other candidate.
3) The Power Broker
The independent typically comes into action in the series B. The thinking is most startups will have a 3-person board in the series A with two seats held by the company and one by the lead investor. It is in the series B that the board gets expanded to 5 people, with two seats still held by the company, two by investors representing the lead of the A and the B, and the independent. Unless a company has different classes of shares with different voting rights it means at the series B investors and management are equally matched. So the independent can sway a vote either way, which is why it is even more critical he/she be someone with enough wisdom to serve on a board, typically grounded inconsiderable experience.
The bottom line about an independent board member — choose them wisely! A single board member can truly change the trajectory of a company and independents that maximize impartiality, bring unique value and balance power are vital towards that goal.