Creating Independent Board Seats. Don’t Do It

My company, Healthie, has a board. It’s made up of myself, my cofounder, and the VC who led our seed round.

We do a board meeting every quarter, and it’s invaluable. It gives my cofounder and I a chance to break out of the day-to-day grind, and do long term strategic thinking. Our third board member brings a wealth of experience and insights, sanity checks us, and pushes us In a way that is motivating and not overbearing. The non-founder board seat comes with the ability to approve or veto certain things, but it has never once been an issue, or forced us to do something that my cofounder and I disagreed with.

As that dry background shows, I have had nothing but positive experience with our board, and boards in general. That said, I vehemently disagree with the recent advice I’ve seen saying that founders of early stage companies should voluntarily create boards, and that those boards should have independent board members. This advice is bad for founders because it introduces new risks outside the founder’s direct control, without giving the founder any additional upside.

At the founding of a company, the founders have 100% of the risk and 100% of the upside. When founders reduce the share of upside they have (by diluting themselves), they do so to either reduce their risk, or to increase the absolute value and/or liquidity of their upside. This is true when you are raising a round, giving employees or advisors equity, or even choosing to sell.

When founders create a board as a condition of fundraising round (like we did), it can make sense. We traded some control of our company, and share of the upside, for money and help that we were confident would lead to a greater overall absolute return for us. The board seat that we created and gave away was part of the control that we sold, and we got something back for it. When founders create board seats, just because they read that it’s a good idea, they gain nothing and lose both control and upside. Common arguments for creating and expanding boards don’t address or explain these negative repercussions on founders.

One major pro-board argument is that independent boards ensure better corporate governance and better company performance. I disagree.

Early-stage founders should be, both in self-confidence and actuality, the best people to make final decisions for their company. The unique mix of insights, passion, and drive that lead founders to start a company, also means that good founders are uniquely positioned to ultimately make the right calls. Founders should seek advice, review data, and listen. However, impeding the founders’ ability to make hard and unpopular decisions jeopardizes what makes early stage companies able to punch above their weight.

In addition, a board preventing bad governance or behavior, means that the founders initiated (or at least condoned) bad behavior. If you’re a founder who does that, why are you reading this? If you aren’t, why get get dragged down by unrelated people’s bad behavior?

Following this advice does not only lead to you immediately giving up control of the board, it also leads to further equity dilution! Fred Wilson’s advice is to to give every independent director 25 basis points per year. If you appoint the recommended two, and have them for four years, that’s two percentage points (more if you raise money in between) that you’ve lost, for the pleasure of having less control over your company. In my experience, the people who give the best advice either do it for free because they like helping, or because they have invested in the company. It is very possible to get more advice then you need, without resorting to further dilution.

The second argument is that large boards, with diverse board nominees, increase diversity. That is fundamentally true, but is a cop out/founder-unfriendly way to solve the very important problem of diversity in tech. The most heralded (and most committed) way to increase diversity, is to hire or wire. If VCs know diverse people who’d be amazing board members, why not invest in them? If you’re a founder, why not go all out trying to hire them? If you don’t know them well enough to do either of the above, how can you be comfortable with them representing your best interest on your board?

When we got our initial term sheet, I (as the CTO) was not included on the board, and we would have had an independent board member instead. That was the area of the term sheet where we put our foot down the most. As a founder, I can’t imagine not being in the room when some of our company’s largest decisions were made. Whether you hate them or respect them, there’s a clear precedent of successful founders, like Zuck, maintaining board control and building large companies. Don’t give in to pressure or online advice to give up board control.

Have comments, or disagree? Let me know on Twitter

TL;DR Watch the below video, and replace “Teen Suicide” with “Creating Independent Board Seats”