Brad Feld - Startup Boards

Benefit corporations don't differ much from traditional C corporations. Changing to a Benefit Corp from a C Corp is straightforward and simply requires a change to the corporate bylaws. While third-party certification isn't required, many companies choose to be certified by the non-profit B Lab to meet rigorous social and environmental performance standards, accountability, and transparency. Brad's VC Firm, Foundry, became a B Corp in 2016 and has been a B Corp advocate since then. 1

At the core of the B Corp movement is the idea that all companies share a duty to build responsible businesses for their employees, customers, and communities. There's a current view that businesses that treat their constituents well can attract and retain employees better, innovate faster, grow more quickly, and create more value. Additionally, some entrepreneurs assert that they are trying to create a better world through the daily actions taken by their businesses. By integrating responsible practices throughout an organization, companies can build better businesses while at the same time being agents for positive change.

While B Corps require a different philosophy of governance than LLCs or C Corps, the board's general role and attributes are similar. Consequently, the fundamentals of building and leading a board of directors remain the same.

In conducting board duties, numerous decisions have to be made. Directors aim to function with transparency and conduct their affairs in the most diligent manner, yet certain outcomes can lead to lawsuits. It's an occupational hazard.

Issues may arise from existing shareholders who believe that the directors didn't act in the interest of all shareholders or get appropriate approvals. In certain situations where the corporation fails to meet its federal or state obligations, such as taxes, environmental safety, or occupational health, the government can initiate action against the corporation. Former employees can sue directors for a variety of reasons.

Corporations indemnify their directors and officers through their bylaws and indemnification agreements with individual directors. Indemnification is the first line of defense for both your board of directors and your officers. Indemnification includes expenses (including attorney's fees), judgments, fines, settlements, and other amounts reasonably incurred with any proceeding, arising because such person is or was an agent of the corporation.

However, startups are generally cash-constrained, and any legal action will impact already scarce cash resources. As a result, the second line of defense is a solid D&O (directors and officers) insurance policy. Such a policy helps preserve corporate funds. In certain situations, corporations become insolvent and yet have lawsuits lingering on. D&O insurance becomes the only source of your legal defense funds in these situations.

D&O insurance offers protection to the board of directors and the corporation's officers. Insurance pays for defense costs and can cover some or all damages. Early-stage (pre-revenue/product development) startups should aim to procure between $1 million and $3 million in coverage, typically costing $5,000–$10,000 per year. As the company matures, these amounts should be revisited and increased for the actual size of the company and current market norms.

D&O policies will have several variables, including the scope of coverage, the annual premium, deductibles, limits on the maximum amount covered, and the term of coverage. As with any insurance policy, you should negotiate carefully with several vendors. At the minimum, make sure you understand what the policy covers concerning the following:

Director and officer wrongdoings within specific terms. The policy definition of “wrongful acts” needs to be understood clearly by each director. Fraud or criminal conduct may be obvious. On the other hand, negligent acts or “intentional harm” can fall into the subjective category. Also, the insurance should cover directors from the actions of other directors or officers. Minor changes in policy language can have a significant impact on costs.

The cost of indemnifying directors and officers.

Defense costs only or defense and damages? Watch for limits and exclusions. The broader the coverage combined with limited exclusions translates to a high premium.

Exclusions state things not covered by the insurance policy. These can include misconduct, blatant fraudulent acts, willful breaches of laws, or criminal conduct. Also, certain exclusions can eliminate coverage when one director sues another, or the corporation sues the director.

Selection of counsel: In some policies, the D&O insurance company has the right to select defense counsel, similar to your car insurance company picking the shop that can repair your car when you have an accident.

The process of filing claims, approving defense expenses, or conditions of denial of coverage need to be understood clearly.

Ensure that the corporation's general liability coverage insurance policy does not duplicate the coverage with the D&O policy. It's easy to get overinsured and pay too much when your insurance broker is eager and not acting in your best interest.

An insurance broker will identify the insurance provider and offer a quote. Your board should be actively involved in studying the various options and the selection of an insurance carrier. Don't change coverage or let the policy lapse without input from your board.

1 1.Seth Levine, “Joining the B Team,” VC Adventure, May 18, 2016. https://www.sethlevine.com/archives/2016/05/joining-the-b-team.html(accessed January 17, 2022).

A board without defined roles will never be as effective as one that has defined roles, even in its simplest structure. There are different ways to assign roles to directors and rotate them through these roles. Being clear about roles and expectations is critical, so board members know their responsibilities.

Boards need a leader. Historically, this role has been titled “chairman,” although we prefer to shorten it simply to “chair.” More recently, as the debate over the split between chair and CEO has intensified, a new construct, a “lead director,” has emerged. For most purposes, “chairman,” “chair,” and “lead director” are interchangeable.

While a founder or the CEO is often also the chair of the board, there are plenty of situations where you want a board chair to be different from the founder or CEO. For some investors, this is a requirement for them to invest.

If your lead investor has experience as a board chair, that's often a good solution. However, many VC investors have no experience as a board chair, lack an understanding of the role of a board chair, or have a history of overplaying their role as board chair. You may run into the VC or potential board member who says, “I'll only serve on your board if I can be the chair.” Be wary of this and do your diligence into the person as a potential board chair.

A board chair's role differs from that of the other board members and requires subtle and deft interpersonal skills. The following are characteristics of a good board chair:

Ensures Alignment: The board exists to help the company be successful. But definitions of success vary. A good chair keeps an eye on the big picture and ensures each meeting is a step in the right direction by working with the CEO on the meeting agenda. When someone gets off track, derails a meeting, has a divergent agenda, or causes other random disruptions, the board chair refocuses the board meeting.

Is a Good Facilitator: The board meeting is where information is shared and decisions are made. People want to be heard, yet loud voices often drown out quieter ones. Some board members focus on showing how smart they are, while others lock horns around trivial issues. A good chair allows all voices to be heard, draws out the quieter participants, and gets all the relevant information on the table while driving the discussion to a decision.