They had it all: credentials, connections, and cash.
People with these skills seem like the ideal Board Member.
Usually they are, but not always.
A founder I work with brought two people onto their board who checked all three boxes. Both seemed like a gift from the governance gods at exactly the right time.
But as soon as major investors came knocking, both moved to push the founder out of the CEO role and off the board, during that very investment round. Not because the company was underperforming, heading in the wrong direction, or pivoting to an AI company.
They attempted the ouster solely because they saw an opportunity to capture more of what had been built. With the founder gone, they could change the terms of the pending investment, install their own CEO, and attempt to claw back shares from the founder.
Luckily, the founder held on, thanks to provisions in the bylaws and charter, and shareholder voting.
They won, but the victory came at a cost: weeks of time. Legal fees. Mental bandwidth that should have gone toward the very raise that triggered this tactical throwdown. Sure, they closed the round, but there’s no way of knowing how much easier it could have been, or how much more they could have raised.
Board composition can prove costly, and is about more than credentials, connections, or cash.
Board composition is a character conversation.
The person who seems like the right fit when the company is grinding might not be a great fit when the big investors come knocking. They may go from being aligned with what the company is building to being aligned with how much more they can line their pockets.
Before anyone gets a seat, I recommend asking them questions and listening carefully to how they answer.
Here are three questions I tell my clients to ask potential board members:
“Tell me about an investment that went badly. What happened, and how did you handle it?”
Look for specificity and personal accountability. The biggest red flag is an answer that blames the founder entirely or pivots quickly to the potential board member’s “numerous” wins.
“How do you think about the balance between short-term returns and long-term company building?”
Look for genuine nuance. A red flag here is an answer that defaults immediately to exits, multiples, and spreadsheet math without talking about vision, mission, or company building itself.
“Tell me about a time you were wrong.”
Look for ease, humility, and maybe even a bit of humor. Someone who has been around the block finds this question straightforward and has no problem providing a real answer.
A red flag is deflection, or a story where they were technically wrong but ultimately right. In this case, the answer matters less than how quickly and honestly they get to it.
The bylaws and charter matter. The other documents matter. Voting matters. But none of that is an excuse for not being careful about who you let in before the money shows up.
If you are preparing for a capital raise and evaluating your governance structure, the Denham Dispatch breaks down the governance decisions that matter most before and during a raise. Subscribe below.