When Investors Join Your Board
Most entrepreneurs underestimate the difference between a board of directors during the startup stage and a board of directors once you've accepted your first check from an investor who wants to join your board. Some years ago, I went through this transition when professional angel investors joined the board of the company I had founded and changed the dynamic of the meetings. Since I have lived to tell the tale, here are some tips that could help you create a board when you're raising money for your startup:
1. Advisors are not directors, and directors are not advisors.
As the cliché goes, if you're looking for a friend, get a dog. As an entrepreneur, if you're looking for an advisor, get a consultant. Don't rely on your board to give you advice. Their job is to hold you accountable for goals that drive your business's success. Along the way, most good directors will also give you advice--but that's not their primary role.
Most entrepreneurs like the idea of recruiting an advisory board. Often, it provides instant credibility. For first-time entrepreneurs, it also gives them confidence that smart people believe in their business concept and are willing to lend their reputations to help the company grow.
In reality, it takes a lot of work to make advisory boards provide advice that's helpful to your company. You'll be lucky if two or three advisors will roll up their sleeves and provide advice that's detailed enough or informed enough to guide your decision making. Most advisors will lose interest after six to 12 months, and you'll need to recruit a new group to help you; if you're not careful, may end up parting with more equity to get them involved.
2. Give your initial directors a term limit.
During the founding stage of your business, some attorneys will encourage you to expand your board to include more people than just the founders. If you're like most entrepreneurs, you may be tempted to ask your closest advisors to join your board even if they aren't investors in the enterprise. This isn't a horrible idea, despite the guidance provided above about keeping advisors and directors separate.
However, if you do invite advisors to join your board, be sure to set a term limit. This is simply a matter of setting expectations through an e-mail or letter. Also, ensure that your attorney has drafted your bylaws and financing documents with the appropriate governance rules giving stockholders and founders the ability to change the composition of the board.
You very likely will want the ability to change directors as you get close to a round of financing. Even if you don't plan to seek future financing, you may find that the advisor-director is no longer very helpful after a few months, and it will be much easier to have the conversation about parting ways if it's associated with a pre-planned end of term.
3. Make sure your directors are willing to sign what you put in front of them.
A large part of a director's job in a startup is to sign legal paperwork. If you plan to raise money from angel investors without changing the make-up of your board, then your directors will need to approve option plans, capitalization tables and stock charters, and various corporate resolutions. Avoid directors who are inexperienced and too cautious to sign what you put in front of them. I would recommend having at least one process-oriented director on your board who likes to follow the rules of good governance. It will instill good habits at your company, which in the long run will save you legal bills and avoid administrative costs.
4. A director who invests $25,000 is different from a director who invests $100,000.
Most angel investors tend to make investments ranging from $10,000 to $500,000, averaging about $25,000 for most high-growth startups. When you invite an investor to join your board, the dynamic of board meetings is likely to change from an advisory, problem-solving environment to a performance, accountability-driven environment. However, in my experience, this only happens when you invite larger investors with more at stake. Angel investors who have contributed $25,000 tend to behave more like advisors even if they're on the board.
5. Learn to become a chairperson.
One of the hardest lessons for entrepreneurs is to learn to balance the roles of CEO and chairperson of the board. Since you spend 99 percent of your time serving as CEO and chief bottlewasher in your enterprise, the ability to act like a board chair for a few hours every quarter is not easy. It took me three years to learn this.
To do the job well, you have to remember that most directors who attend board meetings aren't thinking about your business between meetings, so you need to remind them of the corporate objectives regularly and take full ownership. During the startup stage, the essential administrative roles of a board chair are to run the board meetings, set the agendas and oversee the fiduciary responsibilities of the board. One way to get some insight is to attend board meetings as a guest at other companies--or by joining a non-profit or charitable board.