Position yourself for growth in 2017—join us live at the Entrepreneur 360™.
Flash Sale—save up to $200 on registration. Ends Thursday. Secure Your Seat »
Being your own boss may be the essence of entrepreneurship, but that concept is not always compatible with raising money for a growing business. Julia Stamberger, co-founder and president of GoPicnic, knows that from experience: A recent round of capital spurred growth at her fledgling Chicago food-service business, but it also created a board of directors to whom Stamberger, 34, and co-founder Pam Volpe Jelaca, 39, must now look for guidance.
GoPicnic sells snack boxes and packaged meals to airlines, corporate clients, school fundraisers, hotels and event planners. The company's gourmet, shelf-stable cuisine and portfolio of high-flying customers attracted several investor groups, including angels. Stamberger says that from the start, the investors insisted on board seats, even though the company did not yet have a board.
A board seat is a common investor request, says private equity attorney Sandy Presant, national chairman of the Private Equity Fund Practice and partner at DLA Piper. "As an investor, I want the right to control how my money is used," he says. "I want financial reporting on a real-time basis, and I want to be consulted for changes in the business plan." Presant helps entrepreneurs and investors negotiate the tricky business of board formation and seat allocation. He says land mines exist for both parties: Investors may shy away from the liability associated with board seats (an important issue that should be adequately addressed by the company's insurance), and entrepreneurs naturally scoff at giving up too much control.
"The entrepreneur has to be concerned about paralyzing his company," says Presant. "The [level of] control you give to an investor should not [exceed] day-to-day decisions. We call this 'paperclip approval.'" Having to seek investor approval for every decision is not good for the business and is ultimately dangerous for both the investor and the entrepreneur.
If granting a board seat does not suit the situation, Presant recommends more flexible alternatives: Investors could get the information they need as "board observers" without assuming any actual liability for decision making. Nervous entrepreneurs might also avoid the whole board experience by entering into simpler contractual relationships with investors. Says Presant, "A joint venture or partnership agreement can accomplish many of the same things."
At GoPicnic, the founders accepted their investors' terms and granted them two board seats. While there are certainly drawbacks, Stamberger says she now sees the benefits of having a board to report to each quarter: It keeps her focused on key metrics. "The financial reporting they look for [is] not mandated by any other part of your business," she says. "It's great to have the discipline [of briefing a board]. It prioritizes things that are essential for your business."
Beyond the discipline, Stamberger says her board contributes advice and experience. Because board members are compensated by the gains on their investments--rather than salaries or fees--she says they are her best source for cost-effective help and insight.
The most effective boards include a mix of investors, founders and outside directors. Three, five or seven total members helps avoid deadlocked decisions. A small, balanced board provides the agility and skill set needed to contribute to a growing company.
Along with balance, flexibility is the hallmark of a good board/entrepreneur relationship. Stamberger notes that as her business grows, she hopes to tap into the experience and expertise of the new board members. "A board is useful structurally," she says. "If you have good relationships, and they are aligned in helping you run the company, then it's to everyone's advantage."