I had a group of ex-students out to the ranch who were puzzling over a dilemma – they’ve been working hard on their startup, were close at finding product/market fit and had been approached by Oren, a potential angel investor. Oren had been investing since he left Google four years ago and was insisting on not only a board seat, but he wanted to be chairman of the board. The team wasn’t sure what to do.
I listened for a while as they went back and forth about whether he should be chairman. Then I asked, “Why should he even be on your board at all?” I got looks of confusion and then they said, “We thought all investors get a board seat. At least that’s what Oren told us.”
Uh oh. Red flags just appeared in front of my eyes. I realized it was time for the board of directors versus advisors talk.
Roles for Financial Investors
I pointed out that there are four roles a financial investor can take in your company: a board member, a board observer (a non-voting attendee of board meetings,) an advisory board member, or no active role. I explained that as a non-public company there was no legal requirement for any investor to have a board seat. Period. That said, professional venture capital firms that lead a Series investment round usually make their investment contingent on a board seat. And it sounded like if successful, their startup was going to need additional funding past an angel round to scale.
In the last few years, it’s become more common for angel investors to ask for a board seat, but I suggested they really want to think hard about whether that’s something they need to do now.
“But how do we get the advice we need? We’re getting to the point that we have lots of questions about strategic choices and relationships. Isn’t that what a board is for? That’s what we learned in business school.”
What’s a board for?
I realized that while my students had been through the theory it was time for some practice. So I told them, “At the end of the day your board is not your friend. You may like them and they might like you, but they have a fiduciary duty to the shareholders, not the founders. (And they have a fiduciary responsibility to their own limited partners.) That means the board is your boss, and they have an obligation to optimize results for the company. You may be the ex-employees one day if they think you’re holding the company back.”
I let that sink it for a bit and then asked, “How long have you worked with Oren?”
I kind of expected the answer, but still was a bit disappointed. “Well we met him twice, once over coffee and then over lunch.”
“You want to think hard about appointing someone to be your boss just because they’re going to write you what in the scheme of things will be a small check.”
Now they looked really confused. “But we need people with great advice who we can help us with our next moves.”
Advisory Board (…)
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