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Published 01 August 2012 05:27, Updated 02 August 2012 05:00
Every company is required to have a board of directors. Putting together the right board is critical, as is having the right founding team and hiring correctly.
Having an A grade idea but a B grade team behind you is a disaster waiting to happen (and unfundable).
Having an A grade team but a B grade idea, however, works; your star performers will surely figure out an A grade execution plan once you start building the product and talking to customers (or change the idea).
A bad board, or even a couple of bad directors can be absolutely toxic to the company. I know, I’ve been there. A good board mentors and backs up the CEO but at the same time is prepared to ask hard questions.
The size of a board is inversely proportional to its effectiveness, just like all committees. Keep your board small. Three is best – typically, a founder (for example, CTO), the CEO and a non-executive chairman. Five is next best (so in votes, the outcome is clear). Then four, but you’ll have to give the chairman a casting vote. Any other number is bad in my experience.
Of course, the composition is actually determined by shareholders – each director is voted on separately for their appointment and removal – but when you’re starting out, the founders will own most of the shares.
Ideally you will want the chairman (and non-execs) to be experienced and successful in the industry you’re entering. Importantly, all board members need to have operating experience. Start-ups are like a roller-coaster; one day you’re on top of the world, the next you think you’re staring into the abyss chewing broken glass. If someone has run a company before, they’ll know this.
Junior VCs with no operating experience will freak out the minute any bad news comes in and will meddle in the running of the company. This is toxic. At best it can be a huge distraction, at worst it can kill the company. A board’s role is to direct the CEO (hence “director”); the CEO’s role is to run the company with a management team.
The best advice I had dealing with board problems came from a grizzly CEO: “Matt, as CEO of a start-up you have one job and one job only – to keep the company funded. The board has two jobs; to hire and fire the CEO. If they really don’t like what you’re doing, they’ll fire you. So don’t worry about it.”
When you raise venture capital, it’s usual that a venture capitalist will want a board seat. Typically angel investors won’t because their investment will be small and directors do have legal liability over their decisions, or lack of.
Typically in the early stage of a company’s life VCs will push to have a board of five – two appointed by them, two by the founders and an independent non-executive. This is where young entrepreneurs often lose control because the “independent” ends up being not so independent after all. He who has board control can fire the CEO and in effect change the business plan. I’m a strong believer that founders should retain board control until the company is well established.
How do you remunerate the board? Founders shouldn’t get anything while they are still working at the company, and neither should venture capitalists.
I had to deal with a venture capitalist outfit that insisted we pay their partner $25,000 a year, even though he had carry in the venture fund (which owned shares). They insisted on this to invest and our lead insisted on a co-investor to share risk (it was 2001 in the wake of the tech crash).
Of course if one VC got the cash, the other wanted it, too. It was fair to then pay the three non-executives. That meant an expense of $125,000 a year, which was completely unnecessary for a company that had only four people and whose technology consisted of a PowerPoint presentation.
Only remunerate the non-executive directors and this depends on time commitment and how early they join. An outside CEO costs about 10 per cent, maybe 15 per cent, but less as the company matures (millions in revenue).
The chairman is usually pro-rata this on time (say 2 per cent). Someone who is really experienced and there at the start who is critical to getting things going might get as much as 5 per cent. NEDs later on might get 0.25 per cent. Vest all over two years with no cliff.
The people decisions are the most important, make sure you get them right!
Next week: RedBalloon founder Naomi Simson