Shareholders always want a seat on the board. But if you do this right it will be better for your company, shareholders and you, says veteran angel investor Bill Payne.
Many entrepreneurs and company owners are terrified about losing control of their company. They want to grow the company quickly; they need investment, but they hate relinquishing board control, says American early-stage company (angel) investor Bill Payne.
Bill has invested in more than 50 start-up ventures since 1980 and chaired dozens of boards and investment committees. NZBusiness caught up with him at the last Angel Summit in Dunedin, where the self-confessed Kiwiphile had returned to share his young, high-growth company boardroom wisdom with New Zealand’s angels.
Until an entrepreneur raises capital they don’t really need a board, just a group of good advisors. In fact, having a bunch of people on your board before you seek investment could actually impede your capital-raising efforts, says Bill.
“I’m not in favour of most entrepreneurs having a world-class board of directors until they get funded. They can have a world-class board of advisors, but not directors because it’s difficult and often very uncomfortable to remove directors.”
The biggest mistake many business owners make is putting the wrong people on their boards, such as their lawyer or their accountant. Something Bill just calls “goofy.”
“Those folks just love to bill for their time. If you need them, by all means invite them to a meeting, but most of the time they bring little or nothing to the strategies involved in growing companies.”
Another mistake owners make is asking a family member or close friend to join their board, he says. “My advice to all entrepreneurs is never hire anybody you can’t fire.”
But if you raise capital it’s inevitable your board will change. Investors always want a representative on the board of their investee companies to keep an eye on their investment. But that’s no bad thing, says Bill. If the investor director is selected carefully they will help the company grow; keep shareholders informed (vital if you ever want to secure more capital); help open doors to customers; and secure a good and timely exit to maximise everyone’s return on investment.
These days experienced angel investment groups specify the shape, structure and responsibilities of the board they want in their investment term sheets. This makes it very clear what’s wanted and makes sure any potential issues are confronted before the deal is signed, says Bill.
Current best practice dictates a five-person board comprised of one or two investor directors, representing all investors; one of the founders of the company – the one charged with being the CEO; plus someone else to represent/support the CEO such as a mentor; plus one or two independent directors.
Independent directors and investor directors should be selected on the skills they bring to the company, not the size of their investment or because they chaired the angels’ due diligence committee (the current default). If you have an investor director skilled in high growth company governance, for example, you should look at hiring an independent director with appropriate sector knowledge who could identify and introduce potential company buyers down the track, says Bill.
It’s also best to pick local directors who can attend regular, monthly board meetings, as people are too easily distracted if they phone or Skype into a meeting. Things change so fast in a high-growth company that any lack of attention could prove fatal, says Bill.
As for paying your new directors, well that’s also a no-no, he says. “No one should be paid in cash until the company is cashflow positive.”
Bill advocates the US norm: giving directors options, such as one percent of the company vested over two to four years.
So what can you expect your new board to do for you? Well at least this, says Bill:
• Provide regular progress updates for shareholders from the CEO.
• Ensure the governance of the company is carried out to the letter of the law.
• Keep a beady eye on the financials of the company and assess when the time is right to appoint auditors.
• Assess whether new capital is needed and help in raising that capital, or bring the company to a swift ending if that’s the better option.
• Ensure the CEO is up to the job as the company changes by seeking regular updates from other senior employees/founders.
• Ensure everyone keeps their eye firmly fixed on the end game: when and how to exit the company to provide the greatest return to the founders and the shareholders.
For more about building, investing in and (most important of all) selling high growth companies, visit: http://billpayne.com/
Lesley Springall is an Auckland-based freelance business journalist.