Something I have learned in making the transition from founder to investor is how important it is for founders to take control of their board early in the company’s life. I don’t mean control like having all the votes, but in the sense that it should operate as a result of intentional design.
The other thing I have learned is that founders get bad advice about setting up a board. They are told it doesn’t matter(1), that it can wait(2), that it’s a burden to manage(3), that it’s largely to serve investors(4).
The result of this bad advice is a board that is an accumulation of rights from investment rounds, rather than a carefully crafted tool that serves the founders, the investors, and the shareholders equally well. I have seen how this can come unstuck, and where poor board alignment in tough times can result in decisions that have lasting consequences.
There is plenty that founders and investors can do differently, because board meetings should be the highest leverage meetings they attend - but only if the board composition and function is carefully managed.
When people think of boards, they picture stuffy conference rooms and stern faces. Board meetings are usually either pedestrian or panic stations. What this perspective fails to grasp is that if their board reaches crisis mode, it can behave in unexpected and potentially harmful ways.
Money is a continual concern in startups, but when it becomes scarce, it can impact the company’s ability to pay its debts and remain financially viable (its solvency). Solvency is a major consideration for a board and critically, also extends to personal liability for each director. So it’s inevitable that personal risk tolerance will play a part in how the board operates when the runway is short.
As a founder, I’ve navigated companies that have sailed very close to the wind. Managing cash is a tough and hairasing activity - often changing daily. As a director, I have been in board meetings where this high-wire act has caused great disruption. The gap between operators and non-executive directors can get dangerously wide. These are not the times to be testing the cohesion of the board.
Managing cash and liabilities is one of a set of existentially important decisions that the board oversees. Without a board that is consciously constructed and carefully managed, its operation in high-stakes situations can be unpredictable. Founders may find themselves watching helplessly as their future seems to slip from their control.
As an early-stage investor, we’re often the first outside director at a company. Although we are clear about why we seek appointment as a director, it’s rare that founders at this stage have set clear expectations for what they want from their board.
Founders agreeing to investment terms with director appointment rights shape the board’s direction, consciously or not. Each new investment and shareholder agreement amendment adds another layer to the existing structure. After several rounds of funding, a startup might find itself with a board dominated by investor representatives, each with their own agenda. Attempts to restructure the board often face resistance, as when a founder tries to reduce the number of investor seats but encounters pushback from long-standing board members reluctant to give up their position.
Spending time on board structure and composition in the early stages may seem like a waste of time. But agreeing to terms now that shape the future of the board in ways that are hard to change later can be a high cost of putting it off.
There’s a power dynamic at work during a fundraising, which impacts a founder’s ability to set the board up for success. Instead of adding this to the list of terms being negotiated, it is important for founders to take control of their board from the outset. There are several ways to set up the board for high-function in good and bad times.
When these are done before outside directors are appointed, it makes it easier to get incoming investors to agree. With these things already in place, incoming directors are clear about their responsibilities and other conditions. The longer the delay in setting things up, the harder it gets to change.
I wanted to write this article because my experience has been that there are many ways that early-stage startup boards can work better, and founders and investors alike have opportunities here.
It is true that there are legal definitions for the responsibilities of directors in Australian companies. These cannot be secondary priorities, but they aren’t the totality of what great boards can help achieve. I also believe that the nature of boards evolve as the company grows, and the design and composition must evolve over time as well.
Board meetings are not for investors to get up to speed and check off governance boxes. Notwithstanding what ASIC says about the purpose of a board, I believe that early-stage boards need to significantly support the growth of the founders. If, as investors, we profess belief in the importance of the founding team, the board meeting has to be a forum for learning and improvement and more than anything of support and growth.
The key reason for founders to take control of the structure and operation of their board is to improve the chances that board meetings will deliver a strategic premium to founders, and in turn help to ensure the company’s success, benefitting all shareholders.