- May 20, 2016
- Posted by: admin
- Category: Investment|Startup
Perhaps you have noticed that dynamics on startup boards change as the Company progresses, or indeed doesn’t progress. You may notice that cracks are appearing between the Non-Executive Directors (NEDs) and Executive Team. Things are not as rosy as they once were. You have started to feel tensions build around the board table and there’s an elephant standing in the corner of the room to which everyone is purposefully oblivious!
Why do Startup Boards go bad?
So, the love-in has started to fade. Why? There are several reasons why a startup board may no longer gel.
- An investor may have become over bearing and is trying to micro-manage;
- Conflicts of interest may arise around strategy;
- Power struggles with big ego personalities may be starting;
- The board may be trying to run the company’s day to day executive decisions and processes;
- There may be resistance to growth in certain areas based on different risk perceptions; and
- Objections being raised on additional funding given the dilution this will mean to existing investors.
Of course, maybe you yourself are you the problem – is your ability to run the company failing? Are personal agendas taking precedence?
There are a million reasons that may cause frictions among the board and a bit like everything else in life, there is no text book solution to any of them. Clearly we can’t discuss every issue that may or may not arise but let us discuss some of the things that require attention from the outset.
What you can do as CEOs to manage your Startup Boards
From your perspective as the CEO in the company you need to be fully aware of the things you can and cannot do – and if you do the things you shouldn’t, what the repercussions will be.
Firstly, it is important that you to remember that this is no longer “your” company – you have accepted investment, probably for equity, and therefore have shareholders. These individuals are also owners and hold a portion of “your” company. You can no longer do what you like, the judge, jury and executioner you are not. You are effectively an employee, albeit an important one, but there are higher powers and you will be judged by them! They can make decisions with regards your status in the company, if you break the rules you leave yourself open to the punishment.
It is for these reasons that it is exceptionally important you have read and understood your shareholders agreement – all of it, not just the bit about fees, how many shares you get and your annual leave allowance. Do you understand what bad/early/good leaver means? Do you know why these can arise and what their implications are? Do you know what matters require consent and whose consent is required? Do you know what a disclosure letter is? What warranties were agreed to? What board terms are agreed? What your responsibilities are? All of these can come back and bite you in the proverbial behind – and leave a wound that can take longer to heal! It is your responsibility to understand what you have signed up to and the implications if you do not adhere to it. This is where a really good solicitor helps – someone who can translate everything to you in English, not lawyer mumbo jumbo speak as this can be baffling if you are not used to it.
Keeping yourself in line will certainly minimise the risk of you doing something you shouldn’t – and at this stage no-one will accept excuses such as “my lawyer didn’t tell me that part”!
Secondly, in our experience, one of the issues with start-up boards that can lead to problems can be its size. At the outset, the board is usually small generally consisting of you, possibly another Executive Director from the company and investor representative(s) (e.g. VCs, angels).
Work together, not against each other
Running a startup and being a CEO within a company for the first time is a daunting experience and it is understandable why some startups lean heavily on their board at the outset. However, there is a difference between leaning on startup board for support and letting them run your decision making and effectively the company. Especially in the early stages, when startup boards are small and largely consists of investors, it is easy for CEOs to fall victim and find themselves sitting on the sidelines jumping when they are told to.
It may seem superfluous to have any other board members at this stage, the additional cost of an extra NED or two might be the biggest influencing factor in this case. However, having a totally independent NED on the board who is not an investor, shareholder or founder will bring an impartial, unbiased mind set to the table. It is worth considering this from the start; it can bring a level of neutrality, further expertise, and obviously add numbers.
Having set up our own business and successfully attained funding, we have first hand experience of what works well and what doesn’t work well on a startup board. If you could like help and assistance in this area please contact us on [email protected] or visit our business mentoring page.