"What can I expect from my board of directors? That is a question I am often asked by first time entrepreneurs.
This week I'll comment on that topic and give you help anticipating and managing your board.
- The board is your new boss. Even if you own over half the shares, you will still have to debate with the board of director members what you are going to do, how well you have been doing and your compensation and all the troubles the startup is running into. That's legal. It is in your incorporation bylaws. You cannot get around it. As soon as you have formed a board of directors for your corporation, you get a new boss.
- The board represents the investors, not you. This may sound difficult, but that is the way corporations work. The board is responsible for making decisions in the best interests of the shareholders. You are considered one of the shareholders, so that is in your best interests. But if you start messing up managing the company, then you are exposed and can be terminated. The investors expect good, positive results. Either you deliver or they will find someone else to do so.
- The board votes using special privileges. Preferred shares are what investors get when they invest cash in your startup. That gives them control of the voting of the important decisions of the startup. Voting on your job is one decision, your compensation is another and the big decisions about what the startup is to do next is another. All the rest of the people in the company get common shares, the less expensive shares used for stock options and founders' shares.
- There are no surprises. All the powers of the investors are spelled out in the terms of the deal with them that you signed. The details are in the "term sheet" you got when they offered to invest in your startup. Hopefully you read the documents, discussed the consequences with your lawyer and are now living with the results. There is no excuse for you to be surprised if you did your homework.
- You are not CEO forever. As soon as you have one investor, you are exposed to termination for lack of results (or other sins). No longer is it "your company". No one on the board expects you to be fired, nor do they plan on it. But you should start planning on your successor the day you have your first board meeting. That is most likely to happen.
If you do not like what you have just read, if you insist on being CEO indefinitely, then do not seek outside investors. It is that simple. The startup will be yours as long as you wish.
But if you accept cash from an investor, the game changes. Now you have to execute and deliver. You are in the spotlight, on the hot seat, expected to do amazing things with this startup. If you doubt that, ask the investor.
BOTTOM LINE: Knowing what you get with a board of directors can help you decide on when and who you choose to form a board. That will give you realism and wisdom. Boards are not all bad (I'll discuss their good side tomorrow). A great board can help you convert your idea into a great, enduring startup. In fact, it can help you build an unfair competitive advantage.
I wish you The Best on your Adventure!