What to avoid when you build your first board

October 27, 2018

 

Vicky Brock’s speech to the Scottish Parliament Workshop on Young People on Boards. Business in the Parliament Conference 26th October 2018: Beating the Drum for Scottish Business in the Year of Young People.

 

The startup founder’s view on building and joining a Board

 

I’m a startup founder, now on my 5th company. I have sat on boards as both an executive (as in I work in the business as an employee) and as a non-executive director (NXD) who is not employed by the organisation.

 

I’d like to share a few thoughts on what I wish I’d known when I was building my own board, and some things you may want to think about as you consider joining a board for the first time.

 

I’d like to start with a few real-life decisions I have had to make over the years as part of a board. All these decisions were made in my first 3 months of service as a non-executive director, when I’d had fewer than 24 hours on the job:
 

  • I’ve fired two CEOs (different boards, but it’s a bit of a pattern!)

  • I’ve hired one CEO

  • I’ve turned down a multinational company’s investment bid

  • I’ve accepted a takeover bid

  • I’ve triggered a sequence of events that led to a company’s liquidation

  • I’ve created and terminated entire business streams and the people’s jobs within them
     

My point is that boards make the most important decisions about companies - including your company, if you are a founder or CEO. And these hard decisions often have to be made by individuals despite them having had no more than a few dozen hours of experience in the job, and virtually no day to day involvement in the company.

 

As founder you will be just one vote on that board, and as a non-founder CEO you may not have a vote at all. Which is why building the right board for your business, and business stage, matters so much. And why, whatever your age, being part of those decisions as an NXD yourself is so important.

 

 

Here’s a few things to avoid when you are building a board, particularly your first board of directors:
 

  • Falling for the myth that you need adult supervision & that they inevitably know best.
     

  • Having unrealistic expectations about what an NXD can bring you - they are unlikely to be a fairy godmother or godfather who can solve all your sales, networking or investment problems, whatever they say.
     

  • The ‘same old guys’ who are on everyone else’s boards. The sad fact is, these people are likely to come highly recommended to you by your accountants, lawyers and advisors - but as you will find out later, this is often for reasons that don’t serve you and your company.
     

  • Those who have only ever worked in very large firms, or in firms several stages ahead of where you are.
     

  • People who have no connection to your market or customers in anyway at all.
     

  • Supposedly independent NXDs recommended by/or closely connected to your investors. This is tipping the cards against yourself, because when it really matters, they will vote with your investors, as that is the relationship and status quo they are most motivated to preserve.
     

  • People who ask for 15% to 40%+ of your company and/or a substantial fee when you are not generating revenue, or are still early stage. It is simply not appropriate - nor would any ethical, credible NXD even ask - for such as substantial equity stake in a young company, simply to be a director. And while some public sector and more established companies do pay directors - it is still usually a modest fee, and many organisations (even fairly large ones) do not pay directors at all. So, if your choice is still between paying employees (or yourself) and paying a director, then it is too soon to be hiring a paid NXD

    Additionally, it is your job as a founder to obsessively protect the equity and share cap of the business - you should only trade equity if it markedly grows the value of the company to do so. It doesn't matter if you are giving an NXD 0.1% or 1% if that more than directly multiplies the value of the company (and in effect grows the pie bigger for everyone). But it is beyond shocking to hear real life and very recent incidents of potential directors asking for 40% (That is not a typo, I really did mean 40% not 0.4%)!! Very few investors adding hundreds of thousands of pounds or even millions of pounds of cash into your company would ask for as much as 40% So what could an NXD possibly bring that is worth anything close to that?


    Be proactive, not reactive and think only very, very modest amounts of equity that can be correlated to increased value. Encourage them to buy in to the company (possibly at a 20-25% discount on the share price). Or think time, contribution or accomplishment based share options, for example 1% after or accumulating over 24 months.

 

And here’s what to look for when you recruit, interview and reference candidates for your board. (I highly recommend you do not skip the referencing, especially by asking around amongst your peers and other founders/CEOs connected to the candidate):
 

  • Diversity in every sense, age, gender, perspective, cultural, personality type - but especially diversity of thought. It can be really hard to see your blind-spots when you're all aligned on the same vision and shared work culture, but others can help break your assumptions and reveal your 'unknown unknowns.'
     

  • Right size, rise time. Don’t build a FTSE style big board when you’re only tiny startup. It is distracting and it can take the decision making on the wrong path.
     

  • Someone who listens, learns, & engages with your team, vision and values. Make sure you and your team are ready to be inclusive of difference and diversity, otherwise you risk bringing in people who are then marginalised and become disengaged.
     

  • A person who understands and accepts the stage of your company and the unpaid, or very modestly paid nature of the role as set out in the terms. Always have a simple sets of terms that include role description, voting rights, a term limit (typically 1 to 3 years) and state clearly whether the role is unpaid/paid. If it includes options or equity, spell out the time frames, vesting terms and associated objectives. Be proactive, not reactive, according to your business needs.
     

  • Seek out someone who clearly recognises that they know less about your day to day business operations than you do, and are not seeking to run your company, but are highly informed and comfortable sharing their experience of the big picture, strategy and the potholes and challenges ahead.

 

What to think about before joining your first board

 

I joined my first formal board at 28, but you’re never too young. In fact there is a lot to be gained in all aspects of your career by practising with other people’s money first - I urge you to do it. In advance, start learning how to read business financials, because as an NXD it is important to be able to decode for yourself the veracity of what the executive are telling you about the company's financial health. Read the annual reports of organisations that interest you to get familiar with the vocabulary. You can download the PDFs. The things you read in these reports of big companies are the things boards of all sizes have to worry about, in their own ways.

 

But be sure you do no harm. I’d recommend you start somewhere where you can learn safely and make an impact, before you look to the types of organisations where there are major challenges. Cash strapped startups and charities in dire financial trouble probably shouldn’t be your very first board - because there are typically some urgent decisions, with serious legal repercussions, to be made. You do have specific legal responsibilities as a trustee or NXD, so it is important to learn the art of governance as quickly as possible once you are on the job (it makes little sense before, in my view). It is easier to do that in a relatively stable organisation, that is reasonably well governed, rather than within a chaotic or catastrophe struck basket-case. You can move on to those soon enough, as there's always plenty of those roles going!

 

Consider observing a board meeting before you make a decision, or participating in an advisory panel first. (Founders, advisory panels are a great way to build a halo of skills and experience around you, without the commitment, formality and legal complexities that go with a board).

 

And don’t expect this to make you rich! In many young companies, the investor nominated non-executive director is the only one who gets paid, because the company has a contractual requirement to do so in the terms of their investment agreement. (Which it is why it’s worth trying to break into that network, even if it takes a sledge hammer to do so!) The other directors on the same company’s board may all be unpaid, or have a nominal fee or small options agreement. On smaller charity or non-profit boards, not only is it very likely to be unpaid, you’ll probably be covering your own expenses and may even have an implied or stated expectation to financially contribute to the organisation if you are able.

Finally, I just learned a phrase I wish I knew before - especially when I wish recruiting my own board - and that’s that non-executive directors should have their noses in, and fingers out....

Make sure you and your board candidates understand and adhere to that!

 

 

 

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