So have you hit series-A? Are investors asking for a board seat and getting you to start thinking about board composition and reporting. Yay!
Don’t worry, this isn’t that complicated, though you can, of course, make anything complicated, right?
In startup land, things are kept simple since you need to be executing. As you get larger and there is a lot of money at stake, then no shock, this gets more formal and complicated. You may even start having things like compensation committees. Snoozefest.
So let’s cover this basic question about how you differentiate between you as a founder and you being a director and the board of director thing.
Now, firstly, they aren’t strictly mutually exclusive. A founder can be a director and be on the board. In fact, they usually are. Starting out you as the CEO and the other founder (keep it to one) are directors. It’s going to be the COO or CTO, depending on your labels.
Why do you want to be a director and be on the board?
Ok, being a director IS NOT COOL! It means you are on the hook legally for stuff, especially if you go bankrupt. In many countries, if you go bankrupt, you can’t be a director again for a few years and you may have personal issues getting bank loans etc. So take it seriously if a ‘friend’ asks you to be a director. I’ve certainly said no before when it wasn’t my own company!
But the ‘board’ makes the big decisions. You totally want control over the board for as long as you can. So starting out, if you have two directors (as founders) and an investor wants a board seat, you don’t give them 3! You give them one so you founders have 2 and the investor has one. At series A, maybe you give 2 and you add an ‘independent board director’…. who has your back! Why, when it comes to making decisions, you want your own way, right? Well, control is one way to have it by having effective control over the number of directors.
Ok, let’s differentiate between being a founder and a director.
As a founder, you basically founded the company (the implication being you have a lot of common shares!). You may give someone the title of founder or cofounder after you start, but that’s basically an ego thing. You can do whatever you want.
‘Founder’ is not a legal term and there is no such thing as ‘founder shares’ if you are wondering, and man founders and some staff do think there is!
As a founder, you probably own most of the shares (on a fully diluted basis) and therefore have control over the company, but may not necessarily retain control over it in future (after many rounds of dilution). Even if you don’t own the majority of the shares you still retain the title of founder.
Now, what about CEO title? You only have that title in so long as the board agree for you to be the CEO. Yes, you can get fired, and a lot of founders get fired or demoted or given some fancy title, maybe like the president.
So in short, you will always be the founder, you might not always be the CEO.
Board of directors
The board of directors have oversight of a startup and can fire the CEO. In fact, firing the CEO is the only real performance lever that VCs have if they want to mix things up if things are not working out well.
The founders technically report to the board so you kinda want to keep them happy and not be dicks… They really do matter. The only way to get rid of directors is by getting a new important investor who kicks off the old VC and puts themselves there as ‘they have more experience scaling a company and governance’ etc.
The board sets company’s strategic objectives and ensures that all necessary resources are in place to meet these objectives and reviews management performance regularly (Meaning you!).
As I mentioned, the board can include a founder(s), and very likely will for some time, if not till IPO (and beyond). You might lose a director seat if the VCs bring in a new CEO like Jack Barker with an idea for the ‘box’ 😉
There may be many founders, so the CEO is 99.9% a BoD and the others are ‘maybe’ depending on the board structure.
Other directors are:
- Independent third parties (say 2 founders and 2 investors and one independent)
- Investors who lead a deal
Note there is also sometimes a ‘board observer.’ That just means they are allowed in the room but can’t vote… they can speak though (meaning they will talk and try influence discussions). This is only ‘ok’ at series-b. Otherwise never allow it! My mate who heads up a media company’s investment arm asks for an observer seat at S-B as default.
What about public companies?
This doesn’t really matter to you, but let’s just touch on it.
In public listed companies, the majority of board members will be independent non-executive directors.
Independent means they aren’t founders nor investors, right. Non-executive means they aren’t working at the company full time. They just turn up for free coffee and bagels.
The board will meet only a few times a year (e.g. 6-8 meetings) to decide on high-level matters (for a fat fee), such as structural and constitutional issues, governance, approval of overall strategy, approval of significant transactions, mergers, acquisitions, joint ventures, capital expenditure, etc.
You may find that your now public company may even have only two executive directors on board (CEO and CFO) with all other members (around 8-12) being non-executive. At this point in time, the board basically things they run the company and they delegate all decisions on the operational running of the company to the CEO’. Bit of a mind shift, right?
The CEO is accountable to the board and can delegate any of his powers to other executive officers.
Founders start the company, but it’s an ego title, it doesn’t mean anything. You get your board seat so long as you have control and investors want you around.
As you get bigger you get a bigger board and less control. When you get really big, you’re sort of an employee. But hey, you’re rich now, so who cares!
I hope this was useful to help you think about how to start and scale your company. If you need some help figuring out if your business model makes sense or not etc, you can book a one on one call with me and I can help you be less freaked out. Book a time here.
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