Don’t Let Investors Boss You Around

You love being your own boss, but will investors in your company let you keep that job?

Taking venture capital – or even just a few thousand dollars from angels – often comes with strings attached.  Be ready for investors to ask for a seat on your board of directors – even if you don’t have one yet!

Julia Stamberger, co-founder and president of Go Picnic, talked to me about taking a round of capital – and a new board of directors – in her Chicago food-service business.  (If you haven’t seen them yet, Go Picnic sells snack boxes to airlines. You’ve probably eaten their food on your last trip through O’Hare Airport!)

Julia was fortunate to attract several investors, including angels and VCs. But all of them wanted board seats … even though the company did not yet have a board!

What Do They Really Want?

Asking for a board seat might be code for something else entirely.

What investors really mean is that they want the right to control how their money is used. They want financial reporting, and they want to be consulted about changes in the business plan. What they may not want is the risk and liability associated with board seats (which will give you all good reason to look at your company’s insurance policies).

Should You Do It?

Should you give investors a seat on the board?  Yes!  The expertise and oversight provided by a board is invaluable. If your investors are angels it is very likely that you’ll get great advice on a number of topics that could otherwise trip you up.

But hang on. There’s a difference between a board member and a boss. The control you give to an investor should not involve day-to-day decisions. If you have to seek investor approval for every decision – like whether to buy paperclips–  you’re headed into dangerous territory for both the investor and the entrepreneur.

Consider Alternatives

If granting a board seat does not suit the situation (or your personality), suggest board “observer” status. This avoids liability while preserving the investor’s “insider view” of operations and financial performance.

Or avoid the whole board experience by entering into simpler contractual relationships with investors. It is possible to take an investor’s money and use it for “project finance” or to create a small “joint venture” between you and the investor (ask me how). These solutions could give an investor some control over just a piece of the company and leave you free to be your own boss.

At Go Picnic, Julia granted two board seats to her investors. And she’s glad she did. Having a board to report to each quarter has kept her focused on results. “The financial reporting they look for [is] not mandated by any other part of your business,” she said. “It’s great to have the discipline [of reporting to a board]. It prioritizes things that are essential for your business.”

Devilish Details

Investors make the best board members because their goals are so closely aligned with yours. As a bonus, they often are compensated only by the gains on their investments rather than salaries or fees. These kinds of details are important. Be sure you negotiate every aspect of their participation, from fees to voting rights to when meetings will be held. Having clear expectations up front will save you a lot of future headaches.

Flexibility and efficiency are also concerns for a board of directors. The most effective boards mix investors, founders, and pure outsiders. Three, five, or seven total members helps avoid deadlocked decisions. A small, balanced board provides the agility and skill set needed to contribute to a growing company.

I think that almost any business can benefit from a board. They take careful planning and a bit of work, but they can also direct you toward rapid growth. So when an investor asks for a board seat, smile and welcome him aboard!

Dedicated to your (Board Directed) profits,

David Worrell