[Guest article by Sanjay Anandaram, entrepreneur turned investor.]
You’re delighted to have successfully raised capital. You can now execute the plan and grow the business. One of the first things you do is hire senior sales and marketing people. You negotiate their compensation with them and are about to issue an employment contract. Then you remember that you’re supposed to get the approval of the board before hiring certain categories of people. The board does not approve the hiring. You feel humiliated, dejected and angry. The board is upset that you didn’t consult them before taking the decision to hire. Soon, the relationship sours.
You get irritated and annoyed with some board members because of the enormous micro-managing that they do. It seems that every little decision needs to be run past the board leading to frustratingly long decision making. In addition, you feel upset that you are no longer the driver of the company but just enacting someone else’s decisions. Not a conducive environment for a company to blossom in.
First and foremost, it is important to realise that accepting capital from an investor will lead to their taking board seats in your company. Often times, your company might not even have a board! So a board will need to be formed and board formalities and procedures as enshrined in the shareholders’ agreement will need to be followed. Having a board is supposed to serve several purposes. These range from corporate governance (“Is the company compliant with the law?” “Is the largest vendor to the company also the CEO?” “Is the company being run effectively and efficiently?”) to financial discipline (eg. regular reporting of financial data and management analysis thereof) to advice, counseling and develop and leverage relationships.
It is important to understand that there needs to be total transparency and trust in the relationship between the board and the entrepreneur CEO. This implies that information is shared in advance often times going beyond the legal obligations of the agreements. Bad news is to shared before any good news (“we just lost our best sales person” or “we lost two big sales orders this week” to “we will not be able to meet our numbers”) and not camouflaged if trust is to be developed.
The guidelines of operation need to be also discussed and understood between the two parties. Back-seat driving is to be avoided by the board members by constantly advising the CEO about each and every activity. Another no-no is micro-management where, say, the CEO is questioned on the compensation being paid to each and every individual in the company or requiring approvals from the CEO even to buy office stationery! This is absolutely not good for the company. The CEO needs to be polite but firm in case the board members demonstrate back-seat driving and or micromanagement. It is usually useful to have frequent meetings in the early days to ensure that both parties are comfortable with the protocol being followed.
The entrepreneur needs to be therefore be very careful prior to accepting money from an investor. As mentioned before in these columns, it is imperative for the entrepreneur to do QCs (quality checks) on VCs! Not just on the firm but on the individual member of the VC firm who will be dealing with your company. There needs to be due diligence by the entrepreneur as well on the investor as well.
It is a good idea to have a mix of investor, founders and outside independent directors as board members in the company. Having an odd number of members helps break any deadlock. Usually, 3 to 5 members is sufficient for a young company. Independent directors are usually compensated with some stock or cash or both. It is a good idea to have some stock compensation as it aligns the interests of the board member with that of the company. The board should demonstrate maturity, agility and skill set in decision making that’s relevant to the small growing company. Having the right balance in the board is as important as having flexibility as well since many times, things don’t go according to plan. There needs to be an understanding of the business, the entrepreneurial situation and a realization that no business plan is cast in stone. There needs to be flexibility and adaptability by the board to the changing situation inside and outside the company.
What do you think?
[The article first appeared in FE. Reproduced with author’s permission.]
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