Deal closed, time to celebrate! But with the clock ticking and the cash burning, founders are all too often hungry for cash and will often concede non financial terms too willingly to get it.
Giving away a seat on the board is one common early mistake. It can often mean you are saddled with an early investor, who has unrealistic expectations and who might block strategic pivots, or even further investors.
Distinguishing Investment, Governance and Management
It is vital founders distinguish roles in investment, governance and management of the venture. It’s possible for an individual to be involved in all three, but it’s got to be clear how and why, with agreed boundaries, different “hats” etc. Otherwise, you get role ambiguity and conflicts of interests emerging.
What does the investor bring?
With this in mind, it’s important to understand who the investor is and their potential role in the venture. Are they a purely financial investor with a specific agenda to earn a high return, or are they a more active investor who can bring real value to networks, decision-making?
Question: Do you really know the answer to this? Often, founders, desperate for investment, fail to do their own due diligence on their potential investor!
Are the strategic agendas aligned?
Boards are decision making units, designed to agree a business model, set strategy and make pivotal decisions. Furthermore, there is a moral and legal duty for Directors to act in fiduciary interest of the company, setting aside their own individual agendas. The issue might arise if the investor had a particular agenda. For example, if they wanted a fast exit, they may veto measures to generate organic growth, like brand building.
How do you communicate with your investors?
Angels are in effect minority investors. They are anxious that their interests are protected. Some investors are laissez faire, and let the board get on with it. More often, they expect to be consulted and involved. Some can be good mentors. Possibly, agreement around these consultative mechanisms might be enough to reassure the angel investor, and encourage them to trust the founder team.
But these issues really need to be discussed in an adult way early on.
What are the full spectrum of options available?
Possibly, you could design a non-executive role, which means they have an advisory role (must be heard), but can’t vote on key decisions e.g. on future dilution, or future investment.
So it’s important for founders to consider the full spectrum of options, rather than be faced with a binary choice. Looking at this issue strategically and consulting all parties can significantly reduces the risks of Board log jam and rupture later on.