Paying VCs for being on your board

Recently I talked to an entrepreneur who just closed his first round and got a VC for a board member. All good and well, however the VC asked to be paid for sitting on the board.

I think that's really strange, because:
- it's immoral: VCs give founders money, than take it away to their own pockets! I wonder what their LPs are saying?
- it's misaligned: First rounds are meant to prove the product or leverage revenue generation, not paying the VC.
- it's wrong: VCs should help their companies, regardless of the fact if they are directors, observers or just investors in the company! It's their job to grow the companies they invest in and they are already being paid for that.
- it's pointless : founders and VCs become partners on the project - the startup. If they start charging each other, the whole point get's lost. Should startup charge VC for their services?

I'm not naive and understand that non-executive director get paid in a well established companies even if they are investors, however with a startup, there is whole different story in my view. Every single friction point is potentially dangerous, and a startups don't need insiders bringing new ones up!

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Board of Directors Meeting Notes

Image via Wikipedia

Writing meeting notes is an art, even though it seems trivial at first. Here is what I came up with:

CEO writes down the take away notes (tasks) for each participants. CEO runs the meeting and sets the pace, he's the one who needs to track the different tasks each participant volunteers for (typically these are tasks like intros, sending reports or data to someone...) and summarizes the take away points in an email after the meeting.

(optional) Somebody (another founder) writes down wider notes that summarize the debate, point by point. Having written notes makes a lot of sense in a couple of weeks time when you have to refresh your memory. However it's quite likely that one cannot run a meeting and jolt down proper notes at the same time.

(optional) Have your lawyer write done formal BoD notes. This is something that I resisted at first, but than realized that makes a lot of sense. A good lawyer will not charge you to dial in to your BoD and will be very valuable at any legal questions you might have. An interest of the lawyer is that he's close by to the company and in the loop, because then he can be much more valuable to the business in the future. And you'll end up with a formal and correct board meeting notes.

Why Europeans don't get the BoDs?

I want to expose a common problem that happens when first time founders get funding and start running the company for the first time. After initial celebrations, the first board meetings can be painful and unexpected. At least that's my take on it. The main reason is in power distance where investors and founders don't operate as partners. And the cause of it is in cultural differences that we bring to the table.  

First a bit of theory: Governing through Board of Directors is an Anglo-American governance mechanism (single tier model). In continental Europe it's quite usual for the company to be governed by the Management Board and Supervisory Board (two tiers). 

This has some important implications. Primary power distance. In a two tier model managers prepare reports, get approvals and respond to request from Supervisory Boards. They often don't debate strategy or operations with supervisors. In BoD model debate is expected and directors steer the course of the company together. 

Funded startups are almost exclusively run by a BoD model. Why? Because investors are used to run companies through BoDs. 

Operationally that means that European or first time founders are expected to work in a model that is unnatural to them, while investors don't understand what's the problem. And that causes frictions. Founders don't know what to say or not, what is expected from them and what not. Investors become nervous since it looks like founders want to hide things with them and almost never get into debate. 

Founders often just accept whatever "suggestion" is being thrown on the table as a directive for the next month. 

And it takes invaluable few months before the discussion becomes productive and that founders and investors learn to play together in harmony. 

Often a few months too long.

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BoD's are run by consensus

BoD's are run by consensus. Period!

And we seek consensus among all participants not just board members.

I cannot imagine how a constructive dialog in a startup is productive if the decision is made by over-voting. In one of the previous posts I explained that you can have also observers and in fact at Zemanta we would routinely have a bunch of them (all representatives of our investors). That doesn't mean that we didn't fought over some decisions. We did, but still when the decision was made, it was accepted by consensus.

However, we always made sure that we had a consensus about important decisions. If the topic was complex, I would routinely prebrief all participants (not just board members) and give them my opinion and my options a few days before.

That ensured:
- we debated the most important topics efficiently and effectively
- investors felt comfortable with the openness and involvement in the process
- we avoided bombshells of unexpected news and views

I don't say that that's the only way, but it sure worked for me pretty well and I plan to stick with it in the future.

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Board of Directors Who's Who

Let's tackle the who's who in the BoD world. Composition will typically reflect the ownership. There are no fixed rules though. At first the board would include all of the founders. For example if a new startup gets founding and two founders own 60% of the company after the investment, the composition of the board might look like:

- CEO (founder)

- founder

- investor

BoD can have even more members, if desired. Trouble with having more than 3 members in the beginning is that typically new investors that join the company in the next rounds will want to have board seat and soon you'll end up with more board members that startup can efficiently handle.

Quite often you have two additional participants at the BoD that are important as well:

- observers

- unofficial observers

Observers are members that have the right to participate at the BoD meeting but have no voting rights. The unofficial ones are the ones who participate there because you allow them to. Typically that might be an associate that helps one of the VCs that's on your Board or a senior partner from one of your investors that would like to stay in touch from time to tome.

I'm a great fan of having all those people at the board meeting as long as they have something to say. At Zemanta we had 5 board members, but routinely ended up having a board meeting with at 10 or 11 participants. And I think we had much better board meetings that we would have if we would formally stick to the rules of who's who at the board. 

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Role of Board of Directors

I'll write a few posts on Board of Directors (BoD), because there are some common misunderstandings about its role and function.

Board of Directors corporate governance tool of choice for most funded startups. It's a common way to formally include investors in running the company. They are other models available, but almost never used in the startup world. 

If you want to find out more about formal definitions and duties of BoD, check the Wikipedia, however for practical purposes the advantages of the board is:

- it gives you the chance to brainstorm with your investors and other wise man about your performance and plans once a month

- it brings all investors at the same table and forces them to switch off their cell phones

- gives legal protection to the management for certain decisions (you need the approval of the board, hence investors)

All other roles are important (appointing of the ceo, approving the budget ...), but rarely on a monthly basis.

If you're an entrepreneur don't view the board just as a once-a-month-reporting session. And if you're an investor, don't push entrepreneurs with unimportant details. Take the time to discuss the business and its course. Reporting can be done on paper (and it should be done upfront), discussion almost never.

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