Startup 101 – Composing your Board of Directors

As a founder, one of the critical yet often overlooked tasks is forming your board of directors. Picking the right composition of your board is the difference between having a functional company that is productive and competitive, and those that are deadlocked and hampered by greedy, self-interested individuals that make the process of decision-making near-impossible.

Your board of directors need to serve as promoting and helping execute the vision of the founders, rather than encumbering. They need to provide insight and guidance, help the young entrepreneurs navigate with the knowledge and expertise they have learned over time, which is in their interest, being the ones that have thrown money at your company.

Just as you would pick developers and engineers that build synergy in your team, the same needs to be said of directors. Being smart about your composition, the numbers, as well as who gets represented is critical, as you will be spending lots of hours in the office, and just like the need to be able to get along with your other founders, the same applies to your board. So how do you compose your board of directors?

Whom should sit on the board

Your board of directors can vote, so you need to have the right board member, that complements you, she or he is able to share your vision, and trusts you. That person needs to bring experience to the table, and diversity. If they are in finance, investor, legal, and more importantly, they can offer their expertise on those on the board, and provide particular advice. They could also be the type that are well-connected, and know how to navigate Silicon Valley, and have networks to tap on to. 

Don’t have people who don’t actually provide distinctive skills and just occupy a chair, but rather focus on getting people that together, can provide the wealth and depth of knowledge to cover vital operational matters.

Your board of directors need to trust you, as CEO, to executive your vision responsibly. They fell for your pitch deck, and while they can provide their expertise on other matters (such as legal or financial), they can provide oversight but without the ball-and-chains. Another important thing directors can bring is outside perspective, that are independent. They don’t necessarily have to be an investor of your company but can bring an outsider’s perspective to the table, 

TERMS AND BY-LAWS

Board of directors should normally serve for around 3-4 years, so setting a term-limit to that long allows for an appropriate refresh of the board’s brains trust, rather than recycling the same personalities and their knowledge. There should also be clear deliniated division of responsibility and powers as far as decision-making goes.

“When writing bylaws, you should be sure to clearly state who has the ultimate authority for making decisions about the company, whether the advice of the board is binding, and whether things like compensation or employment decisions are the board’s responsibilities or fall with the company’s management team.” (source: entrepreneur.com)

DON’T COMPOSE A BLOATED BOARD

The size of the board, like government shouldn’t be massive. Too much of a democracy can hinder decision-making, so choose to have the right size of people serve on the board. Generally, you have  common directors which represent the common stock and it’s shareholders, so in this case, one or two of the founders. 

When you raise money, you then would have preferred directors, representing your preferred stockholders (preferred stocks) consisting of lead investors and make decisions serving the interest of the investors. You would probably want to limit how many of these you have, to one or two. 

Independent directors are outsiders that come in with an outside perspective on helping decisino making. These would be those that we mentioned earlier, such as attorneys, technology experts, ex-entrepreneurs. They should not hold any stock in the company, but rather help push decision-making along, and help break the deadlock in the board-room. Around 2-3 perhaps. 

“As for the size of the board, business professionals say there isn’t one answer that will suit all companies. Most recommend having a body between seven and 15 members, but the important thing is to make sure to find the right balance for the size of your company. If the body is too small, the board won’t have a diversity of opinion; too large and it could get unwieldy and difficult to organize. ” (source: entrepreneur)

Capture the Attention of Venture Capitalists with the 10|20|30 Rule


A man I respect a lot, @guykawasaki, who has worked with Apple, Google and has been behind a lot of great venture projects under Garage Technology Ventures, evangelizes a great approach towards capturing the interested investor or investors, without over-burdening them with unnecessary crap. It’s called the 10|20|30 ruleSimply put, it means:

10 Slides in your presentation

Humans aren’t meant to read more than 10 concepts in a meeting, so 10 is the most optimal number of slides a person can read and internalize. If you need to go beyond 10 slides, it means you can’t articulate your business well enough and perhaps should re-think your venture. 

20 Minutes

You have 20 minutes to pitch your 10 slides, allowing the rest of your time to be taken up by questions from the audience. Less is more, and being succinct captures imagination without inundation.

30-Point Font

Don’t have essays up on your slides, use 30-point fonts to force yourself to be concise. More text isn’t more convincing but rather the opposite, it means you are nervous and need to continuously justify your claims and hypotheses. 

Instead, fewer text allows for impressions to be embossed in the audiences minds, 

 

Guy suggests you focus on the following points which venture capitalists care about the most:

  1. Problem
  2. Your solution
  3. Business model
  4. Underlying magic/technology
  5. Marketing and sales
  6. Competition
  7. Team
  8. Projections and milestones
  9. Status and timeline
  10. Summary and call to action

 

 

Startup Lingo: What are Convertible Notes?


Continuing on from my first article on what is Common Stock, we now move on to understanding what are Convertible Notes, in our quest towards understanding the lingo you will need when dealing with Venture Capitalists.

What is a convertible note?

As a founder in the early stages of your startup looking to get some cash to build your infrastructure, you would take out what is called a convertible note, a loan that eventuates into equity when your company has a bit more operating history and you can substantiate a fair price down the line. 

This debt instrument is essentially unsecured, and allow you to defer defer having to unfairly decide how much your company is worth during seed rounds, because you may still be composing your team amongst other things, which would certainly increase your company value if you somehow hire superstars. 

You usually raise between $100 and $2 million dollars. 

How does a convertible note work?

Convertible Notes usually come with a maturity date, where the note as well as interest rate (usually between 1-to-3 years) needs to get paid back. You get the money usually immediately but you have to defer the number of shares you as the founders distribute amongst yourselves until the next round of financing, when a more accurate evaluation of your company can be ascertained. 

Discount Rate: The discount rate establishes how much you will be compensated for the additional risk you take on by investing in a company before the series A investors. For examples, if you invest using a note with a 20% discount rate, and the A round investors wind up investing at a price of $1/share, your note will convert into equity at $0.80/share and you will receive 25% more shares for the same price.

— WeFunder.com (https://wefunder.com/post/17-convertible-notes)

At that stage, the loan you have converts into shares along with a conversion discount which rewards your investors for the additional risk they took to invest early, prior to the pricing of your company.

The convertible note valuation cap is another form of rewarding the investors that take an early-risk on your venture, by setting the maximum price your loan will convert to into equity (in case your price evaluation somehow explodes next round of funding).

To translate that into a share price, you divide the valuation cap by the series A valuation. Lets say you invest in a startup using a note with a $3 million cap. If the series A investors decide that the company is worth $6 million dollars and pay $1/share, your note will convert into equity AS IF the price had actually been $3 million. By dividing $6 million by $3 million we get an effective price $.50/share. That means that you will get twice as many shares as the series A investors for the same price. (source: WeFunder)

The good and the bad

For investors, they provide great downside protection whilst deferring pricing of your company until you have enough time to substantiate your ideal company evaluation, making it an attraction proposition for investors especially when you don’t have the ‘street-cred’ in Silicon Valley. The cons include the potential to dilute your stock pricing due to having a valuation cap that is too low (too high a discount).