Startup founders: how to leverage boards when seeking investment
A discussion and FAQ on what founders will want to consider
What are some of the best practices to help founders effectively leverage their boards, particularly when seeking investment?
Jessica He of Torys’ Emerging Companies and Venture Capital group sat down with Hamzah Nassif, partner at Real Ventures, to discuss key considerations for founders of startups when working with their boards. Prior to joining Real Ventures’ Toronto office, Hamzah worked in a venture builder in the Middle East, where he invested in companies and helped founders build their early stage startups.
You can watch Jessica and Hamzah’s conversation by clicking on the video below, or keep scrolling to read through their written FAQ that covers these issues.
Video: How to leverage boards when seeking investment.
FAQ: Maximizing the relationship with your board
Q: What are some of the considerations you look at when deciding whether you want to take a seat on the board of a startup? What is the average size of an initial board?
Real Ventures is primarily a seed stage investor, so we are usually the lead investor in what is typically a startup’s first institutional round. As a result, we generally ask for a board seat. We have a playbook for building successful ventures and taking them from seed to Series A and beyond, so we try to be very engaged with our founders - not just on the board level, but on a monthly or even weekly basis. This is driven by a thesis around adding value to companies at that early stage, which I believe really underscores why lead investors will usually ask for board seats.
Usually at this early stage, there are 3-5 board members which consists of the CEO/Founder and a lead investor partner, plus potentially another cofounder or co-investor.
Q: How should founders approach replacing board members as the company continues to raise more money?
Usually this is dictated by the terms of subsequent rounds. If the company is raising a Series A or Series B, the lead investor of those rounds will often include a paragraph specifying what the board makeup should be in order to close the investment. From the founder’s perspective, having those terms makes the discussion a little bit easier. This is also a well-known part of the natural evolution of a company, so board members will expect it.
Q: How are observer seats usually filled?
With observer seats, there isn't a magic formula for how many observers can or should be on the board. When it comes to the group dynamics of the board, you as a founder want to keep board member and observer numbers under control. Two common ways observer seats arise are when:
1: you have an early investor who stayed on the board after the Series A or B and now the company is going in to a Series B or C with new investors coming in. If the existing board member is pretty engaged with the company they may be asked to remain involved to act as a sounding board for the group. Having a non-founder shareholder who knows the history and context of the company, and who understands things from an investor standpoint, is very valuable to board members.
2: observer seats may also be explicitly asked for from strategic investors. For example, an enterprise software startup may receive a term sheet from a large enterprise—this could be a typical client that also wants to invest in the company with a thesis around potentially acquiring it in the future. That strategic investor will likely want to be privy to board discussions, particularly around any potential M&A that can impact the value of their strategic investment. However, as there may be a conflict of interest, they may ask to observe board meetings rather than have an official board seat.
Q: What should founders consider when they are building out their board?
Your VC selection will determine your investor board members so, before accepting the term sheet, ask yourself whether you are comfortable with that individual partner becoming a board member.
Additionally, whenever you're considering adding a board member ask yourself: what value can this board member bring to the table? Is it their domain knowledge, their operational experience as a senior executive, or have they previously been a successful founder in this space or with a startup using a similar business model? Is it their current connections in the market, or is it something else? And then ask yourself, how does that align with your company's goal and how can they bring value to you and your business based on the plan that you have?
Founders should have a deliberate approach to thinking about the board makeup and should use that to anchor and guide discussions with their existing and incoming board members.
Q: When should a founder let their board know that they are considering their next institutional round?
You should establish frequent update calls with your board. Sharing monthly updates about the business performance, financials, and where the business is generally at, will give your board a level of awareness and knowledge such that they can anticipate when you’ll need to raise your next round. If you are not bringing up the discussion about fundraising when the business needs additional funds, they will be.
If you receive a term sheet, you should think about who the investors are and if they are a good fit for the company and its future growth. It is important to identify if the term sheet parameters match what you, and your investors, are aspiring to for the next stage of your company’s growth.
Q: How have you seen founders leverage their board in the fundraising process?
The board can help you prepare for fundraising. They can help you hone in on the right story and pitch and strategize around the group of investors you want to reach out to. As a founder, you are expected to leverage your investor board members and their networks to get warm introductions to potential investors so don’t be afraid to ask for that. At Real, our seed to Series A fundraising playbook breaks it down into a clear process, highlighting the different steps and timelines from how to create your pitch to what is involved in scheduling those first meetings.
Having said that, ultimately a business has to sell itself, so it’s important for startup CEOs to remember that funding the business is not anyone’s obligation, but that the fundraising process is ultimately their responsibility, and having a business that is attractive to investors makes that process easier. So if your business model is just fundamentally not working, have that discussion with your board as soon as possible so they can help you course correct early on.
Q: What advice can you give to founders on how to run, and prepare for, a board meeting?
First, just to reiterate, don’t limit your interactions to just board meetings—constantly communicate with your board. Second, have a pre-board meeting briefing with each of your board members in the week before. This allows you to socialize the agenda so that no one is surprised by a topic. It also gives people an opportunity to ask questions in advance so you are not wasting meeting time answering questions you could have already addressed. And then, of course, share materials at least three days before the meeting so that everybody has time to come to the meeting prepared.
Before COVID we would recommend that our founders host an informal pre-meeting dinner to help strengthen the group dynamic. Hosting a virtual dinner can also be really helpful.
Q: How long should board meetings be? Is there a good time frame that founders should aim for?
There is a common practice that is not necessarily obvious to first time founders. Usually, we structure board meetings into two sessions; a formal monitored session and an informal strategy session.
The formal session walks through all the board governance and housekeeping items on the agenda, such as approving any stock option grants to employees, or approving any outstanding directors’ resolutions. This usually takes 15 - 20 minutes max and takes place first.
The informal strategy session is like a workshop for the business and, in addition to the board members and observers, will usually have other attendees such as the CFO, the head of sales or the VP of product. They will provide an update on their department and may not stay for the full duration of the session. This session usually is where the bulk of the time is spent and can take anywhere between an hour and a half to four hours.
Q: Do you have any stories that you can share of instances where a very competent founder completely mishandled their relationship with their board and, in that case, what happened?
It is very difficult to ruin an entire relationship, particularly as the people around the table all have a vested interest in your success as a founder and the success of your business. So, it is very hard to have that relationship broken. But it is possible to do things that play with the level of trust between the board member and the founder.
One pitfall is setting incorrect expectations and having surprises in the board meeting, especially if the company is running into distress. You should disclose any material changes in your company’s projections, operations etc. to the board in a timely manner so it doesn’t catch them by surprise at the board meeting.
A second pitfall is when a founder comes to a meeting and presents a problem but does not make any clear recommendations or present any concrete options or alternatives—then issues can arise. You end up having many different opinions about the problem and how to solve it, instead of having a clear, structured discussion around how to solve the problem.
It also looks bad for the CEO if they are asking the board to present solutions to a challenge that they themselves have not come up with potential solutions for. That triggers concerns around whether you can run the ship. The board is there to help guide you but you're the one with your hands on the wheel and the one who’s ultimately responsible for managing the business. When coming to the table with a challenge, always make sure you present alternatives and ensure that you've done your homework and can have discussions around recommendations and alternatives. Show that you've done the thinking and have a clear ask around your plan.
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This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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