Startup general interest

Why it can be useful to have a board of directors

By November 18, 2013 4 Comments

Ari Newman has a guest post on Brad Feld’s blog which gives some great examples of how a board of directors can be useful. This is not your usual ‘access their rolodex and give strategic guidance’ faire which gets regularly served up, but more about how a board can help founders avoid mistakes, including mistakes that can kill a company.

Ari makes his points vividly by telling a story about a fictitious company he calls ACME SaaS corp which raises a convertible debt round and then doesn’t form a board. One of the many differences between a convertible debt round and an equity round is that convertible debt rounds don’t stipulate investor presence on the board of directors. At the highest level Ari’s point is that even though they don’t have to companies that have raised convertible debt should appoint investors to their board to subject themselves to regular scrutiny and make sure they regularly open the kimono to trusted advisors. That process forces companies to properly think through their budgeting and cash out date and make sure they face up to difficult situations early enough to fix them.

The story format is great because it illustrates how easy it is to walk unwittingly into problems. As with most forms of discipline and rigour at one level having a board with investors can seem like an unnecessary pain in the ass, but also as with most forms of discipline and rigour they are a great way of optimising outcomes. If you’re not sure you agree with this point I urge you to go read the story.

The caveat here of course is that the board members must be good board members. I recently heard a very famous and successful west coast investor say that 90% of investors destroy value, 9% are neutral and 1% add value. I think that is probably overly dramatic but it nicely illustrates the importance of choosing directors carefully.