Raising funds from outside investors is an important milestone in your entrepreneurship journey. However, while an investment means having more funds at your disposal, it also often means transitioning from running a startup by yourself or with your co-founders to suddenly having to work with outside investors. This might also be the first time you are asked to hold a board meeting.
While some argue to hold off on board meetings until the Series A stage, Cocoon Capital firmly believes that an active board is an integral part of running a successful organisation all the way from the startup stage. Our experiences across our portfolio strongly suggest that companies with well-functioning boards massively increase their chances of scaling fast and ensuring successful exits.
A functional board not only introduces great corporate governance and accountability, but also serves as a forum where founders can work alongside fellow directors on the more strategic decisions a business have to make. For startups considering fund-raising, here are a few pointers to get you started to make the board work in your favour:
Who should be on your board?
A startup board should ideally comprise of 3 to 5 members. Smaller boards are more efficient, enable agility and give members a strong sense of ownership. The board composition is usually an odd number to simplify voting outcomes and normally consists of at least one investor director. Not all founders need to be on the board, so a normal setup would be two founder directors and one investor director. In many cases, it will be valuable to bring in at least one industry expert. Experts can bring industry-specific experience and knowledge that founders and investors may not possess and can bring tremendous value in business development and even for a future acquisition.
What are your responsibilities as a director?
Many people fail to understand the role a director has to play and what the board’s responsibilities are in general. Whether you are a director appointed by the founders or by the investor, your responsibilities are actually exactly the same and include, but are not limited to, a duty to act honestly and in good faith, to avoid conflict of interest, to exercise care, skill and diligence and to not misuse powers and information. All this is described in Singapore’s Companies Act and you will find the same in most other jurisdictions. A director is simply responsible for acting in the best interest of all shareholders. She might have been granted special rights if she is an investor director, but her responsibilities remain the same.
Using the board to keep control
Founders are understandably concerned about control. At a certain point in time, most founders lose their shareholder majority, but until then, founders deserve to also have a majority of directors on the Board. This does not mean, however, that boards should be seen as vehicles to enforce majority rule by voting. In fact, in the 60+ companies we have invested in, surprisingly, no board has ever had a formal vote as far as we can remember.
Running your first board meeting
Sending out the agenda: Board members deserve time to prepare for the meeting and the Constitution usually dictates that meetings should be called for with an ample notice period and that board materials should be sent out at least 3 days before the meeting. If you would like an agenda template, download Cocoon Capital’s template here for free.
Calling to order: At the start of each board meeting, the directors shall agree on a chairperson to lead the meeting and a referee to take notes of what is discussed and decided. The Minutes from the previous board meeting are also put up for approval and should be signed by the chairperson and referee. Also, the chairperson shall declare whether or not a quorum is met. A quorum is defined in the Constitution and regulates which combination of directors need to be present for a board meeting to be valid.
Board meetings are not management meetings: The board meeting is not the same as a weekly management meeting. Don’t turn it into one. Board meetings are about defining the vision of the company and developing strategies to fulfil this vision. Leave the day to day operational challenges for management, and use the board’s time judiciously to tackle high-level problems.
The board scorecard: When we enter a new board, the first thing we do is to suggest creating a board scorecard; basically a set of parameters that the board finds useful in tracking the health of the business. Also, the board often maintains a small set of tasks for management to work on till the next meeting. At Cocoon, we are trying to practice 5 tasks – no more, no less.
Key areas for discussion: Board meetings are a perfect place for transparent conversations between the founders and investors and to ask the hard questions. Directors should analyse where the company stands and how it plans to meet its vision. Board meetings are also the perfect platform develop short term and long term goals, discuss budget allocation and establish company milestones. And let us not forget a key responsibility for a board: Keeping enough cash in the bank.
Why bother with board meetings?
Investor relations: As we discussed above, board meetings formalise a way for investors to work with entrepreneurs. Regular board meetings ensure continued conversations between them, facilitating transparency. Board meetings also strengthen the investor’s relationship with the founders and warrants their involvement. On the other hand, board meetings provide founders with a platform to exchange ideas with their investors on their business strategies and vision in an organised setting.
Foundations for professionalism: Regular board meetings drive companies to have structures and processes in place. They provide a formal setting where founders can raise any concerns they may have about their business. Taking a step back and analysing their business functions and goals at regular intervals bring accountability and clarity to the founders.
Management lessons on the go: For most founders, it is usually the first time running a business and managing teams. Founders can learn a great deal about team management and organisation based on how investors handle and engage with their portfolio companies. There is no reason why board meetings shouldn’t double up as management lessons.
While it’s great for startups to have the flexibility and agility to innovate, scaling companies requires direction and structure. You are the captain of your ship and a functional board is precisely the push you need to keep navigating in the right direction.
Conclusion: Start your board early
While some investors suggest not having boards until the Series A round, we believe having a board can be a tremendous strength and can make raising your next, big round both faster and less painful. Boards can be the key to unlock value from your investors and a wonderful arena in which to learn new management skills that will prove valuable as your company grows larger. Boards are not be about investor control, but about investor collaboration and value-add. They are there to support you as a founder and provide relief from the loneliness many founders feel on the top. Embrace the role of of the board and we know you will be duly rewarded.