Silicon Valley Review S2, Ep2-4: The Importance of a Good Board
May 27, 2015 | By Kevin Vela
Enter Russ Hanneman. What a great character.
Russ emerges as a white knight after Pied Piper’s VC walks and Russ agrees to fund Pied Piper, but in milestones. This means that Pied Piper doesn’t get all of the investment dollars at once, but rather the funds are released when certain goals or targets (“milestones”) are met.
there are many ways to structure a deal
This is the first lesson of episode three – there are many ways to structure a deal. Obviously, startups would prefer to avoid tiered or milestone based investments, but when you’re desperate, you start to lose bargaining power. Though please don’t ever do what Richard (our lovable protagonist) did and accept investment terms without consulting with your attorney.
For the examples below I’m going to assume that Monica is a founder. For those of you watching the show you know that she represents the first investor, but it’s made clear that, as of now anyway, she’s voting alongside Richard.
As part of Hanneman’s investment, he receives two out of five board seats, which is not uncommon for a second or third round when there is only one investor. By taking two out of five board seats, the investor leaves control of the board in the hands of the founder(s), but puts himself in a good position to exert significant influence on the Board.
One of the key tenets of a board seat is the ability to “have a voice in the room.” Board members also get access to information that shareholders normally don’t. I like to think that you get as many smart guys in the room as you can, have good discourse on the subject, and the right decisions will emerge.
Hanneman has 2/5 board seats, so he doesn’t control the board, but if the three founders get crossways (as Jared and Erlich do), then those 2 seats become very important. Don’t think that the pettiness displayed by Erlich in the board meeting was a fabrication – that stuff happens. You hope that it doesn’t, but people are still people.
Do Your Due Diligence
Here’s the next lesson – if you are surprised by a board member’s vote on a critical topic, then you haven’t done your diligence prior to the board meeting.
What’s interesting about Hanneman’s board rights is that he has the right to appoint anyone to the seats. This right is loudly abused when Hanneman appoints his dim-witted girlfriend du jour to the board right before a key board meeting. It provided great comedy, but it did not really matter as she voted in step with him, which is what we would expect from any of his appointees.
board members who represent the same interests tend to vote together
Honestly, in real life, having three investor reps (Hanneman, Hanneman’s girlfriend, and Monica) on the board of such an early-stage company would be a real no-no and should be avoided if possible, but the plot has been set up such that Monica is really voting alongside the founders.
Understand that later-stage company boards are generally a mix of several rounds of investors, and it’s not unusual for founders to lose control by then.
value outside the board room
The final point I want to make about Hanneman is about the resources he is putting at the company’s disposal. Traditionally, a board member with a strong network or significant relevant experience can be very useful for a startup. Hanneman’s resources have comically turned out to be a waste of money thus far (namely, billboards and SWAG), but I’m guessing that he’ll pull through down the road. When you take on investors, look for investors who can make introductions to potential customers, partners, acquirers, vendors, or other investors.
In summary, investor board reps for early-stage companies rarely have control, but they will have significant influence on your startup and can be a tremendous resource for your company. If you have multiple stages of funding and multiple investor board members, chances are that they will vote together on most issues, as their financial interests are usually aligned. A good board can accelerate your growth through wisdom and connections. So don’t take the first dollars you see when a board seat is attached without giving serious consideration to who the investor board representative will be.
Posted in Silicon Valley Reviews, Startups
Kevin Vela is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, mergers & acquisitions, corporate law, capital raises, and real estate investment activities. You can see Kevin’s attorney profile HERE.