Are you wondering about the importance of board seats during fundraising?
Your company’s Board of Directors will have a huge impact on current and future fundraising goals. If your boardroom is functioning well, then this will be a great advantage. However, even if your boardroom is well-intentioned, it can still have a detrimental influence on fundraising outcomes when not managed correctly.
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Here is the content that we will cover in this post. Let’s get started.
- 1. How Do Board Seats Impact Fundraising?
- 2. Board Seats as a Negotiating Tactic
- 3. Types of Director Positions Open to Investors
- 4. Why Do Some Board Members Block Fundraising Attempts?
- 5. What Happens During Fundraising When Board Members have Different Motives?
- 6. How to Get the Best Result in the Boardroom
How Do Board Seats Impact Fundraising?
In an ideal world, your boardroom functions to ensure the continued prosperity and development of your company. Those who have a seat on it should, in theory, only look to help secure the future of the business.
We’ll discuss the problems you’ll face fundraising when some board members have ulterior motives, but for now, let’s assume that all is well with your board of directors.
When you are thinking about the importance of board seats during startup fundraising, keep in mind that your board of directors should help with this by:
- Identifying timescales for necessary fundraising and helping to set a healthy schedule between fundraising stages
- Leveraging existing business relationships to secure potential partners and pitch meetings
- Drawing up target lists for potential investors, whether angel investors or venture capitalists
- Helping create effective pitches for specific investors
- Creating an overall strategy for pursuing investment
- Negotiating with both existing and potential investors for the betterment of the company
- Setting realistic expectations for the executive director and other senior management
Developing a “culture of fundraising” within the boardroom brings the above points together, helping founders and management create a strategy with the best possible outcomes.
Board Seats as a Negotiating Tactic
If a venture capitalist or angel investor is going to provide a substantial amount of capital, they will often want representation on the board of directors. There are three reasons for this:
- To have eyes and ears in the boardroom so that they are privy to all salient decisions
- To have direct voting rights on company policy and direction
- To offer advice to the board and company management
A seat on the board can, therefore, be offered as a bargaining chip during fundraising, with some form of representation in the boardroom always preferential. This allows investors to protect their investment and shepherd a company in the direction they think best.
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What type of board seat investors take, is usually open for discussion. However, must of those discussions will happen when you are setting up expectations and that is part as well of how you structure your materials and how you are pitching the story.
Remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Types of Director Positions Open to Investors
Note when considering the importance of board seats during fundraising that if a board seat is not offered to an investor, they may refuse investment. Sometimes, it’s not preferential for the company to offer a full seat on the board, which is why there are several options. Some of these are not “legally” different but are given different weight in business circles.
Types of board seats include:
- Inside Director: Someone who has a deep connection with the company, usually a founder or early investor.
- Outside Director: Someone with little or no personal connection to the company. Note, while inside and outside directors are viewed differently, they often have the same sort of voting rights.
- Executive Director: A board member who is an executive, meaning they have a defined role in running the company, with a specific “job description”.
- Non-Executive: A director with no specific job description or responsibility other than voting in the boardroom.
- Shadow Director: Also referred to as a “de facto director”. This is someone who is not officially a director of the business but has the power, influence, and ear of the boardroom to such a degree that they shape policy and control the company.
- Nominee: This is someone who represents the investor. They are there to protect the investor’s interests, not necessarily the health of the company. A nominee can also be appointed for a creditor or other shareholding group.
- Observer: Investors with rights to review board minutes and also attend meetings with no vote.
Fundraising is key to your success, especially in its early stages. To get a better understanding of how fundraising rounds you can see the video below where I explain this in detail.
Why Do Some Board Members Block Fundraising Attempts?
A common stumbling block within the boardroom during fundraising is to discover that sitting board members have different outlooks, goals, and methods. A healthy boardroom will do its best to compromise on these and find a way forward that keeps the happiest.
In some situations, board members will act detrimentally to the fundraising process for the following reasons:
- Specific board members either represent or are existing investors who are following their own exit strategy. For example, some may want to accept a takeover while others may resist such a move.
- Board members may want to hold onto their stakes in the business without it being diluted, and so resist future dilutive investment rounds.
- A board member may wish for a company to be liquidated and its assets sold, prohibiting any sale.
- Another reason could be that a board member does not like the terms given by a potential investor.
- It could be that board members disagree over the direction of the business, with some blocking any investor that wants to change the business in some meaningful way.
- Finally, some board members can be restrictive because they do not trust an investor based on reputation/previous experience.
What Happens During Fundraising When Board Members have Different Motives?
When board members have different opinions, this can be settled either amicably or with hostility. This often involves directors securing the support of other people holding seats in order to further their own agenda to the detriment of the opposing view.
This sounds sinister, but it is actually part of the boardroom process. In other words, there is very much a democratic aspect to the process where the larger number of seats, when wielding more power, chart policy during fundraising.
Sometimes, there will be an impasse, and, unfortunately, a faction within the boardroom will be dissatisfied. This is why it’s important for startup founders to be aware of how much influence they are giving away with each investor if they want to keep control of boardroom policy
How to Get the Best Result in the Boardroom
Figuring out the importance of board seats during fundraising and negotiating with investors is difficult. I offer advice on this topic, along with mentoring entrepreneurs about getting the best deal for themselves and their businesses, over at the Inner Circle.