Q. I am seeking business funding from individual investors. I think it would be a good strategy to have a few board members in place to increase my credibility. What do board members expect in return for helping me raise funds and succeed in business? How do I pay them?
A. There are four general factors that high caliber business people consider when asked to join the board of a promising startup company.
- Personal Integrity: Experienced board members know that there will be unforeseen problems and delays associated with reaching key operating goals. What they don't accept is any delay in learning about brewing company problems from management. Entrepreneurs who promise to deliver the bad news just as fast as the good news in an honest, straightforward way will impress prospective board members.
- Skilled financial management: Most first-time entrepreneurs don't appreciate that board members of privately-held companies assume certain financial liabilities for management screw ups. For example, if a company fails to pay payroll taxes, board members can be held liable for the shortfall including interest and penalties. For this reason, many experienced business people turn down board seats until companies have reliable accounting systems in place or have raised enough funds to cover upcoming payroll obligations.
- Willingness to collaborate: Short-sighted entrepreneurs tend to look to their boards for fast approvals rather than "devils advocate" challenge. Great board members can help entrepreneurs avoid costly mistakes, provided that company founders are willing to consider constructive criticism.
- Compensation: Cash-starved companies typically offer prospective board members stock options or common stock to compensate them for the contingent risks and time associated with active board membership. It is not uncommon for knowledgeable directors to receive a non-trivial sign up award of 1% to 4% of a startup company's outstanding shares plus subsequent annual stock option awards. Essentially, if you want great business people to join your board, you have to make it worth their while to join a board of a pre-revenue stage business.
Once a company reaches a comfortable level of cash flow and profitability, board members can receive a modest cash fee or stock award for board meeting attendance. If board members are required to travel on behalf of your company, promptly reimburse them for agreed travel costs.
Here's one last tip. Don't apologize for your company's startup position or your inexperience as an entrepreneur when you approach first board members. Focus instead on what you want to accomplish as a responsible and determined business builder. You can do it!
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Susan Schreter is a 20-year veteran of the venture finance community, MBA-level educator and policy advocate for small business owners. Her work is dedicated to improving startup operating performance with reduced personal risk to entrepreneurs. She is the founder of www.takecommand.org, which offers the largest centralized database of regional and national small business funding sources in the U.S., including angel clubs, micro-finance lenders, venture capital funds and more. Follow Susan on Twitter @TakeCommand