Investor on your Board.
What does it feel like?
I got asked this really interesting question last week. Normally, when it comes to the subject of taking on investment people want to know how deals are structured, what the valuation was etc, but having an investor on your board does change the way you ‘feel’ about the company you founded, too. It’s important, because it’s something you’re likely going to have to live with for several years.
They say it’s easier to get a divorce than it is to get rid of your investor. So buckle up and let’s dive a bit deeper.
The Positives
Having an investor on board should be a positive. Let’s start with the ways in which it feels good to make the change.
Having money in the bank
I remember looking at my banking app on my phone when we got our largest investment round and we’d never had so much money in our lives. Having stressed for so long about how we were going to survive long-term, the tables had completely turned.
This ‘feels’ good. It helps you sleep at night. Although it’s actually just the beginning of the next gnarly phase, it definitely changes things. It makes you feel like you can implement your plans without the constraints you’d previously faced.
Wise Heads
Having a good investor who has your back is incredible. My own experience is that they don’t have any silver bullet but over time, their advice adds up to something game-changing. That’s not to say that you wouldn’t get there yourself, and you should be getting advice from a variety of sources, but having someone who has a broader understanding of what you’re likely to experience because they’ve seen it with other portfolio companies is invaluable.
On top of that, getting encouragement from someone who knows what they’re talking about ‘feels’ great too. As a founder you are often just making it up as you go along and you may not know anyone whose opinion you can genuinely trust. If you have a good investor, this will change.
Validation
You may not quite realise this at the time, but getting an investor on board validates you as a business. When you speak to potential customers, employees, partners, other investors, journalists, podcast hosts, friends, family… the fact that someone has backed you speaks volumes. It’s shorthand for proving that you are a bona fide business. Obviously having a top tier VC counts for more than having a group of Angel Investors, but nevertheless, it’s a big tick in the credibility box.
Network
You should be plugged into an investor’s network (talking VCs here) and if they are good, they will facilitate that. One of our investors, Point9 organises an annual Founders meet-up with world class speakers and the chance to make friends with like-minded founders. Pretty much any challenge you can think of, you’ll probably find someone who has been there and done it. Feeling part of something like that is good.
Behaving as you mean. to continue
If you’ve raised money it’s because you have ambition to grow the company to something significant. The increase in processes and formality is also an increase in professionalism. This is no bad thing. Future investors and acquirers, as well as superstar employees will want to be sure that the business has been run well, following generally accepted practices. Having an investor makes you feel like you have to be more grown up in a sense.
The Negatives
From Family to Fiduciary Duty
Look, when you become a director of a company, any company, you have a fiduciary duty to act in the best interests of the shareholders. But if it’s just you and your co-founder(s) then your decisions on how to spend your money are often ad hoc and agreed casually. We use terms like ‘it’s your baby’ when referring to founders and their startups and to an extent you feel like you’re all one big family.
Founder 1: "Thinking I might fly business class to New York as last time was a nightmare”
Founder 2: ”Yeah, go for it, I might do the same when I fly out to Dubai later this year”
No biggie, right?
But when you take an investors’s money then the company’s money doesn’t wholly belong to the founders any more. In reality, an investor probably wouldn’t question a the costs of flights unless something crazy shows up on the P&L, but the fact that you have to consider it changes the way you will feel about having them on board. You can’t just do whatever you and your co-founders feel like anymore.
You are Employees of The Board
When it’s just you and you are also the board, then your board isn’t going to tell you to take the hard decisions you want to avoid. But when you have an investor the board meetings become something more formal. If the board decides something, you have to enact it. In some ways this feels more like you’re working for a boss again. It’s not the same but there are similarities. On a more positive note, it can also allow you to step back a bit from the emotion of making tough choices. This is not something you dreamt up in the shower that morning, this is something that was discussed and decided at the board level (albeit a board that you are a part of).
Good investors are great, bad investors are really, really bad
You can’t just get rid of an investor because it’s not working and so if you make a bad choice, you will end up regretting it. Some examples of bad situations that I’ve either witnessed first hand or heard about from others:
1. An investor acting as a quasi-CEO. An investor who controlled the purse-strings since this was the only money the business had. Board meetings were basically about the investor telling the rest of the board (including the actual CEO) how they were going to spend the money. If there was a disagreement, the investor had the final say because of the way the money was released. Way to feel like someone has stolen your baby.
2. An investor insisting on way too many consent requirements. This comes down to the advice you get when you negotiate the deal, but I know of a situation where the investor had so many requirements for consent, it ‘felt’ to the founders that they had a boss they had to convince on decisions they would have previously agreed on in minutes. It’s worth mentioning that even if the investor only has 10% of your business, if the restrictions in the Shareholders Agreement are overly onerous, they can behave as if they are the majority shareholder.
3. Investors playing a judgemental role just for the sake of it. An investor who did not understand the business and so to appear valuable ended up giving the founders homework that amounted to a waste of time. Being given an MBA exercise to complete when you are scaling a tech business in a world that you’ve spent the last however many years obsessing about feels ridiculous.
4. This isn’t really an investor behaving badly because they are totally within their rights here, but if an investor refuses to follow on at the next round, this can send a bad signal. Imagine finding a new investor who then gets cold feet because your current investor has decided you’re not a good bet? How would that feel?
If you ask around you’ll hear lots of other horror stories, I’m sure! I know one person who has vowed never to take external investment again based on her experiences of not only having investors on the cap table, but the whole pitching process to prospective investors itself.
The bottom line is that you and the investor’s interests should be aligned. You need proper advice to make sure that anything you agree during the deal is something you can live with if things go wrong. And believe me, things will go wrong. I would also strongly advise doing as much Due Diligence on them as they are likely to do on you.
But, get it right and it could make a huge difference to your business and you’ll end up learning a lot in the process.