Week 7 ENT 640: Supporting

The deal has been structured, negotiated, and the first round of funding has been raised.  As discussed in Winning Angels, the next fundamental is support by the investor to the startup and the entrepreneur.  According to Amis and Stevenson there are five fundamental roles of support for investors.  All of them will have made a capital investment and some of them may play a more active and supportive role for the entrepreneur.

  1. Silent Investor: This angel has no active interest besides investing capital in the company.
  2. Reserve Force: These angels are always available to help the entrepreneur with advice, training, or connections.
  3. Team Member: This angel takes a position within the company either full time and short term or part time and long term.  They may temporary fill a leadership position.
  4. Coach: The angel becomes a mentor to the entrepreneur and may be a daily advisor depending upon how much support the entrepreneur needs.
  5. Controlling Investor: This angel has a lot of control and a major impact on the startup.

One question the founder(s) need to ask themselves is whether they are going to set up a board of directors or advisory board in the initial phase.  A board of directors is responsible for managing the CEO and approving all key decisions, whereas an advisory board comprises people who provide industry specific advice. (Deeb) The support and responsibility of each of these groups is varied yet both can have an impact on the startup.  Whether the entrepreneur chooses to have a board of directors or an advisory board it is important to set it up properly to benefit the startup.

George Deeb, managing partner at Red Rocket ventures, has advice on structuring either board.

Board of Directors:

  1. Odd numbers to prevent a voting tie.
  2. Five or seven members makes it easier to schedule meetings,
  3. The members should be friendly to the entrepreneur and their vision. This can prevent the startup from moving in a different direction.
  4. The members need to have real value they can add such as connections, industry expertise, or skillsets.
  5. The board should be structured in line with the equity. If you own 20% of the equity, and there are five seats then that would be a 20% voice at the board table.
  6. If you own 100% of your business then you may not want anyone on your board but have advisors you go to for advice.
  7. Be sure there is a mutually acceptable third party on the board who has a non-biased view of the business. Someone who is neither manager or investor and can break any voting ties between management and investors.
  8. Board members should be passionate and active, taking on work in between meetings.
  9. The number of meetings will depend on the stage of the business. If the startup is still developing its model then once a month; if the business is more established, quarterly.
  10. No compensation for board members who are investors because they already have equity. For outside board members, he suggests setting aside a little equity to be divided among these people based on how active they are. Be sure these equity grants have vesting periods in the event they need to be changed.

Advisory Board:

  1. This board has more flexibility and you have as many or as few advisors as you think you may need.
  2. These members need to bring specific skills that the startup may be missing.
  3. The adviser’s “brand name” is important. They will have experience to share with you.
  4. “Brand name” advisers can help get other investors excited about investing in the startup.
  5. It may be difficult to get these brand name advisors without an equity incentive.
  6. Meetings may not be needed because the CEO is contacting the advisors on an as needed basis and speaking with them more frequently.
  7. Like the outside board members, he believes the key advisors should be given a small amount of equity based on how active they are.

Not all investors have the time, inclination, experience or desire to serve on either board. Each angel will have to decide where their comfort level is and how they are able to best support an entrepreneur and their startup.

Resources:

Amis, David, and Howard H. Stevenson. Winning Angels: The Seven Fundamentals of Early-stage

               Investing. London: Financial Times Prentice Hall, 2001. Print.

Deeb, George. “How To Structure Your Board Of Directors Or Advisory Board.”Forbes. Forbes Magazine,

11 Oct. 2014. Web. 19 June 2017. <https://www.forbes.com/sites/georgedeeb/2014/10/11/how-to-structure-your-board-of-directors-or-advisory-board/#6f62eedd3777>.

Hudson, Marianne. “Ding! Tips To Earn Your Angel Board Member ‘Wings’.” Forbes. Forbes Magazine, 29

Dec. 2014. Web. 19 June 2017. <https://www.forbes.com/sites/mariannehudson/2014/12/29/ding-tips-to-earn-your-angel-board-member-wings/#6c0a9639725b>.

Zwilling, Martin. “Mistakes To Avoid With A Startup Board Of Directors.” Forbes. Forbes Magazine, 30

June 2015. Web. 19 June 2017. <https://www.forbes.com/sites/martinzwilling/2015/06/30/mistakes-to-avoid-with-a-startup-board-of-directors/#2da8982956fd>.

4 thoughts on “Week 7 ENT 640: Supporting

  1. Of the 5 types of support, it is important to know what you want going in. As an investor, it is important to work with those in line with your goals. If one party does not give or receive the support desired by the other party, it can lead to a bad investment. Personally, reserve force would be my choice because I like to take control and learn on my own…but I appreciate guidance when I hit road blocks.

  2. Cece,

    Along with what Alex said, I think it is important to have investors that have experience in your field and can give you sound advice to help you through issues they may have experienced before. I think I would want a coach, to have a daily advisor, who I could constantly ask for advice.

    Thanks,
    Mackensie

  3. Cece,
    Another great post! To me, if an entrepreneur is really an expert or genius where he or she knows the ins and outs of the industry then they might be better served with advisors instead of a board of directors. But if the venture is set up with several people who know their industry well, then a board of directors might be better.
    Great work,
    Austin

  4. I like the idea of the angel investor as a coach. I talked about trust in my previous blogs. The start-up success can be measured by trust even if there are small failures along the way. These failures turn into stepping stones if the investor and owner have a good relationship; which makes the bottom line not just about financial profit but influence and growth personally for the owner.

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