by Michael Pearson, airCFO Manager of Financial Advisory
Recently, a letter from a CEO to departing board member went viral on #VCTwitter. In it, the founder of CircleUp published an anonymous email he sent to a departing board member that underscored the havoc a board member can cause within a company. Ryan was also dealing with some deeply personal health issues at the same time, which combined with the board member’s antics to cause significant stress on him, his leadership team, and their execution of strategy.
In order to avoid similar issues within your own company, here at airCFO, we counsel our clients to take time to understand their investors. We understand how exciting it can be to finally receive that term sheet, along with the access to capital to execute on your business strategy and enable you to grow the company, but this is precisely where caution and focus on details is important. As your investors will be beginning deep due diligence on your business, this is the time to perform some of your own due diligence on your investors, and should be completed to your satisfaction before you accept a term sheet.
Questions you need to ask yourself.
- Who is going to be on the board if an investor is requesting a board seat as part of the term sheet. If they are not requesting a board seat, are they expecting to send an observer?
- Does your future board member plan on bringing observers regularly? Observers, while they can’t vote, can still affect the flow of meetings. If possible get to know the observers as well and understand the roles they will play in the board dynamic.
- How many other boards is that investor a member of? How many other meetings do they attend as an observer or advisory boards do they sit on? It may signal a potential bandwidth issue or flag that it could be challenging to get meetings scheduled with that person.
- Can you talk to another founder/board member that the investor works with? What do they think of the potential board member? Do they help? Do they appreciate the advice? Do they follow-through? It can be particularly enlightening to speak with the founder from a company who didn’t have a successful exit and should be a red-flag if an investor declines.
- If it’s a larger VC firm, are there other people you have met with that you think would work better with you than the designated person? Usually its possible to have a different representative on the board so the answer to this is probably! But it does become part of the term sheet negotiations, so understand that it may be something else you are giving up to have a preferred person on the board.
- What is the process for a firm to change the person they appoint if that board member were to leave the firm. How much notice will they give you and is there a process for interim board members? Is anyone considered a “key man” at the firm?
- What structure are they investing funds out of and are there any investment horizons to understand. Typically, VC investors will have specific investment horizons tied to their investments and its important to understand if they have additional capital set aside for future rounds or not.
The biggest advice we’d recommend to founders looking to talk with investors is to ask questions! For so long as part of the pitch process, it’s been a very one-sided relationship with founders focusing on answering questions posed by investors. Receiving a term sheet is a perfect opportunity to enter into more of a 2-sided conversation. This is someone you are linking your company with for the years to come so caution and due diligence is warranted.
Remember, each interaction with a board member is an opportunity to grow and nurture that relationship.
Author Note: Michael comes to airCFO after holding leadership roles in financial planning and analysis, business intelligence, and strategic planning teams across multiple startups. He has his MBA from Babson, which consistently ranks as the #1 entrepreneurship program in the country. He has worked across multiple industries and helped his companies successfully raise over $50m in funding.