Structuring Boards for Growth Companies panel discussion

Introduction

LG: The idea for this panel came about because of the number of founders asking how they should structure their boards after a fundraising and how many people should be on the board. Let’s hear from the panel:
What is a board, and what is the difference between a board of directors and an advisory board?

SR: In a word formality. A board of directors has statutory and fiduciary duties and the power to vote on management matters at board meetings. An advisory board can be a different thing to different companies, and it can also be a different entity depending on what stage of growth a company is at.
SR: In general terms an advisory board is much less formal, there are not necessarily any kind of contracts of appointment or engagement, they may be entirely voluntary. They do not always sit alongside the board of directors. Early-stage companies may have a board of advisors informally before they have an established board of non-executives.
SR: Whether you put an advisory board in place is going to depend on where you are in your journey and the expertise you want to tap into. That will also vary depending on the industry you’re in and your growth stage.

What’s the ideal size and composition of a board for seed to series A stages?

LC: It varies depending on the stage of your business. Boards tend to grow as businesses develop, particularly as investors join the board. 3-4 as a starting point is sensible. My preference is not to go over 7 so that you don’t have too many voices around the room. Between 4 and 6 is about the right number, unless you have to go beyond that.

Does the panel have a view on how you manage the requirements of investors who are coming on the board? André, you have some views on the size of boards and particularly on the investor community.

AB: The bigger the board, the harder it is to manage. You often end up with non-executives or observers who feel the need to contribute, which can be positive or time consuming. I would keep the board as small as you can for as long as you can. 4-5 is a good number, 3 is probably too small.
AB: If you are a founder, think of board seats as being the last lifeboat to leave the Titanic – it should be that precious.
AB: If you get the wrong people on the board, it can create havoc, so be very careful about who you give board seats to. Although I trust my CFO, I am pleased to have a good finance person as a non-exec, it’s good to have someone who can ‘see through’ the numbers. In my previous business we had a lawyer as a non-exec, and I liked that as we were getting ready to float. Be tactical. What will they bring to the board? Consider, who will open doors for you? Who will get you meetings that lead to sales? It is the same for investors as well.
ST: I echo André’s point about how precious board positions are. When we create a company, we have an academic whose idea it was, and a university representative and they are non-execs, an IP person and someone who is a chief executive, but these are small programmes.
ST: The one thing we really value is having an independent non-executive director. I use the analogy; it’s like having a referee. If you’ve got a good chair to independently manage the board and that individual has some understanding of the technology and the market, then the various parties should listen to that person and allow them to chair/referee the company.
ST: I don’t like a proliferation of non-executives. We tend to put corporate/commercial propel on our boards and limit the number of investor directors.
The board growth before it goes through an IPO and reduces, because typically a 5-person board on a listed company is what you’re looking for. And before that reduction there is a differentiation between the top board and the operations board.”
LC: A float process can trigger a round of thinking about who is on your board. I would say keep considering who is on your board and whether they continue to fulfil the functions that you require. Is it working? You might try and set the expectation that the Board will be more formally reviewed every couple of years which could lead to Board change.

How does a founder manage angel/VC expectations about putting a director on a board?

LC: Whether it is a must-have will depend on the size of the investment they are making. All investors want eyers and ears over the company, so it’s a request to expect. But they won’t always insist depending on what they’re investing and what percentage of equity they are.

Is there a market practice on this?

LC: Not that I am aware but, if they are sub-10% of equity you should have a good argument that they may not have a seat at the table. Normally, you have the chief executive and the CFO as executives. But there is nothing stopping you bringing in head of sales for example or a technology person on rotation. Typically, with NEDs or NXC, the roles you want them to perform are running the audit committee and the remuneration committee. Two non-executives for this might not be enough.

Coming back to the Independent Chairperson, how do you find that person?

ST: You can use a head hunter or do it yourself. A head hunter knows the market well and should bring high quality individuals to you. Think about the value you will gain rather than the cost because it is very expensive.
ST: The next level is to advertise on platforms where interested people put their information and an administrator who sends roles out to that community. Less expensive but you miss the crafted shortlist that a head hunter brings.
ST: Your advisors (lawyers, accountants, brokers) are fantastic networks, especially if they have sector experience. I find the best head hunters are communications advisors, as they’ve got the ear of the boards they’re advising. Think about the directors that you have on board, they have got a network and it’s about pooling those ideas and understanding where those networks can take you.
AB: If you are a founder, get a chairman who will back you. If you have three investors, you have potentially got 1 against 3 on the board. There will be tough times and you need someone who will get in the trenches with you. I quest whether an independent chairman might decide it won’t look good on their CV and off they go.
ST: Our situation differs from the founder led model. We take an idea from an academic who wouldn’t know how to build a business. The university, the academic and IP Group are broadly 1/3 shareholder each from the start. We buy parts of their equity from them, and we buy a position in the company, but not a majority. We at IP Group know the commercialisation process and so we need a friend in the camp to be able to reassure the academics on the direction of travel.
LC: An investor will typically want an independent chair. A good independent chair will act as a mentor role as well as a mediator.
ST: The chair is responsible for managing the board and having difficult conversations with the Chief Executive. If the chief executive is not performing, they will go not the Chair. It may be different in founder-led businesses but for us the chair is key in how the board works and determining whether or the chief executive is up to it.
SR: I would add that when you’re dealing with a problem, especially from the legal side, having someone who is willing to take direction is useful. We find that problems spiral when you don’t have someone who can see both sides and is able to take the lead.

Assuming, you get the right independent chair, how do we remunerate them?

ST: Typically, the chairs we deal with are not doing it for the cash remuneration but for the long-term equity play. It is usually a straightforward conversation about remuneration based on share options/shares, rather than fees.

Steve, what if the independent chairman doesn’t work out and you have given equity or stock. What are the mechanisms that can be put in place?

SR: You will need a framework, and to be clear on the terms in which share options or equity are granted. Non-exec board members and chairs rarely meet the working time requirements for EMIs. So straight equity, or deferred equity arrangements make sense. If performance gateways aren’t met, then reverse vesting is an option if someone leaves early.
SR: Fees are another point, as we find that some NEDs ask for fees if they provide additional services beyond their duties as directors. You need to be clear on structure. NEDs receiving consultancy fees was commonplace, although it is rarer now. If you have an arrangement like that it’s essential to make it clear on the separation between consultancy services and NED duties.

When there has been an angel investment round, they like having a seat on the board. Let’s talk about forming an advisory board, and your views on how they work.

ST: You ought to pay advisory board directors. You value what they bring to the company, you ring them intermittently and they bring you access to fantastic people. You want to avoid directors who won’t share their contacts.
AB: I don’t have an advisory board but one of my smaller investors wanted a seat and this is a good example of how I could satisfy his request.

Is it better for founders to use advisory board members 1:1 or together in group meetings?

ST: If you get them together it tends to be for a day, once or twice a year. A lot of prep work needs to be done by the executive team who want to leverage the expertise. You need to get the questions you want to debate right and give the board enough information beforehand to have a good discussion.

What can you do when things go wrong – directors who don’t want to leave or have different views from the founders?

SR: Make sure that everything is in place at the outset. The right letter of appointment, the right powers under the articles. Without that there will be problems like having to through a Companies Act route of removal.
AB: Things never heal themselves. As soon as you realise there is a problem, start talking.
LC: That statement applies to all executives. Make sure you share goals and can work together. Don’t be afraid of moving people on.

What is your one takeaway tip for our audience? [Our audience was a mixture of founders, NEDs, and investors.]

AB: Think of the board meeting in two parts: Reporting and Requests. Reporting you talk about what’s going on in the business. Requests are decisions you want the board to make, and you need to come prepared.
SR: Have documents in place: Watertight agreements, including executive service agreements and the right letter of appointment for NEDs. Check that articles have the right provisions around removal.
LC: Be demanding of your board. But to do this you’ll need to be organised and give them the right information. Consider having 4-5 clear questions for your Board to debate.. And get the outcomes documented.
ST: Chairs need to do regular performance reviews with their NEDs. Non-execs may not always know what they need to do. Annual reviews with NEDs provide an opportunity to discuss what you expect.

To view the Q&A session please click here.

About the panel:

André Brown is the founder and CEO of Advanced Commerce. This is the second software start-up he has been involved with. His previous one ran for about 15 years, and they ended up floating in 2014 and completing an ambitious takeover of their biggest competitor in 2017. André is also a non-exec on watchmycompetitor.

Stephen Ravenscroft is a partner and head of the employment practice at Memery Crystal. For over 25 years he has worked with boards of private companies, listed companies and investors and he has helped them to navigate issues around employment, departures, incentivisation, how to attract and retain suitable experts and specialists and advisors and how to get out of a problem when issues arise.

Laura Cockburn has spent most of her career in investing. She was in the Equity Finance investment team at RBS and more recently at BGF until she left earlier this year. She has acted as an investor director on multiple boards.

Stuart Thompson has spent 30 years headhunting in two different organisations; one of the bold bracket search firms where he worked with large company non-executive director and chairman search and the last 15 years with a venture that backs deep-tech ideas out of university around the world. Stuart is responsible for building the boards of those companies.

About the Chair:

Lesley Gregory is a corporate partner. In 2020, she was named Mentor of the Year at the Women in Law Awards 2020 in recognition of her work in elevating women working not only in the legal profession but also mentoring female founders and entrepreneurs. She leads Memery Crystal’s growth companies and Women in Business initiatives.

Takeaways

• Board members should have something from their network or experience that opens opportunities for your business.
• You source NEDs from your own network, or advertise in forums that recruit non-execs.
• Recruiting a non-exec via a head hunter is expensive but you’ll get a qualified contributor.
• Consider advisory panels or observer roles for investors who want board membership.
• Set expectations that board membership is a performance driven role.
• Have review and appraisal set within your board documents and review members annually.
• Make sure your documentation is appropriate and gives you clarity and control.
• Whatever their role, NEDs need to bring something to the table that will benefit your business.
• Your board isn’t set in stone for the lifetime of your business, you may need different skills at different stages.
• Board meetings need preparation and clear expectations to deliver value and not follow process.
• Board membership isn’t only about board meetings, each person should have something to add outside the context of the meeting itself.