How to build a company board as a founder?
How to build a company board as a founder?
Lessons for Indian founders.
Welcome to the 197th edition of the GrowthX Newsletter. Btw, we’re opening access to our last immersion of the year. The previous one saw ~200 operators, leaders & founders from B2C (53%) & B2B (47%) join the vibrant GrowthX experience.
Board firing founders isn't new. The OpenAI sh*t storm isn't a standalone event. If you are an Indian founder building a board due to fundraise, here are top things to keep in mind 👇🏻
First things first, the board almost always acts in the best interest of the shareholders of the company. The Open AI incident is a classic example of a board protecting the non-profit side and attacking the other.
But, what does this mean for Indian startup founders?
It’s crucial to learn the board structure that comes with fundraising. We will also cover specific nuances of board seats, rights & handling crises from a founder lens.
What's the purpose of a board, really? 🤔
Protecting shareholder interest, period. This could mean
→ Hiring/ firing the leadership
→ Approving corporate decisions (bonus, stock options, spending budgets)
→ Offering guidance on strategic decisions to the leadership.
At what point a board seat is given? ⏳
Typically when founders raise a Series A/B or sometimes when a large Seed round is raised, a partner at a venture capital firm may get board seats. In India, typically series investors will ask for a minimum of 1 board seat depending on the cheque size 💵.
Your term sheet → probably your board
Your board is formed & evolved during your term sheet agreement. Important specifics will be listed down and sometimes may be wrapped under complex jargon.
First/ type of shares in a company 💰
There are two types - voting and non-voting shares. Typically employees will get non-voting rights while founders + investors get voting rights. There is also further classification in the type of voting shares - Class A & Class B.
Second/ Class A & Class B shares 💡
Take the example of Facebook, the founder owns Class B shares, which have 10X the voting power of a Class A share. This is the core reason why Mark Zuckerberg still has a majority of the voting power at Meta. He negotiated it when they raised it. The same goes for even the automobile giant Ford Motor Company.
In India however, there are no class A & B shares. You will have to workaround that.
Third/ Fail-safe if you’re fired 😕
One of the things to look for while structuring the founder legally is to build a clause - "In case the board fires the founder, he/she is still a part of the company as a voting board member".
Fourth/ liquidation preferences 📜
While signing the termsheet, look for terms on this one. In the case of a merger or company going public, who will cash out first and how much will they cash out? This is extremely important to get right if any meaningful founder/ founding team wealth is to be created.
Fifth/ be aware of a double dip 💦
This one's nasty. In case a term sheet has preferred participation, during a liquidation event - the investors will get their initial investment before everyone else and also get a % share of the remaining profits as per their shareholding pattern.
Personally, I would recommend sitting down with a corporate lawyer and asking them to walk you through different scenarios that might happen at different times in subsequent fund-raises & liquidation/merger events.
Some rituals to building/managing a board.
Find investors who understand & align with you on a mission level.
Understand the nuances in your term sheet.
Sit down with a lawyer.
Break down any jargon you don’t understand.
Run scenarios with him/her.
Ensure you send monthly updates to your board members including performance on KPIs, hiring, burning issues, and any asks. Keep the communication water-tight. Bad news first, good news last.
Remember | Unwinding bad terms is impossible & can push away future investors even if your product has incredible metrics and momentum.
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Lovely insights ❤️