Reuben Buchanan

Wednesday, 16 January 2013 00:00

Should we already know the people who will sit on our board?

This article first appeared August 29, 2011.

If you are starting out, you should definitely approach potential board members that you already know.

There are many reasons for this:

Relationship: If they know and like you, this may be enough for them to join your board. People are primarily attracted to individuals that they like.

Business is no different. If you don’t know them already, it may take some time to build a relationship before asking them to become a board member.
Background: You know them already, their background, track record and so on. This way you know if they are suitable for your business.

Many people exaggerate or overstate their skills and experience on their CVs when applying for board positions. And it takes time to do background and reference checks. By starting with someone you know, you are already comfortable with their proven track record.
Easier to do a non-cash deal: It’s definitely to structure a non-cash deal with someone you know. In one of my previous articles, I mentioned different strategies for attaining board members that don’t require cash (equity, contras, etc).

If they know you, it’s far easier to structure these deals because of the existing relationship.
Better access: It’s no point having a board member that you don’t have access too. This is a common problem. You need to be able to meet with them each month and call or email them on a regular basis for advice and guidance.

If you don’t previously know them, you don’t know how accessible they are. I’ve met plenty of people who have the experience, but are not accessible because they are too busy, travelling, on several other boards, etc.
Honesty: It’s vitally important that a board member is honest with you. They need to be able to give you their honest opinion and not pull any punches.

If they don’t know you very well, there is a chance that they might just tell you things that you want to hear so as not to upset you. Board members shouldn’t fear about expressing their opinions.

Some other tips for start-ups:

Start with one: If you have never built a board before, just start with one for six months. See how they go and build experience working with a board member. After that you can bring on other members.

Rotate your board members: As a business grows and evolves, so should the board. So agree upfront to review the board positions every 12 months. That way if you need to replace a board member, they won’t get offended.

As the business gets bigger, you can of course bring in board members that you don’t previously know.

ASX public companies often have eight or more board members and they rotate them regularly.

But if you are small, best to stick with people that you know.

Reuben Buchanan is an expert in capital raising and corporate finance. He has raised in excess of $40 million for private companies and participated in over $200 million in corporate transactions. He has 17 years experience in media, investment and finance industries. In 2001 he founded Wealth Creator magazine, a bi-monthly business and investment publication, selling the group in 2005.

In 2008 he co-founded Wholesale Investor Pty Ltd, which has quickly become Australia’s largest private investor platform with over $400 million in transactions listed.

Ask Rueben or any other StartupSmart mentor a question here.

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Comments (3)

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Reuben, I largely disagree. In almost all cases above, independent directors who are not connected to the CEO/Leader are better. Here is why:

- They have taken on the role because they see value in the people/business.
- They are investing time/resources completely voluntarily
- You (Leadership) see value in their expertise/knowledge.

Often it is those who you know that are unable to speak up and tell you when you are going down the wrong path.

I am biased in my response, I am part of http://BoardofDirectors.com.au , a platform for organisations to seek directors and in turn, for directors to seek directorship opportunities.

From my research and experience, many organisations have failed to utilise their board or have been let down by their board simply because there has been external relationships/factors that have prevented people from being open and honest.

Moreover, there has been a serious lack of accountability of board members/advisors since they are simply seen to be doing a favour to the organisation/leader. Independent board members, however, value their position and ensure they are value adding towards the organisation. At the same time, they are not afraid to walk away from the role if they do not feel it fits their skills/interests.

Whilst there are some benefits of having board members that you already know, the costs far outweigh them. Independent directors are far more effective in accomplishing the purpose of a board.

Puneet

a guest , August 29, 2011

Maybe the answer is somewhere in the middle of the observations of Reuban and Puneet. A director whom you know is not necessarily a friend or someone who will not take an stance in the best interests of a company. I've seen totally independant board members cowed by a strong charismatic chairman. People accept directorships for many different reasons. Young companies benefit from directors with good connections relevant to the company, wide experience, ethics and common sense.

Julia Hayes , August 30, 2011

I pretty much disagree with everything you've written here.
If a founder is investing time and money into a startup, they should be seeking to add people to their board who will deliver optimum value. They absolutley should NOT invite someone on to their board simply because they know them - they may be the best person (with the requisite skill set) to meet business's needs, but it's unlikely, and it's worth casting the net wider just to make sure.
I query point 3, which is predicated on the assumption that giving away equity is cheaper than paying cash. That is not necessarily the case, especially in the long run.
I would argue that the opposite is that case to what you've written in Points 4 and 5.
Finally, as a person in the capital raising industry, I'm surprised you didn't express a view on whether a strong board makes it easier to raise capital.
Andrew

AndrewJT , January 06, 2012