Lateral Capital Management, LLC

Early Stage Boards: Roles and Remuneration

by John O. Huston, Ohio Tech Angels

Early Stage companies are always told that they “need a board,” but not exactly what the Board should do! As a result, Board members are a lot harder to find and Board meetings are a lot less productive than they could be.

One big reason for this is the lack of clear role definition. Here’s how veteran Angel investor John O. Huston from Ohio Tech Angels would answer the question of what Boards must do, with a little embellishment from us.

The Board of Directors of an Early Stage company has five key responsibilities:

  1. To have regular meetings. This should always include an Executive Session. By Executive Session, we mean a time for the outside directors to discuss the performance of the CEO in private and to decide who will deliver the feedback – both positive and negative.
  2. To maintain a steady focus on the objective. The Board’s objective is always, always to sell the company at a price which delivers the target return for the investors. This may sound shocking, but really, that’s why we are all here, right? Remember that until there is a sale, investors are just donors.
  3. To mentor/review/remove/replace the CEO. The Board does not run the company. They do control the tenure and compensation of the man or woman who does run the company.
  4. To insure that investors receive regular progress updates. Quarterly is the right frequency. Don’t forget to tell the investors what they can do to help.
  5. To never, never, never let the company run out of cash. This sounds obvious. But amazingly, many Boards find out way too often that “this is our last meeting.” Every BOD meeting should start with a Cash Flow forecast.

How should you pay your Directors? With options. Each non-employee Director should be “paid” enough to insure this role is important enough to keep him or her fully engaged in helping the company. Two-year term, 1% of the company vesting over two years, vesting monthly. For this “price,” the company should get what it needs. For example: Directors should attend every meeting, in person or on the phone. If they miss a meeting, time for a new Director. And it goes without saying: Directors must have skin in the game; and have put their own money into the enterprise.