When you sit on a Board of Directors, you have a lot of responsibility. It should never be a passive activity. At their worst, directors can be overbearing burying themselves in the minute details of the business. They can be a royal pain in the ass. I have had to mediate disruptive directors off of a board.
On the other hand, they can be a tremendous asset to the company. They can mentor, find customers, find employees, and generally help you propel the business forward. Great directors can pick companies up. I have seen how directors can change the course of a company in a positive manner.
One of the things I don’t care for when it comes to funding companies is funding companies that are raising on a convertible note or SAFE. They aren’t required to have a Board of Directors. I understand that it’s often hard to price a round when there isn’t a lead. I know it’s slightly more expensive to do a priced round. But, it’s worth the expense and time. At our fund, we like to have a board seat if we can get it. At the same time, we are happy to give up that seat to more qualified investors in later rounds. A great company has a board that changes over time as it responds to the needs of that company-even established ones should bring in new blood.
The structure of a company is important. Putting money in an LLC also means that there is no requirement for a board. That’s one reason most VCs will not invest in LLCs along with other reasons. The answer is always Delaware C Corp if you want to raise institutional capital.
A few stories have been in the news recently that caused me to think about the responsibilities of the director and why it is great to have a board. The first one is a story that a local company mislead advertisers. Whether they did or didn’t I don’t know. I do know that if I was an investor I’d be upset because capital that could be going to move the business forward is going down the drain. They aren’t the only startup that has had this problem. Theranos did things that were much worse. If they had a good solid board of directors during the time of the transgression that gave the entrepreneurs honest feedback, it might not have happened.
The other story that caught my eye was the Harvey Weinstein story. Supposedly, the Weinstein Company board agreed to let Harvey pay for sexual harassment cases out of his own pocket. The board is trying to wiggle out of it by saying they assumed payments were for “cover up consensual affairs”. Given that the entire industry knew of Weinstein’s harassment, it’s pretty hard to believe the board didn’t know it. Why didn’t they say anything? Good boards question the ethics of the company officers when they find out something. I have seen that in action too.
If you do have a board of directors, make sure you get D&O insurance. It protects your directors and company officers from lawsuits. Sometimes, there are frivolous lawsuits that they need to be protected from. Sometimes it comes from other disgruntled investors. However, D&O insurance probably doesn’t protect the directors of the Weinstein Company. They could be personally liable.
I am sure the lawyers will decide. It won’t be pretty. Could be costly.