Wednesday, 11 November 2015

How to get the best from NEDs in start-ups

Entrepreneurs and Non-Exec Directors – friends or foes?

Returning to a common theme of these blogs – entrepreneurs’ responsibilities to shareholders when they have accepted external shareholder money: take investor directors and other NEDs that come with the deal seriously.  NEDs, most of them at least, are there because they have deep commercial and business experience that deserves respect.  And by respect I mean, should be taken notice of unless there is strong evidence that they are misguided.

Brilliant entrepreneurs can find their way through the maze of uncertainty and challenges of running their businesses as if they were born to do it and have a natural intuition of when to hit the right buttons and in what order.  Many are so excited by their situation that they think they can re-write the rule books and ignore sage advice as irrelevant and not applicable to them.  Hear echoes of the over-optimistic sales forecasting tendency here from a previous blog?

A phrase I never wish to hear again – “I wish I had heeded your advice – you were right but I needed to see it for myself”.  In some cases this sentence can, sadly, qualify in the "famous last words bucket".  NEDs are an inevitable consequence of raising funds in an entrepreneurial business and often you are landed with people that come with the investment rather than those who you might choose to help you with the business.

A lot has to do with how issues are raised by the NED too of course – have they keyed into the entrepreneurs behavioural traits and decision-making preferences?  Have they parked their egos at the door and just focused on coaching the CEO towards taking notice of the information he needs to make the best decisions?    Are NEDs self-aware enough to know when they are past their sell-by dates and should voluntarily suggest stepping aside and finding someone more valuable at that time?  There can be constraints as well imposed by the need to have investor representatives on the Board but how to avoid that being a constraint that holds the company back.

Taking notice of NEDs is not giving up your autonomy as an entrepreneur – only you will think any less of yourself if you are not the lone hero and are too proud to acknowledge others people out there may actually know something you don’t and can fill-out your skill set.

Initial lessons about constructive NED interactions with entrepreneurial companies:

From the NED perspective:
  • Avoid the NED route being treated as a reliable source of income – your only role is to help the company achieve its milestones and your financial independence  should be found elsewhere

    Yes you should be paid a retainer to cover for opportunity cost, expenses and legal risks/obligations but not enough that you can build up a reasonable compensation package by just taking on more NED positions
  • Equity is a good thing to have as an NED – you should be allowed to buy some equity as well as have it topped up based on tenure of service as part of option schemes and the like
  • All these factors help build alignment amongst Board members and avoid any us/them situation being created between Execs/Non-Execs
  • If there is a role as a NED that you have clear objectives for that becomes more hands-on/consulting orientated then think about negotiating a consulting contract but not at your usual market rates – entrepreneurs shouldn’t take advantage of you and neither should you of them given your privileged position

    There is nothing more contentious than starting to count hours as a consultant when you are a NED when you have a retainer and equity as well
  • Remember Execs have the right to ignore your advice, make mistakes as long as they implement the strategy you have agreed together
  • Be clear on your role on the Board – personal vs investor representative, observer/adviser, Chair vs plain NED

    Conflicts can clearly be created if an Investor observer is also accountable for the Board governance and part of the outward PR/marketing message.  I have seen that be a problem with others and am sensitive to this in my own situation.  You become very dependent on the CEO/entrepreneur giving good updates and you are torn as Chair between complete honesty and also ensuring you maintain collective responsibility as leader of the Board.
From Entrepreneurs perspective:
  • Recognise that you are accountable to the Board and meeting Board objectives is now just as important to you, as why ever else would you set up your business?  On the basis that NEDs have come in because the shareholder base has widened then they are now your new “boss” and do have the authority to review your performance and take appropriate actions
  • Pay NEDs a retainer as a sign of respect but also then agree objectives with them that you can review and evaluate their contribution against over time – if they are there for the ride, find a replacement but give feedback

    Even if they refuse a retainer you should push for it – challenge their motivation for being there if they don’t what it as a proper, professional commercial arrangement
  • Remember that investing NEDs are a critical link for other future and follow-on investors to judge whether to continue to invest or not in future rounds.  If NEDs don’t feel respected, they think business plans are ignored, milestones treated like abstract artefacts, feel they are being put on as the main source of rescue capital, their funds are being treated with less respect than yours (i.e., are you willing to invest alongside them – and not just time/sweat equity?)     

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