On Board Work in Founder-led Companies

Everything is easy in theory. The annual meeting elects the Directors of the Board. The board sets the strategy which is then executed by the Chief Executive Officer the board has appointed. The company prospers. All stakeholders are happy.

Theory however often encounters a problem, reality. And when you choose between theory, the map of the terrain you are to traverse, and reality, the actual terrain, you are always well advised to prioritise the reality of the terrain higher than the theory of the map. If nothing else such that you avoid falling into holes or finding yourself swimming across marshlands.

In this text I will try to guide you past the most obvious pits and swamps of board work in founder-led companies. I will mainly address the founder, but investors who invest to see strong returns on investment and board professionals who want to make a meaningful contribution may also have something to learn.

Founder teams

Who then is the founder, or the founder team? Founder teams are small, they typically consist of one or two people, like Elvis Presley or Simon and Garfunkel.

As a boomer you might say, but what about the Beatles, they were four! Well they weren't really four. They were two. Johan and Paul led the band and wrote (most of) the songs. George and Ringo came along for the ride. They made important contributions but other guitarists and drummers could probably have been able to make similar contributions. George and Ringo happened to be the best people John and Paul could get to fill those roles. Clearly Eric Clapton would have been a stronger lead guitarist than George, but he wasn't available at the time.

Today, and if it was a company, not a band, George and Ringo would probably have been called co-founders. A co-founder is a bit like an honorary professor, not really a professor. Co-founders typically get behind an idea, or join a company, when it exists. A founder creates the original idea, and the company.

Skin in the game

While new companies materialise, seemingly out of air, first there was nothing, then there was a company, companies are not started in theory, they are started in reality. Companies are started when the passion, the desire and the need of a founder outweigh the, often significant, risks. Entrepreneurship is a brave plunge into the dark, into uncharted territory. It is an expression of will, and of personality. A founder-led company is an extension of the founder. Its values are based on the character of the founder. Its purpose is to realise the vision of the founder. Starting a company is an act of self expression that could be considered an art form. To create something out of nothing is to conjure magic. Something few have the guts, or the skills, to do.

Experienced investor Sophia Bendz (Cherry, Atomico) said something along the lines of that the paths of the life of a founder seem to have perfectly intersected at the point where they founded the company. This is not as extraordinary as it may sound, in fact, when done correctly, this is rather always the case. A successful founder will start the company that only they can start. They will start it based on who they are, what they desire, what they have learnt and who and what is available to them.

Investors are important. Many endeavours cannot be bootstrapped. They require significant investment before they can, or should, be profitable. Products can require a lot of work to be completed and securing the right market position may require years of growth over profitability. Investors provide the money required for this journey.

Sometimes, but rarely, investors can also provide knowledge and networks. An investor will know if they have knowledge to offer if the founder freely requests advice from them. An investor who has a meaningful network will, on the request from the founder, open doors to desirable partners or investors. If an investor is not requested by the founder to give advice or to make introductions the investor should not do so. If the advice, or the introductions, are not requested, the investor will see a larger return on investment if they stay out of the way.

Successful serial entrepreneurs will have their choice of investors. Investors will often have a very short period of time to decide if they want to invest. Before they do so they need to decide if they are prepared to fully back the founder.

When investors, or indeed founders, give civil servants and bureaucrats power they need to beware of the differences in motivation between an owner, be they investors or founders, and a civil servant or a bureaucrat.

Civil servants and bureaucrats have jobs and careers. They want to do well at their job so that they have a good career. If they are offered a job with better compensation and prospects they will switch to the new job. They are motivated by high salaries and bonuses. They have no reason to suffer or to endure difficult conditions. They will want their conditions to be the best possible. Nowadays they often also want their job to make them feel good about themselves. I usually say that if your health and your relationships do not suffer because of your work you can work harder. Employees rarely work that hard.

Civil servants and bureaucrats like to get options and shares but they will not take ownership responsibility and they are not concerned with dilution. Rather they will prefer large funding rounds, at higher dilution, to ensure that they have the funds needed for their salaries, bonuses and plans for the company. They will prioritise closing any type of funding before negotiating the best possible terms. The same applies for mergers and acquisitions negotiated by civil servants and bureaucrats. The benefit to a founder and an investor here lies in when they exit their company by selling it to a larger company run by civil servants and bureaucrats who will pay an exuberant amount without any real concern for the interests of the owners of the company they work for.

Civil servants pushed Steve Jobs out from Apple, nearly killing the company by doing so, and had to bring him back to save Apple.

Will Apple be able to innovate now that he is gone? Apple seems to be doing interesting work with auto generation of 3D environments but the question is if the civil servants currently in charge of Apple will be able to choose the future over short term profit the way Mark Zuckerberg now so forcefully does at Meta (formerly Facebook).

Carina Silberg, a civil servant at the Swedish pension company Alecta, a main owner in Spotify, has an opinion. She thinks that Spotify founder Daniel Ek should step down from his position as Chairman of Spotify and focus on only being the CEO. Imagine if he did. Carina would choose a civil servant to be Chairman, he would soon find Daniel odd, not the normal type of a civil servant he was used to, and let him go. What would that do to Spotify?

In all exceptional endeavours we need to stay away from “ordinary people”. Philosopher René Girard has written well on the human condition and especially on the mechanisms of the ordinary cleansing themselves and their societies of their felt unrest by expelling the extraordinary.

For the reasons above, a Director of the board in a founder-led company should always be brilliant, and should always have skin in the game. They should own a part of the company. They should be investors or founders.

Shareholder agreements

The Companies Act is typically sufficient and beneficial to the majority owner, which for the longest time should be the founder. Minority owners may request shareholder agreements to secure rights beyond their investment and ownership share. Sometimes it is in the interest of the founder and the investor to pretend that the valuation has been higher than it actually was (if you take the rights obtained through the shareholder agreement into account).

Founders do best to only raise money when their negotiation power is sufficiently strong that they can avoid or limit shareholder agreements.

There should be no shareholder agreements between founders. Founders should have such a crucial importance for a company that if they leave the company should fold.

There can be shareholder agreements between founders and co-founders. Mainly the important term here is that if the co-founder leaves before a defined time founders should have the right to repurchase shares at the then current market price. A setup could be as follows;

• a co-founder who leaves within one year sells all their shares to the founders at the price they originally bought the shares for.
• a co-founder who leaves during the 2nd year sells 3?4 of their shares to the founders at the then current market price (as defined by the latest right issue).
• during the 3rd year 1?2, during the 4th 1?4.

Voting at the annual meeting

Owners who show up at the annual meeting, after properly announcing their participation in accordance with the instructions in the notice of the meeting, elect the board.

In a founder-led company, these owners typically consist of the founders themselves and of those investors who care the most. These will be early investors, typically friends, family and angels, and those investors who joined the last round(s) with substantial amounts.

In my experience it is often to the advantage of the founder if many investors show up. Engaged investors who are eager to hear what the founder has to say are supporters. They will back their idol.

When times are tough, and most investors stay home, the founder needs to keep his friends close, and his enemies closer. The voting majority at the annual meeting decides all.

The founder, and the clever investor, should ensure that the vote at the annual meeting elects a board over which the founder has control. A good board could be two founders and one investor, or possibly more investors if the founder has deep trust in these investors.

Only the paranoid survive

Intels Andy Grove said that only the paranoid survive. And right he was. Who is your friend? Who is your supporter? Who has a different agenda? You may think you know who the people you are dealing with are but having real problems in a company can be a good way to find out. I have often been surprised. I have received strong support from people I didn't know very well, and people I trusted have proven not to have been worthy of that trust.

To be able to realise your vision of your company you need to put first things first. You must retain the power. You retain power by minimising dilution and by keeping your alliances with your supporters strong. You must invest time in these alliances. The time you must waste wooing investors is the best reason to bootstrap your company. If you can run your company without external investment this is almost always the best choice.

IKEA founder Ingvar Kamprad was often approached by people who offered to help him list his company. His response was that listing was like peeing in the bed, first it gets warm and then it gets cold. Ingvar Kamprad maintained control and established a world leading company.

Advice and the people who give it

Some people say that you should use the opportunity to fill the board with different types of experts whose advice you may need. They will suggest that you put a lawyer on the board, and someone who is good at finance, and maybe some other expert too. Soon you have a large board with lots of specialists, none of which understand your business or your company. But because they are specialists and they know one area well they often have the inflated type of self confidence that makes them think that they are well equipped to form meaningful opinions outside their field of expertise. These “experts” are often civil servants. And René Girard applies. And they should not be on the board.

Generally it is cheaper and safer to pay for consultancy services when you need them, which is not that often. If you really want advice, and you know people who could provide this advice, you could ask them to join an advisory board. Because the advisory board is not a decision forum, it has no power, discussions here are typically much freer and more rewarding. Reward advisory board members with options. Perhaps 0.5% if they are really good.

The role of the Chairman

A good Chairman makes board work productive and meaningful and is a true coach and friend of the founder/CEO. Boards do not have to be stages for conspiratorial power games, they can be, and should be a place where competent and knowledgeable people take a step back and look at bigger perspectives. For the board to be effective its members must be very knowledgeable in the business area of the company, and they must have a fair understanding of the company.

A non effective, or inconsequential, board is much better than an active and dangerously incompetent board. If the Chairman finds the board to be the latter he should work with the founder, and the nomination committee, to improve the board, and also suggest to some Directors that they resign.

The Chairman should request that the founder/CEO provide a written report and that all board members read it prior to the board meeting. The board meeting starts with questions on the report. The founder/CEO should not present the entire report at the board meeting, only those specific points he or she wants to discuss with the board. The board can of course ask to discuss specific topics too.

Raising money for a very successful company is easy. In this case funding can be handled by the board. The chairman may convene a financing committee to handle the task. In most companies it is the founder/CEO that must raise capital. It is because of the founder/CEO that most investors invest. They invest in their belief in his/her capability and personality. An experienced Chairman will have a contact network of suitable investors to which he/she can introduce the founder/CEO.

The board year

Assuming Swedish law and that the company has an accounting year from January to December a board meeting calendar may be as follows.

February

Approve and publish the Year End Report.

April

Approve and publish the Annual Report and call the Annual Meeting.

May

At the constitutional board meeting following the annual meeting the work instructions for the board are approved and the signatory rights are defined. Approve and publish the Q1 report.

August

A longer meeting at which company strategy is discussed, updated and approved. Approve and publish the Q2 report.

November

Approve the budget/prognosis for the next year. Approve and publish the Q3 report.

The Nomination Committee

The Nomination Committee, appointed at the annual meeting, typically consists of approximately three owners who are not serving on the board. The Chairman of the board is typically invited to the meetings of the nomination committee as a guest. Obviously it is important for the founder to have people she/he trusts deeply on the nomination committee. Consider people like your spouse or your parents, family and close friends. Early angels with whom you have celebrated one or more previous exits may also do. You can take a risk with one of the members of the Nomination Committee. After all it is helpful if you can continuously, at a controlled rate, grow your network of trustworthy people.

Summary

GP Bullhound, in their report on European unicorn companies, wrote “when founders leave so should the investors”. This based on their finding that all European unicorns still had founders in their leadership.

Board work in founder-led companies should focus on supporting the founder such that investors and founders succeed together.

Boards of founder-led companies should consist of people similarly remarkable as the founder him/herself. Directors of such companies should not be ordinary people who are afraid of the extraordinary. It takes extraordinary people to achieve extraordinary results.

Directors of the board should have skin in the game. They should have invested, or if they don’t have the ability to do so, but the founder still wants them on the board, the founder is well advised to give the Directors ownership in shares, not options, to ensure that motivations are aligned.

Founders should remain paranoid, vigilant and extraordinary.