The rate of startup formation among business school graduates is at its highest point in recent memory, with a recent Financial Times survey finding that 22% of recent MBA graduates from the world’s top 100-ranked programs are engaged in startup entrepreneurship.
All of these entrepreneurial companies need Board members who can contribute with ideas, experiences, contacts and resources, all of which can help in generating business growth.
Maybe you are a “business angel” considering investing in a startup, or you have been mentoring an entrepreneur. If you are excited about the idea of getting involved in the startup as a Board member, you should be prepared for the roller-coaster ride that may lie ahead.
A position in the Board of a startup is not only a privilege. It also carries a legal and financial responsibility to do what is right for the company and its stakeholders
A position in the Board is not only a privilege that allows you to monitor the entrepreneur and influence the company’s development. It also carries a legal and financial responsibility to do what is right for the company and its stakeholders. Accordingly, you should ask some basic questions before making up your mind about joining the Board , even if you believe that there is a great fit between you and the entrepreneur. Here is my list of the five most important questions that will yield useful information:
1. What was the most difficult situation that the Board has faced until now?
With this question, you will get a general impression of how well the Company has been managed so far. As you hear the answer, you need to listen carefully for clues about how the Board resolved that difficult situation. Have the Board members contributed with ideas, contacts and resources in order to find and implement a solution, or have they expected the entrepreneur to deal with it all alone? The latter is a warning sign.
2. How is the Company doing relative to its most recent business plan?
This question helps you to get an understanding of where the potential areas for concern are. The chances are that there will be a gap between targets and actual performance in areas such as customer acquisition, revenues and profits. While it is understandable that a business may underperform compared to its business plan, you should ask how the entrepreneur intends to get things back on track. If there is a significant performance gap, the entrepreneur should keep an open mind about ways to improve the situation, and not aim to “Do more of the same in a better way” (which would be a potential sign of being difficult to mentor or to influence.)
3. Does the Company have (or expect to have in the near future) any overdue debt to employees, suppliers, or the Government?
This is really a fundamental question to find out what you would be getting into if you were to join the Board. Every Board member likes to talk about growth, new customers and profits. Not many like to deal with crisis situations where the threat of bankruptcy and legal action against the company appears on the horizon. If you don’t have the stomach or the experience to deal with a company turnaround, any sign of trouble on this point should lead you to thank the entrepreneur for the invitation, and simply say “No.”
If you don’t have the stomach or the experience to deal with a company turnaround you should thank the entrepreneur for the invitation and simply say “No”
4. Who will replace you (the entrepreneur) one day?
You should ask this question even if it is an unpleasant one for an entrepreneur who wants to build a successful company and stay with it for the long term. There are two important pieces of information that you can gain by hearing the entrepreneur’s response.
First, you should see whether the response starts with “I think…” or “The Board thinks…” You want to join a Board where the entrepreneur accepts the Board’s input on key issues such as who should lead the business.
Second, you should see whether any of the existing team members in the company are in contention for being CEO one day. It’s a warning sign when an entrepreneur has no apparent No. 2 in command with the expertise and willingness to take over, if requested by the Board to do so.
5. Can you put me in touch with the member who has the most influence on the Board?
After all, if you decide to join the Board, you will deal not only with the entrepreneur but with all Board members. You should get to know who they are, what led them to become part of the Board, and whether they are generally happy with how things work in the Board. During that conversation, you should also see whether the entrepreneur’s responses to the previous questions are aligned with the Board member’s perspective.
Just like any significant relationship in your life, a Board membership in a startup is not a decision to be taken lightly .
If you know about an interesting real life story of how a startup’s Board of Directors dealt with challenging circumstances – a story that can yield useful insights to others facing similar situations – please get in touch with us at IESE’s Entrepreneurship Department.