In the 5th episode of the Modus Capital Podcast, Kareem Elsirafy explains the difference between an Advisory board and the Investor Board. How to painstakingly select the members of each one as an entrepreneur, build strategic relations with board members, and also get the support your startup needs by providing a safety net to your team.
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Good morning, everyone. And welcome to the Modus podcast. This is Kareem Elsirafy, the managing partner at modus capital. So today we’re going to talk about putting together a board. A board is supposed to serve a supportive function in your company. It’s supposed to be a group of people that you can sound against that help give you direction and support. They’re not supposed to be key decision-makers in the day to day operations of your business. So most investors are going to require you to put together a board when you take outside capital. And what we’re going to talk about today is what are the things that you should look out for and consider when putting together your first board.
So, first of all, when you first take in the capital and you need to put together a board, you’re likely going to have two to three people on that board, the board, isn’t going to be so much as a support, an active supporting role in the early stages of your company and becomes more and more supportive and more and more critical as your company grows.
When we first put together a board you’re primarily going to, or initially, you’re going to want to have it be very small. Most startups will have two people that’ll consist of one investor. And one of the founders or three early on as your company grows, you’ll want to continue to expand it. Having five people and continually maintaining an odd number of individuals so that you have the ability to be able to, during voting times of voting on critical things, be able to essentially break any sort of gridlocks. So early on again, you want to have the board tipped so that it’s primarily founder-friendly. What does that mean? It means a friendly investor. In addition to one or two cofounders, that’s a well-rounded board in the beginning, as your company begins to grow, and you need to add more people to your board.
There’s a couple of things that you should consider. One is subject matter expertise. You want to bring some people onto your board that understands the industry or understands the technology that you’re using. If you’re a tech company. And the goal here is to be able to get good perspective on things that are critical to your day to day operations. Again, if a board is not there to actually get into the weeds and details about your day to day operations, but provide us specific support function or a strategic support function for your company, having people that are subject matter experts on your board can really help guide the decisions and help give you good insights into things that you should be considering and doing as the founder and CEO of your company. The second is when you select your board. I know a lot of entrepreneurs do it in a way that they get investment in.
What do I mean by that?
Some investors actually required to be on the board. That’s okay. They want to be able to have a level of oversight on the company, especially if they’re putting in a large check, most lead investors, or the biggest checks usually required to have a seat on the board so that they can help influence decisions within the company. And this is okay, but don’t be giving it up very, very freely again, make sure that when you’re going through, even your investor selection, that the type of investors you bring in are good for the company, they share the same values and visions and are going to allow you enough autonomy to do what it is that you need to do and flexibility so that you can pivot as you need and push the company forward in the right way.
And this is also going to translate into how they’re going to be on the board itself and how they’re going to function on the board itself. Another important point that I want to differentiate is between an executive board, which is the board that actually meets with the CEO. As we’ve been discussing an advisory board. These are two very, very different roles. One is actually documented within the company. They actually participate in voting on specific items related to the company and the other is more in an advisory capacity. So let’s touch a little bit on an advisory board. Advisory boards are also extremely strategic and can provide even more value than an executive board. When thinking about your advisory board, you want to be able to incentivize an advisor with economics, right? You want to keep them engaged. You want to be able to incentivize them and give them some sort of upside, but you don’t need to give them a big chunk of your equity.
Something small between half to one and 2% is usually sufficient depending on the type of value that they can bring. It’s important to incentivize them because what you’re going to want to do is you’re going to want to attach milestones and deliverables to them and to what they’re going to actually be providing for that equity. Just like any other employee. Now, when selecting an advisory board, there’s a couple of things that I recommend first find somebody who is in the actual industry that you are operating in. So if you are a SAS company and you provide a B2B SAS solution, try to find somebody who’s very senior that may be worked at Salesforce or Microsoft or another big software company. And this one will help you get insights into the industry. It also helps you to overcome some possible growth pains by seeing how it is that they’ve handled similar situations.
Again, whether it be growth or otherwise, but it’s really, really critical to have somebody very senior. Somebody who’s been around for a while, give you some good, strong perspective in an advisory capacity. Another thing to consider when putting together an advisory board is to bring somebody on that actually supplements or fills in a gap in something that you guys are missing early, early on in your startup. So for example, if the CEO is doing business development and you don’t have a sales team yet, it might be a good idea to bring somebody on your board that can help with a sales process, helps organize and structure a sales team or a sales structure within your organization. And this is essentially the same way that you would want to bring in a consultant or bring in somebody that maybe you don’t need them full time, just yet as an employee, but you can actually have this.
You can actually have this responsibility outsourced to an advisor. So the last thing that I like to recommend to startup founders also have somebody on your board that may be able to help with some sort of liquidity event. What do I mean, I mean, bring on somebody who may be a senior executive at a company that you think may someday purchase your startup. So this is something that some founders do strategically. You know, they say they know that they’re building a piece of software. This software targets a specific industry. And this senior advisory board member may work for a company that might find that market or that segment attractive as part of their expansion plans. So what you do is you’re actually planting the seed for a potential future, a future acquisition or collaboration. I’ve seen a lot of founders do this in the past with a lot of success. So I would definitely consider that one putting together your advisory board.
That’s all we have for today. I hope you found this insightful. Please make sure to follow our social media modus capital on Facebook and Instagram, Twitter as well. And we will talk to you again soon. Thanks a lot.