Board seats for investors?

We received this email from a founder recently:

“When should a startup invite an investor to be a board member? A potential investor asked about this possibility on top of their investment. We’re only in the pre-seed stage so this feels a bit early… Thoughts?”

I asked the General Partners (GPs) at Hustle Fund and they broke it down for us.

They shared:

  1. how founders should think about their board 
  2. their philosophy on why Hustle Fund doesn’t ask for board seats

Here’s what I learned.

The upside to having a board of directors

Ok, real talk.

Boards are kinda boring. Let’s just get through this section together, then it’ll get spicier a bit further down. Cool?

A board of directors helps founders make key strategic business decisions. Venture capitalist Gregg Adkin made this list of things a board can help with. 

The TL;DR is: giving board seats to investors that you trust can potentially accelerate the company’s success. They have extra skin in the game, so they’re incentivized to give support, make intros, and provide resources.

It can also help with your reputation. 

High profile board members could attract other investors, partners, and customers.

Many investors would love to be on a company’s board. Some might even commit more money or take different terms if it meant securing a board seat.

This seems like a win-win. Right?

Maybe. But maybe not. While there are many upsides, we recommend being cautious and selective about who you let onto your board.

The downside to having a board of directors

The biggest downside of giving a board seat to an investor is losing control over your company.

For example, the board can vote to remove founders from the company entirely.

Yup, you read that right.

Here’s the thing.

The board’s main incentive is for the company to eventually exit (be acquired or IPO). Because that’s how they will get a return on their investment.

If board members see founders go through major drama or think they are acting irresponsibly, they might ask themselves,

“Is this founder still the best person to lead this company?”

If not, they can vote to remove the founder and replace her with a new CEO. This isn’t common, but it’s possible. 

How Hustle Fund operates

As a rule, Hustle Fund doesn’t take on any board seats.

Why? We believe the incentives for founders and board members are misaligned.

See, if the board has the power to remove a founder, there’s less incentive for the founder to be completely honest.

The founders might withhold information if they’re going through a tough time. Or they may send cheery investor newsletters saying everything is swell when that’s not the case, so as not to raise any red flags.

It’s ironic, really. If the founder isn’t honest with her board members, those people can’t help when things are going wrong.

Which is… you know… the main function a board is designed to do.

This is why we choose to be investors without a board seat. In our experience, this helps us:

  1. get more honest insights
  2. have the opportunity to assist with real problems
  3. maintain a more equal relationship with the founders

Our advice to you?

Think carefully before offering a board seat to an investor. Or anyone. And please, do your due diligence.

Don’t offer a board seat solely as a bargaining chip to cash in a bigger check.

Inviting an investor to your board is a difficult decision to undo. If you’re going to do it, make sure you’ve built a solid relationship with your investors.