Startup Business Plan

Corporate Governance Requirements For Angel Investors

Angel Investing is inherently risky. Startups, in general, aren’t for the weak at heart. It is even more perilous when investing with minimal leverage that comes with a small investment of $25 – $50 thousand. Over a 10 year period, I made 7 investments that returned 180 percent. Over the same period of time, the S&P returned 250 percent. Yes, I took 50 times the risk to get a fraction of the return.

How could I have improved the returns? I should have insisted that companies followed certain corporate governance norms. And if I didn’t have the leverage to dictate good governance, I should have invested alongside someone who had the power to mandate good corporate governance terms.

Let’s look at my investments to illustrate what I mean?

  • Winners With Responsible Leadership
    • Social Tables – Great Management Team, Frequent Credible Business Status, and Financial Reporting and Regular Board Supervision
    • Veenome – Great Founder, Frequent Credible Business Status and regular investor conference calls seeking input.
  • Sideways With Responsible Leadership
    • TalkLocal – Great Management Team, Frequent Credible Business Status, and Financial Reporting and regular investor conference calls seeking input.
  • Winners With Leadership Issues
    • none
  • Losers With Leadership Issues
    • SpotFlux – Not sure, I invested alongside New Atlantic Ventures and the NAV folks supervised corporate governance. (I did get about a 7 percent return on my investment)
    • YouEye – Founder moved away, had personal issues that affected the business, I was not impressed with replacement management.
    • Spinnkr – Clowns! Unresponsive, irresponsible, uncommunicative, unfocused.
    • HugeFan – Founder was just f34king nuts… my bad for not doing due diligence

*TalkLocal is still in operation and has a marginal chance of some return to investors

In the startup world, it is normal that only a small percentage of your investments provide the bulk of your returns. Yet when I look at my investments I know there is one way I could have done better. Four of my investments required adult supervision. Three of the seven might have done better if there was adult strong board oversight and more tightly managed corporate governance.

Here’s a list of good corporate governance practices that would have improved the odds.

  1. Board of Directors – A real board of directors made up of at least five members. Two chosen by the company, two by the investors and one mutually agreed upon independent board member. A minimum of six board meetings a year.
  2. Monthly Financial and Operation Memo – A monthly memo from the CEO outlining revenue, cash or runway, significant customer wins, hires and employee turnover, and other major events.
  3. Board Secretary – An Attorney To Sit In on Board Meetings acting as Board Secretary
  4. Annual Budget Approval – The submission of an annual projected financial plan to include revenue, expenses, capital investment, and P&L. There should be guidelines that prohibit the company to spend a pre-agreed upon amount outside the expense or P&L guidelines of the budget without board approval.
  5. Set And Manage To Agreed Upon Performance Metrics – The board and executive team should agree on up to 5 key performance indicators and hold the company executives accountable to those metrics
  6. Compensation – Compensation matters should be proposed by the CEO and decided by a vote of the outside board members.
  7. Executive Session – Board meetings should conclude with executive session. That is a meeting of the outside board members with the company execs not present.
  8. Audit Rights – Board members should have the right to audit the companies books at their expense for companies with funding under a certain threshold (for example companies with outside investment under $1.5 million) and revenues under a target revenue threshold (for instance revenue under $1 million). Regular annual audits, paid for by the company should be mandated when the company exceeds either funding or revenue thresholds.
  9. Hiring Authority – Certain positions, outlined in the corporate charter, should not be filled without board approval.
  10. No-Confidence Vote – Ethical, regulatory, serious execution lapses, should allow the board to vote to replace the CEO
  11. Follow-on Capital Raise Approval – The board should have approval or rejection of allowing the company to raise capital and should have approval authority over the acceptance of term sheets.
  12. Debt Approval – The company should not be able to assume debt in excess of a pre-determined amount without board approval.

I am convinced that if there was a well functioning board in place at HugeFan and Spnnakr the CEOs would have been replaced and the company might have survived and performed. Spinnkr still exits, I think, but no investors have a clue what they are doing.

Trustify had a board of directors. That board was made up of the husband and wife crime team of Danny Boice and Jennifer Mellon. There was a third board member who was an outsider. Even though they held quarterly board meetings, the documents and materials presented were reported to realistic-looking but in retrospect… totally fabricated. The lack of audits, an audit committee, and true board oversite allowed the couple to con investors.  Had Danny Boice and Jen Mellon had true board supervision, and if there were audit provisions, they would never have been able to steal $20 million from investors. In fact, Anchorage Capital committed fiduciary malfeasance and should be sued by their limited partners for investing over $6 million in Trustify and not demanding a board seat or annual independent audits.

Communcilique raised a reported $50 million dollars. It is not clear if the company had a board and yet the Chairman of the Board, Ram Reddy claims that even though he often spoke of the companies revenue being in excess of $20 million and customer wins with FedEx, Uber, and Airbnb, he claims he didn’t know that the company had zero revenue and no customers. Ram was Chairman of the board for over a decade. He claims he was chairman of the Advisory Board and not Chairman of the Board of Directors which is in conflict with his business card below (seen below). He is either a fellow conspirator in fraud with Andy Powers or he is the most incompetent Chairman of the Board in the history of corporate America. A well-formed board and annual audits would have saved investors millions.

Investing in startups is risky enough, even startups armed with great ideas, dream teams, and perfect execution often fail. Startups without strong adult oversight have a greater chance of failure. Without a good functioning board, it is difficult to make a correction when the executive team goes off course.