Startup Accelerators: Bundled and Unbundled

TL;DR: Elite accelerators have cemented themselves as the universities of the entrepreneurial world; offering a bundle of resources in exchange for a price (tuition in form of equity). The most elite absolutely deliver on their promise. But as with education, that bundle of resources can be unbundled, and that’s what’s happening among entrepreneurs who don’t need or want the “full package.”

Background / Related Reading:

What is the purpose of universities? It depends on whom you ask. Employers who are honest will tell you it’s mostly one thing: curation; various filters (admissions, testing, etc.) to help sort out who the good candidates are from the bad. If you ask students, you’ll likely get more varied responses. For some, it’s about preparing for a successful career, including building a network that you can leverage for your career. Those are the pragmatists.

Others will get a little more poetic and talk about how universities are a place to ‘find yourself,’ and be exposed to experiences and knowledge that stretch you beyond the narrowness of your upbringing.

The value and purpose of accelerators tracks almost exactly the above points about universities; just replace “students” with “entrepreneurs” and perhaps “employers” with “investors.” Pragmatically, accelerators offer entrepreneurs a curated bundle of resources (a network of entrepreneurs and advisors, faster access to investors, education, some initial money, etc.) in exchange for a price: usually 6-9% of equity, with (sometimes) heavy anti-dilution rights, and pro-rata rights.

Better curation leads to a better network and bundle, which leads to even higher quality, which further enhances the network, etc. It feeds on itself, at least when it works. And for a handful of top accelerators it works very well.

And of course there are certain accelerators who push beyond pragmatism and aim for loftier, more romantic goals than ‘just’ offering a set of resources: helping entrepreneurs build friendships, find greater meaning in their businesses, being part of ‘something greater,’ etc. It sounds very similar to how more liberal artsy universities pitch themselves to students. And you can verify from certain founders (not pragmatists) that the right accelerators do deliver on that kind of experience; that the accelerator was “life changing.”

Here are some thoughts, based on conversations I’ve had with founders and my own observations in the market, about the evolution of accelerators and how entrepreneurs are likely to engage them going forward.

1. Top accelerators have corrected an imbalance between the strength of founders’ networks and those of VCs.

In doing so, elite accelerators have ‘unbundled’ some of the ‘value add’ aspects of how venture capitalists, and other service providers (like law firms), traditionally used to sell themselves. First-time entrepreneurs often start out with virtually no network. VCs and law firms would pitch themselves to these entrepreneurs by emphasizing not just the core service they provide (capital, legal services), but that using them over someone else included access to their network. I’ve written before about law firms that pitch magical access to investors. 

A founder who gets into a top accelerator, however, gains access to a vast, well-curated network of other founders, mentors, potential hires, etc. When they shop for a law firm, they’re now much more interested in the actual service quality of the firm, rather than some lawyer’s half-baked ability to make investor intros. And having access to many resources that they once would’ve relied on VCs for, founders can focus on other variables in investor diligence; like how helpful they are on the Board.

In some ways, the resources that top accelerators give founders have upped the ante on what “value add” from institutional investors really means, and has put some traditional VCs in the same category as prominent angels or well-coordinated angel groups: checks, perhaps with a few intros, but not much more. Some VCs really do add value. Others mostly just provide large checks; which is perfectly fine – you want big checks – but some big checks are smarter.

2. However, there are still a lot of founders who don’t pursue traditional accelerators, and never will.

Traditional, fully bundled accelerators – the kind that involve months of full-time commitment, a demo day, and giving up a large amount of equity in exchange for the large “package” of resources described above – heavily slant toward young, first-time founders. As they should: those are the people who have the most to gain, and the least to lose, from the full accelerator experience.

As influential as accelerators have become, an enormous amount of our client base doesn’t go through them, and hasn’t tried to. The reasons vary:

(i) I’ve got a family and don’t want to move across the country for several months;

(ii) I’ve got my own professional network and don’t see the cost of the accelerator as worth what it can deliver to me; or maybe [and this last one is worth a discussion]

(iii) I can hustle my way to access the people I need – who are now easier to find thanks to the accelerator – without actually joining it.

3. Without tight integration, unbundling of non-elite accelerators is inevitable.

No matter how many MOOCs, Khan Academies, apprentice programs, degree-less job openings, Thiel Fellowships, etc. arise to eat away at the dominance of the 4-year university model, Stanford, Harvard, and MIT aren’t going anywhere. The exact same can be said for the most prestigious accelerator programs.

But outside of the true elite, the traditional format and cost of accelerator programs is likely not sustainable. Very little of what most accelerators offer founders (curated groups of people) is proprietary in any way; nor can it be viably cut off from the market to restrict access to only those who ‘pay’.  The content that is proprietary is *usually* not what draws founders into the program. I’ve seen some accelerators try to get control over ecosystem resources by playing gatekeeper. I’m sure you can predict how that ended for them. Don’t try to ‘gatekeep’ entrepreneurs.

If entrepreneurs are good at anything it’s being resourceful and gaining access to resources (including people) that are visible in the market. And accelerators, through a few years of curation and operation, have made those resources a lot more visible.

Yes, I know several entrepreneurs who are happily tapping into the networks of accelerators without actually going through them. And it’s not surprising, at all. They’re doing what entrepreneurs do. I’m sure the accelerators themselves aren’t even surprised. The networks of accelerators are effectively the compilation of smaller networks of individual people, very few of whom are beholden to any accelerator. And as is now common knowledge, modern tools have made networking 10x easier and more transparent than it was even 5 years ago.

So what does this mean? It means that outside of the very elite accelerators with the tightest integration and network effects, you’re probably going to see experimentation with smaller, more targeted, lower ‘cost’ alternatives. Some will still be called accelerators; others won’t. If the ‘price’ drops to 2% instead of 8%, a little boost in finding investors may be worth it. Maybe programs targeted toward educating founders in a Khan Academy way will pop up, perhaps just for cash.  Although YC appears to be building that, for free.

Prominent angels and advisors may band together to invest very early, and get a little extra equity for value-add advisory; their brand serving as a signal (via great curation) to larger, later-stage checks. Even certain targeted co-working spaces are playing a role, adding on some value add programming/events to sell their real estate.

I can’t predict where it will all go, but I can already see bits and pieces of the unbundling occurring.  My advice to new founders is always to approach accelerators just like they would approach any other resource or service provider in the market: (i) what is the cost, (ii) what do I get for that cost, and (iii) is it worth it, given alternatives available in the market. And always *always* ask the users.

Some founders will continue to pursue the very elite accelerators, and for good reason.  Others will over time find ways to access just the parts of the accelerator “bundle” that they need, and for the right price, all made easier by the foundation laid by the original accelerator boom. 

Even if most accelerators as we know them don’t survive, the people who built and ran them made enormous contributions to the market, and will surely find other ways to keep participating in their ecosystems. What’s definitely clear is that it’s never been a better time to be a tech entrepreneur.

Do my startup’s lawyers need to be local?

TL;DR: No. Most top startup lawyers have clients in many different cities, and lawyers specializing in emerging tech/startup work usually exist only in denser tech ecosystems. Familiarity with your ecosystem, and the expectations of its participants, matters more than being physically local.

Background Reading:

If you live in a small town/city and need specialized (not general practice) medical care, you most likely need to look to a larger city to find that specialist. Any kind of service provider needs some minimal user base to build a viable practice. Larger cities have a higher concentration of patients, and therefore a higher number of patients needing a particular specialty, which is what enables the development of specialist doctors.

This is why cardiologists generally don’t live in farm towns, at least not during their working-week. They live in larger cities. And neonatal cardiologists (even more narrowly specialized) generally only live in the very largest cities.

For localized work, specialization requires density.

It’s also why true startup lawyers – corporate lawyers with a focused practice in emerging tech and venture-backed companies – generally exist only in cities with dense startup ecosystems. Even with modern technology that enables casting a wider net for your market reach, most professionals rely significantly on a local client base. If that local base doesn’t exist, they move to where one does, or they change their practice to mirror the local market. Houston has among the world’s top energy lawyers, but slim pickings for technology/vc lawyers. Boston has among the world’s top healthcare lawyers, but slim pickings for entertainment lawyers (many of which are in Los Angeles). No surprises there.

So to the extent work has a heavily local component (like healthcare, and to a lesser extent law), if you need a particular kind of specialized service, you are smart to look for it in places that have a real density of users for that service. Otherwise you will end up with sub-par local providers, which can be fine if the stakes are low, but disastrous when they aren’t.

Startup Law really isn’t that localized.

It may come as a surprise to people that, for a significant portion of my client base, I have never met the principals in person; and likely never will. Videoconferencing and teleconferencing serve just fine (in addition to other tech tools). That is actually the case for a lot of lawyers with specialized practices. Most serious startup/VC lawyers that I know have clients in multiple cities. In my case, about half of my clients are in Austin (reflecting the need for a dense local base to usually build a specialized practice), and the other half are not (confirming that being local isn’t required at all).

Unlike a cardiologist, I don’t need to physically examine anyone to do my job, which makes geography largely irrelevant. Because most startups generally incorporate in Delaware for reasons discussed throughout the startup blogosphere, local state law only plays a small role in most of the legal issues that startups deal with (usually local employment law); and for those issues, most startup lawyers collaborate with local employment lawyers. The corporate issues generally require very little understanding of local state law. I have quite a few clients with lawyers in half a dozen different cities, none of which are the city where the company is headquartered. And it works just fine.

More important than truly local lawyers is lawyers who are familiar with working in ecosystems that look like your own. The norms of Silicon Valley financing and governance are very different from those of Denver and Atlanta, as an example; both what some would call “2nd tier” ecosystems.  But a Denver lawyer would be quite comfortable with Austin norms, and visa versa.

Local v. foreign specialized lawyers is about tradeoffs.

Silicon valley startups generally use silicon valley startup lawyers. Austin startups generally use Austin startup lawyers. And in both cases, that works very well, because there isn’t a cost to ‘going local.’ Being able to meet up once in a while in person with your service providers is obviously nice from a relationship standpoint. There is some benefit also to your investors being familiar with company counsel, although that issue is usually exaggerated for reasons that I’ll discuss more below.

So if you can get the nice benefits of having someone local, without many costs, going local is usually a good idea as long as you can find someone local who isn’t captive to local investor interests. And sometimes you can’t. See: “How to avoid ‘captive’ company counsel.” There is no set of advisors for whom a founder/management team should care more about their independence than company counsel.

For startups with less dense ecosystems than Silicon Valley or Austin, however, the cost to going local can be much higher. The reason VC or Angel-backed startups in Houston, San Antonio, Dallas, Atlanta, Miami, New Orleans, Phoenix, Salt Lake City, and similar cities often hire startup lawyers who aren’t local is that they (correctly) recognize that their local ecosystems (generally) lack the density to support truly specialized, scalable startup/vc law practices. Each of those cities has fantastic, very smart corporate lawyers who likely have some tech clients, but startup/vc law as a specialization is more difficult to find; although there are exceptions.

My non-Austin clients have concluded that it’s much better, and more efficient, to collaborate with lawyers in another city who’ve seen the exact issues they’re dealing with dozens of times, and have the resources to address them quickly, relative to someone who may be easier to grab beers with, but hasn’t. CEOs need to exercise their own judgment for their own circumstances.

Be careful with localism, and localist incentives.

“Localism” is a term I’ve started using to refer to the underlying, subtle incentives among ecosystem players that push them to promote local people onto a set of founders, sometimes at a very high cost to the company; discussed in the links at the beginning of this post. Ask any experienced founder, and they’ll tell you about so-called “advisors” or “mentors” in their local ecosystem who, while fun to hang around as cheerleaders, unfortunately don’t actually deliver much real advice or mentorship. There are some great advisors/mentors out there, but also a lot of duds.

There are, broadly speaking, 2 ways (not mutually exclusive) in which service providers (venture capitalists, lawyers, accelerators, accountants, advisors, etc.) build their portfolios: (A) being actually good (objectively) at their service, and (B) building relationships and generating referrals from those relationships. Most A-level people rely on both (because the first leads to the second).  But there are a whole lot of people in every business community who are quite mediocre at the actual service they provide, but are exceptional at marketing themselves and building referrals.

If my social capital is the primary way that I get business, then I’m heavily incentivized to refer to people within my personal, local social circle, even if I know that objectively, someone better may be in another city. That “someone better in the other city” has his own social circles she/he belongs to that aren’t as inter-connected (or dependent) on my own. Sending business to them makes it less likely that it’ll come back to me, unless there’s some objective reason for the referral.

I don’t mean to sound cynical about all of this. It is how a lot of good people build their practices and reputations in the business world, and it’s just fine. But it’s important for every team to to be aware of these dynamics in their raw form, and correct for them as needed. And believe me I get the “farmers market” “go local” “support the LOCAL ecosystem” aspects of promoting local people as well, even if I believe the more self-interested dynamics underly a lot of that; at least as it relates to service providers. 

There’s something noble in that, but not when it comes at the expense of founders – who are putting their entire livelihoods on the line – getting shit service. As I’ve written before, nothing builds an ecosystem more than great companies, and great companies aren’t built with mediocre people. 

Watch out for ‘captive’ local counsel.

Circling back quickly to the issue of captive company counsel is a good place to close this out. For many people in startup ecosystems, localism is driven either by self-interested referral circles, or ecosystem cheerleading.  But for the most influential players in a particular ecosystem, it can also be driven by control. Thankfully the transparency of the web is weakening this dynamic, but institutional investors with heavy local influence often like to see local VC lawyers in the company counsel seat because they’ve strategically built leverage over those lawyers by (i) being their clients, and/or (ii) pushing portfolio companies to use them as company counsel. In other words, they’re company counsel, but… not really. 

Obviously you’ll never hear anything like this stated flat out in a board meeting. What you’ll more often hear is discussion about credentials, or familiarity, or experience, etc. etc. “I’m not sure those lawyers have the right experience” or “We’re more comfortable with these guys.” As I’ve written before, sometimes those concerns have merit. Take them seriously, and if you need to upgrade, go through the process yourself to find independent counsel. But also understand how these comments are usually veiled attempts at pushing companies to engage lawyers who are captive to the investors’ interests, and unable to fully represent the company.  If your lead investors seem peculiarly interested in your using a particular set of lawyers, that’s often a good indication of whom you should avoid.

Yes, there’s some reduction of “friction” when company counsel is familiar with the norms/expectations of investors across the table. But its value shouldn’t be overstated. Sometimes what investors call “friction” is just your lawyers doing their damn job. In this regard, we have seen companies from smaller ecosystems choose to engage foreign company counsel not because local VC specialists weren’t available, but because the founder team viewed them all as captive. Sometimes (but not always) they are right. 

There’s no right answer for all companies on this issue. Specialization is important. Local can be helpful at times, but also costly in specific circumstances. But you’ll arrive at a much better decision by weighing all the variables, instead of just assuming that “going local” is a requirement. It most certainly is not.

Do I need a PPM for my startup’s financing?

TL;DR: Legally speaking, probably not. Most tech startups never prepare one.

PPM stands for “Private Placement Memorandum.” You can think of it as the private company equivalent of an S-1, the long disclosure document that companies produce when going IPO. PPMs are lengthy documents that include risk factors, financial projections, business plan information, etc.  For a broad description of what a PPM is, see this article.

In dense startup ecosystems, PPMs are rare.

Startups in dense, more mature tech ecosystems like SV or Austin usually don’t even think of producing PPMs; nor should they. Assuming that they are taking the classic approach of raising money only from accredited investors, a well-made deck and a solid operating plan are often their core needs for closing on early money. Delivering an Austin tech investor a PPM would send an immediate signal that the founders aren’t being well-advised, which itself signals poor judgment in choosing advisors. 

Asking for a PPM signals inexperience.

In less dense ecosystems, however, I do occasionally encounter tech companies who are told by advisors, lawyers, or other players that they need a PPM to close on financing. FACT: The vast majority of tech startups raising money solely from accredited investors are not creating PPMs, and legally speaking, they don’t have to.  Most repeat ecosystem players consider PPMs a waste of time and money. 

One of the main reasons that startups avoid non-accredited investors and stick to accredited-only rounds is that the legal disclosure burdens are dramatically reduced, which means no need for PPMs. In healthcare, energy, and a whole host of other industries, using PPMs in private fundraising is very common. For this reason, if your lawyer is telling you (a tech startup) that you need a PPM, that’s often a good ‘tell’ that they lack experience in the norms of emerging tech financing. 

Exercise diplomacy with more traditional investors.

All of the above being side, I have also on occasion encountered more traditional investors who, because they do not regularly invest in emerging tech companies, ask startups for PPMs (because PPMs are more common in other industries).  All money is green and, particularly for early angel money, you need to be respectful of the expectations that angels bring to the table; even if they’re ‘off market.’

In these situations, it’s best to diplomatically let them know that PPMs are not the norm in the tech startup space, and that the company would prefer (as should they) to focus its legal budget solely on those things that are truly needed.   Asking a more traditional investor what specific information she/he was hoping to see in the PPM, and trying to address those concerns more informally, usually goes a long way to bridge the gap. Sometimes hearing directly from a Tech/VC lawyer about the norms of startup finance also helps. 

Founders outside of Silicon Valley can sometimes forget that most of the resources – blogs, articles, podcasts, tweets, etc. – on startup finance and norms are, in the grand scheme of things, a tiny bubble in the overall business market.  When anyone says there simply “isn’t enough money” available for startups in Texas, or markets similar to Texas, what they really mean is that there isn’t enough money flowing into tech companies. There’s tons of money floating around elsewhere. People who can culturally build bridges between tech ecosystems and more traditional business networks have a competitive advantage in the market, and are often the ones forging ahead building new companies, and even investment funds, while others run around in circles soliciting only the ‘techies’ of the market.

Startups Scale. Solo Lawyers Don’t.

TL;DR: Freelancer marketplaces push solo lawyers as a way to keep legal costs down for startups.  But what they’re marketing is very different from what they actually deliver. Solo lawyers can’t scale, and lack specialization. For high-growth startups, that is a big problem.

Background Reading:

In the landscape of options for getting legal covered for a tech company, there are generally speaking three types of providers, in order of largest to smallest: (i) BigLaw, (ii) Boutique firms, and (iii) Solo lawyers.  I’ve written quite a bit about the comparison between (i) and (ii), but this post is mostly about (iii).

Overhead

“Overhead” is a term often used to refer to everything that a lawyer’s rate has built into it that doesn’t directly go into compensation. Very large firms (BigLaw) have significant amounts of “overhead”; only about 20-25% of the $575/hr you pay for a top-tier BigLaw senior non-partner actually goes into her pocket.

But it’s far too simplistic to assume that all those resources are simply being burned for no reason. Large, fast-moving, complex transactions require collaboration among lots of different kinds of legal professionals, including different kinds of specialties of lawyers, paralegals, legal assistants, legal technology providers, etc. For the very top end of the market, good arguments can be made that the “overhead” of large, international firms is actually quite necessary. The idea that a bunch of freelancer lawyers/legal professionals could just team up to get a billion-dollar merger done efficiently and on-time is little short of delusional.

Boutique firms are the market’s response, enabled in part by new low-cost technology and infrastructure, to BigLaw’s overhead. Those deal lawyers who don’t cater to, and aren’t pursuing, the Ubers and Facebooks of the world, are acknowledging that while they do need institutional resources (overhead) to create strong teams that can close meaningful deals, those institutional resources don’t need to eat up more than half of revenue; certainly not with today’s technology. A $100MM acquisition, or even in many cases a $10MM financing, is sufficiently complex and fast-moving that, again, you are delusional if you think a bunch of freelancers working independently are going to get it done effectively; but a small integrated team of affiliated lawyers, or even a handful of boutique firms, can easily get it done outside of a 1,000 lawyer firm with offices on multiple continents.

Solo lawyers are on the opposite end of the overhead spectrum. They are the freelancers of the legal world. Their ‘overhead’ amounts to maybe a few SaaS subscriptions and a computer. MEMN’s specialist network, in fact, has a fair amount of solo lawyers in various legal specialties. Their rates are naturally lower than lawyers in large or even small firms, due in part to overhead. You might conclude – and there are definitely solo lawyer marketplaces out there trying to drive this conclusion – that every early-stage startup should obviously be using solo lawyers, because they’re “cheaper.” But this overlooks certain key facts about the nature of startups, and about legal services, that call for a reality check.

Legal bills don’t correlate completely with hourly rates.

It’s not that complicated to understand that a well-structured team of lawyers billing $425/hr can easily produce a lower legal bill than independent solo lawyers billing at $275 if they have the right institutional resources – technology, team, knowledge, process (“overhead”) – in place. They’re also often supported by junior professionals/non-lawyers with dramatically lower rates to cover routine items. At very early stage, a lot of the tasks that startups need actually require very little lawyer involvement at all if the right infrastructure (‘overhead’) is in place. If you assume solo means cheaper, you’re often wrong.

Specialization drives efficiency.

What is a “startup lawyer”? That will take too long to fully explain in this post, but I can tell you what it’s not: a litigator, a small business lawyer, a generalist who dabbles in a little estate planning, real estate, and a few seed financings on the side, or a generalist corporate lawyer. I’ve been shocked by how many of these solo lawyer websites market lawyers as “startup lawyers” when they clearly, from their own bio descriptions, are nothing of the sort. Similar to the first point above, a lawyer at $425/hr who has done a project 50 times will be dramatically more efficient at it than someone at $275 who has done it once.

This is not rocket science. Smart founders know that developers with higher salaries often get far more done than 10 developers at lower salaries. The talent market dynamics of lawyers are not that different from those of developers.

In a talent market, the cheap guy is usually cheap for a reason.

In an industry where results are driven by human, not just institutional, capital, you simply cannot hire whoever walks in the door and train them to produce A-level service; no matter how fantastic your resources are. As elitist as it may sound, most lawyers on the market simply lack the capacity and knowledge to correctly manage and close complex legal work. They may be very well suited for certain areas, but the moment you leave the minors and start playing in the majors, everything goes off the rails.

Serious talent requires serious compensation, which sets a floor on hourly rates; regardless of overhead. If that is too difficult to understand, good luck in business. It can be (and is) simultaneously true that the legal market is flooded with under-employed lawyers willing to discount and jump through hoops for work, and yet great lawyers who can manage and navigate specialized complexity/scale are in very high demand and short supply. 

Fast growth requires scalability. Switching lawyers is costly.

A startup can go from 2 founders needing to just incorporate to needing fast VC, employment law, tax, licensing, etc. support in just 1-2 years; sometimes sooner. You’ve got a VC term sheet on the table, 10 equity grants that need to get done in 2 days, a resolution to the issues with the VP you just fired, and assistance finalizing that LOI with the big customer that will help close your round; and you need all of this done this week. Virtually every single startup that has switched to MEMN from solo lawyers has had the same universal complaint: they are SLOW.

Of course they’re slow. All that (air quotes) “unnecessary overhead” they cut out to get you that awesome hourly rate is precisely what could’ve funded the institutional resources that ensure legal work keeps moving: a well-trained team to collaborate with, technology (and training for technology) that streamlines unnecessary tasks, non-lawyer professionals to knock out checklist items while the lawyers focus on the big stuff. Scaling companies need legal teams, and max out a solo lawyer very quickly.  If a single solo lawyer happens to peculiarly have all the time in the world, please re-read my comments on talent markets.

And if you think it’s smart to go with the solo who is ‘cheaper’ and then switch quickly to a firm: again, a reality check. Switching lawyers/firms is costly. The new lawyers have to familiarize themselves with what the prior guy did, on forms that they (usually) aren’t familiar with. That takes time, and increases the likelihood of errors. Finding a firm that can scale-down for very early-stage, but then scale up when needed, all using its own forms and resources, is far smarter than taking an iterative approach with your legal team.

In short, the changing legal landscape available to tech companies is being driven very much by technology, and it’s been great not just for entrepreneurs, but also for lawyers looking for alternative platforms to work from.  I’m a big fan of how solo lawyer marketplaces are helping connect demand with supply in areas where the ‘overhead’ of firms really is unnecessary.

But be very careful about buying into any marketing suggesting that there’s this untapped market of great solo “startup lawyers” just waiting to fill your startup’s legal needs at unbelievably low rates.  Solo law works great for small businesses, who don’t scale fast;  and also for certain legal specialties where projects are very compartmentalized. But true startup/vc law requires institutional resources and well-trained, well-coordinated teams of lawyers/non-lawyersThe goal of tech startups is to scale quickly.  But solo lawyers can’t scale at all. That means that solo “startup lawyers” are, at best, a bad fit; and at worst, an oxymoron. 

Pre-Series A Startup Boards

It’s pretty well known that startups usually undergo a meaningful change in Board composition at their Series A round. At a minimum, the lead investor(s) of the round get Board seats; although they shouldn’t get Board control.

Less has been written about what startup boards tend to look like before a Series A round. Given that the time from formation to Series A has stretched out significantly for many companies in the market – due to pre-seed, seed, seed plus, seed premium, series seed, seed platinum diamond, whatever-you-want-to-call-not-Series A rounds. So here’s some info on what a board of directors tends to/should look like Pre-Series A.

A. Know the difference between a ‘Board’ of Advisors and a Board of Directors.

A lot of companies refer to their set of advisors as a ‘Board’ of advisors. That’s fine, even though they very rarely actually act like a board. There (usually) aren’t ‘Board of Advisors’ meetings where everyone gets on a conference call and talks shop. Instead, the company just has a loose set of individual advisors they work with on strategic matters, often in exchange for equity with a vesting schedule. Advisors often times are angel investors as well.

The important point here is that Advisors have no power/control over the company. They just advise. The Board of Directors, however, is the most powerful group of people in the Company, with the ability to hire and fire senior executives and approve (or block) key transactions. Big difference. Giving someone a seat on your Board of Directors is 100x more consequential to the company than naming them an advisor.

B. Know the difference between a Board Observer, Information Rights, and being a member of the Board of Directors.

Most angel investors writing small checks are buying the right to a small portion of the Company, and that’s it. They don’t expect to be very involved in day-to-day, and are happy to just receive whatever e-mail updates the Company intends to send out.

Angels / Seed Funds who write larger checks may want a deeper view into what’s going on in the company. They’ll often ask for different variants of ‘information rights’ – which can include delivery of regular financials, and notification of major transactions (like financings).

A step up from ‘information rights’ is a Board observer right. This means the investor has the right to observe everything that happens at the Board level, which includes hiring people, equity grants, approving major deals, etc. Do not dish out Board observer rights lightly. Having too many observers can make it difficult to keep confidential matters from being leaked to the market. It also can just be logistically cumbersome for a seed stage company to keep track of who gets to attend meetings, who has to be notified of what, etc.

Also, if you do give someone a Board observer right, ensure that it’s clear that they are a silent observer. This means that they can listen in on Board discussions, but they are not entitled to provide their thoughts/input, which can have legal ramifications and influence the true decision makers.

C. Giving seed stage investors Board seats is not the norm. Take it seriously.

The majority of companies we see have Founders only on the Board before closing their Series A. Sometimes it’s just the CEO; other times it’s 2 or 3 founders. That’s very much driven by the personal dynamics among the core team.

Occasionally a seed or VC fund writing a large seed check ($250K+) will request a Board seat for their seed investment. While not the norm, it’s also not terribly off market if a large check is being written. Founders should just understand that giving anyone a Board seat, even if they don’t control the Board vote, is inviting them to give their input on every single major strategic decision the Company will make. It is a very deep commitment, and should only be given to people you believe can deliver real value to the business, and whose values are aligned with the founder team. Otherwise you’re asking for unnecessary and distracting drama.

If the fund that wrote the large seed investment has deep enough pockets to lead a Series A, and is interested in leading your A, this adds even more layers of complexity to the decision. A *true* seed investor who only invests in seed rounds can be an asset in sourcing Series A leads, because those leads are a complement to their position. A VC who dabbles in seed investment for pipeline purposes, however, has opposite incentives; assuming you’re doing well, they may prefer to lock out other potential competitors and take the Series A round for themselves. Having a VC already on your seed-stage Board can make it harder to get term sheets from outsiders for your Series A.

This dynamic of committing early to a VC before you’re ready for a Series A is discussed somewhat in The Many Flavors of Seed Investor “Pro-Rata” Rights.  My experience has been that getting trustworthy VCs on your cap table pre-Series A is generally a very good thing, so long as their participation is not contingent on terms that effectively lock you into having them lead your Series A. That is the startup equivalent of getting married as a teenager, before you’ve had a chance to mature and really explore the market.

VCs who ask for board seats at seed stage, or who require that you guarantee them the right to a large percentage of your Series A (50%+) are trying to get you to lock yourself in early. You should want them to invest, but still ensure that they have to earn the right to lead your Series A.

D. Board composition should ‘reset’ at Series A.

If you’ve ended up giving a Board seat to a large seed investor in order to secure their investment, it is extremely important that it be clear between everyone that the seat is not guaranteed indefinitely. Boards can only be so large. If your seed investor who put in $250K is guaranteed a Board seat forever, it makes it a lot harder to make room on your Board for the people putting in millions, or even tens of millions of dollars.

The logic here should be that if the seed investor insisted on a Board seat at seed stage in order to ‘monitor’ things early on, they should be comfortable letting go of the wheel once they know larger, more experienced institutional investors are taking over. Their interests as an investor are more aligned with the new VCs investing in the Series A than they are with the Common Stock. It simply is not appropriate for a company who’s raised $5 million, $10 million, $30 million+ dollars of capital to still have someone who wrote a $250k-500k check taking up a board seat. Board observer rights should also terminate at Series A, or perhaps Series B, for similar reasons.

So, in a nutshell, founders should start with the assumption that no one will join their Board of Directors until a Series A happens, and someone writes a 7-figure check; as that is the norm. However, for large checks from investors with strong value-add and alignment with the founders, there can be a justification for giving them a seat at the table, as long as it’s structured in a way that will not cause any issues, or prevent competition, in Series A negotiations. For investors who want (and deserve) something ‘extra’ on top of their investment security, advisor equity, information rights, and silent observer rights should all be explored as alternatives.