Does my startup need a NED?
Startups can oftentimes call upon the services or external parties to help scale their vision. One of the most well known is the NED (Non Executive Director). But the question is, do you need one?
The role of NEDs at a startup
One of the most influential but confusing appointments on a startup’s board is that of a NED not least because as a title—its a coveted one, with many actors vying for appointments. However the reality is, few really understand the role or have the relevant experience to be successful in it.
So what makes a NED?
The expectations and responsibilities of a NED will inevitably vary from company to company and role to role but at a high level can roughly be broken down in to five distinct areas.
Contacts — typically the most appealing aspect of bringing a NED onboard is the opportunity to leverage their little black book. A well appointed NED will have connections in your industry or your market that a founder can only dream of having access to when they start out.
Perspective — the skill and ability to look at the varying issues facing founders and show them how to strip back and break down each issue, prioritising them accordingly.
Experience —often confused with wisdom, experience can be obtained over a number of time horizons and from various situations. A good NED is someone who’s been around the block a fair few times, with a strong pool of both good and bad experiences to call upon when needed.
Objectivity — they’re completely impartial, not C-suite, not management, nor investor. NEDs should not have an agenda. Business decisions should have zero impact on them, allowing them to help founders make any decision in the best interests of the company.
Reputation — their background can oftentimes be a draw and with that comes symbolic value. To have a well respected business leader or subject matter expert on the board brings comfort to investors, stakeholders and staff and demonstrates a validation, whether perceived rightly or wrongly.
So you’ve found a NED, how do you compensate them and for how long?
Cash in terms of a salary is always a good start with the alternative being an equity allocation awarded after their term is complete. A hybrid of the two can also work, allowing a both parties the option to spread the cost. A NED seat should really only last for a maximum of two to three years in a given role. At which point it can be called in to question their independence and impartiality as well as the company’s dependance and reliance on them. Fresh eyes and new perspectives make for a healthy organisation, a good NED will recognises this.
Can an investor be an NED?
No. Frankly, how can they be? Any investor relinquishes any and all impartiality the second they have a a vested interest in the form of equity. Additionally many investors hold strong beliefs and opinions and given their day to day, are unlikely to stop themselves from imparting this on daily operations. This doesn’t stop investors from trying however. Clauses to this effect are placed in countless term Sheets as a condition of investment.
If an investor wishes to take a more active role there are typical ED (Executive Director) positions that are much better suited to this type of involvement.
So do i need a NED or an ED?
It really depends on what you want, if you are looking for an impartial advisor to work in the best interest of your business you will likely be searching for a NED. If however, you are looking for a someone to take a more active role in your business or you are offering equity ahead of any services being provided, you are stepping into the world of the ED or Advisors/ Investment Directors.
It’s worth noting that in the UK at least there is no legal distinction between EDs and NEDs and a NED will have the same legal responsibilities as any other director under the Companies Act 2006.