The role of an NED in a startup
One of the most confusing appointments on a startup board is that of the NED (the Non-Executive Director*) not least because many want to be one or have one yet few really understand the role or have the relevant experience.
An NED is an impartial, part-time, non-operational appointee who joins the board of a startup. At the point of joining they should have zero skin in the game. Zero. The primary role of an NED is to represent the interests of all shareholders, including the founders. They are an essential addition to an inexperienced founding team and/or teams with two or less founders. Many solo entrepreneurs credit the success of their startups to guidance offered by their NED’s, Nick Jenkins, the founder of Moonpig (the successful personalised E card company that sold to Photobox in 2011), being just one example.
How do you pay them and for how long?
Cash is always a good start or in the alternative an equity award POST services provided (around 1 – 2%). An NED seat should really only last for a maximum of two years, after this time it can be argued that the independence test starts to wain/the Company starts to get too reliant. Fresh eyes make for a healthy organisation, a good NED recognises this.
So what is the makeup of an NED?
Perspective – the ability to look at the issues facing the founding team, show them how to break down each issue and then prioritise.
Wisdom – I’m not being ageist, I’m being truthful. An NED is someone who has been around the block a few times, a professional with a back catalogue of good and bad experiences gained over a number of decades.
Contacts – maybe this individual is the holder of a little black book. They have connections in your industry that a founder can only dream of having access to.
Objectivity – they are completely impartial, not C-suite, not managerial, not investors. Decisions have zero impact on them so they help founders make those decisions in the interests of the greater good ergo no agenda.
Credibility – their prior standing or success brings with it symbolic value. To have a well respected business leader on the board brings comfort to investors and showcases perceived validation to the wider stakeholders.
Can an investor be an NED?
No. How can they be? They are not impartial because they have a vested interest in the form of equity and they won’t be able to stop themselves from having an opinion on the day to day operations (yet despite this, I see countless Term Sheets where this is a condition of the investment.)
If the investor would like to take a more active role in the startup and providing they have more to offer, then the correct hat for them to wear would be the Advisor hat, or even the Investor Director hat (allowing them to monitor their own investment) and the Advisor hat. Just not the NED hat because without doubt, that hat’s for another head.
*Unlike many of the fancy terms in the startup ecosystem, an NED is not a title which we can lay claim to. It’s an actual thing, created by and governed by the ICSA.
