When it comes to building your board, what are the most important things you need to know?
Today’s shorter, snackable episode was taken from a session Roland Frasier did at this year’s Scalable Impact LIVE. It was very helpful for the sold-out crowd, so we’re passing it along to you.
Listen in for some expert tips on structuring your board and advisors.
Your Business Needs a Board-Friendly Structure
The two boards that will be important to you are:
- your board of directors
- your board of advisors.
They’re two very different things. A board of directors has power; a board of advisors does not.
There are also a few different types of entities you might choose for your business:
- a corporation
- an LLC (limited liability company)
- an LLP (limited liability partnership)
- an LP (limited partnership)
And there are at least 8 different objectives to consider:
- Limiting liability
- Having a different cap table (who the owners are)
- Saving on taxes
- Whether you want income to pass to you personally or not
- Preferential law
- Geographic diversity
- Funding-friendly
- To prepare for sale
Where Do You Want to Hold Value?
What is the value of cash? We don’t typically leave it all in one place in a company. We put the value of a profit center in one entity and we’ll put tangible assets in another company. You can also put intangible assets in another company. And intellectual property in a separate company. And create license relationships back to the original company.
How this all shapes up is the goose and egg structure. We like to be able to exit part or whole of the company. If you structure it properly, you can keep the momentum and still sell the thing that makes the money. Roland recommends that you don’t own your business individually. He doesn’t own anything in his name. He has no net worth per se, but he has plenty of money. He recommends having a holding company that owns all your assets. It gives you so many planning options.
Then you have your primary operating entity. Roland and his partners have a separate company that they put all their shared resources in—their media properties, finance team, sales team. They put all of their employees in one company. Then, if you sell one of your companies, you don’t lose your team. Or you can sell a company without losing your intellectual property. There’s nothing shady about this. It’s all in the documents.
The next thing you want to think about: what if I want to have a new product line and want to separate the liability for that from my existing company? You can do this. It’s a good idea. You can have a separate company. Or you can transfer some of the risk to investors without giving them any more ownership. Give them more equity in the new unproven company, not in the holding company or the operating company.
Roland has found that this structure works really well. How does it relate to boards of directors and boards of advisors? You have your holding company. This will typically have a board of directors. They have power. They can vote you out of your company. Then there’s a board of advisors. They don’t have power; you’re just asking them for advice. That’s the difference.
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