In the earliest days of your business, big decisions can be made over a cup of coffee.
But as you grow beyond the bounds of the founding team, decision making will become more difficult. You'll need to hire directors, partner with investors, and enlist the help of startup mentors and advisors. Very quickly, you'll find yourself with a board of directors: passionate, invested people, each trying to make the right decision for the company.
As a result, it can become extremely difficult to make objective decisions on important issues. Thankfully, that's where a non-executive director comes in.
What is a Non-Executive Director?
In simple terms:
A non-executive director (NED) is a member of the board of directors, but crucially, is not an employee of the company, and is not part of the executive management team.
A non-executive director's primary role is to attend board meetings, and offer advice and objective criticism of the company's decisions.
In this sense, NEDs (also known as independent directors) share many responsibilities with 'traditional' directors; but crucially, it's their lack of direct involvement in the day-to-day running of the company that gives them their real value.
Why You Need a Non-Executive Director
1) They Bring an Outside Perspective
Independent directors are just that: independent.
Unlike other directors and board members, NEDs aren't involved in the minutiae of running your business. They won't be affected by the same stresses and strains that beset founders, directors and investors, and can often provide a fresh perspective on your biggest problems.
This can be invaluable when tackling potentially emotive decisions, like appointing other directors, and setting compensation for the executive team: their outside perspective will allow them to be fair, balanced and critical.
2) They'll stay cool when things go wrong
If things start to go badly wrong, who can you turn to? Chances are your co-founders are going to be just as freaked out as you; your investors have a ton at stake; friends and family won't be able to help; and casual advisors might not be around.
In fact, anybody who has a lot at stake (be it their jobs, money or dreams) is likely to have their judgement clouded, so it makes sense to turn to somebody outside of the situation.
Without a significant vested interest in your company, the advice of neutral, clear-headed non-execs can be invaluable for overcoming emotive biases, and steering decisions in the right direction for the business as a whole.
3) They'll have different skills, experience and contacts
Most NEDs are seasoned entrepreneurs, with years and decades of experience behind them. In many cases, companies actually look for non-execs from a different industry to their own, in an attempt to introduce a different perspective on the challenges they face.
With that experience comes connections. Whether you're looking for investors, advisors, startup mentors or specialised partners, NEDs will often have a network of friends and colleagues - perfect for opening up new markets and solving difficult growth challenges.
Should I Pay a Non-Executive Director?
Lots of different types of businesses leverage NEDs, and in many cases, pay them for their help (a 2006 survey found that the average day rate for non-execs was £1,020). This is particularly true in in larger (and often public) organisations, where the role of a non-exec is much more complicated and defined.
However, most startups are cash-poor, and if they're able to offer a salary, it's unlikely to be competitive enough to act as an incentive for an experienced entrepreneur.
Instead, many people view nominal equity stakes as suitable 'payment' for the help of non-execs, a way of rewarding them for their help and better aligning their interests with yours:
"I have a rule that outside "independent" board members should actually invest a nominal amount in order to be on the board. Crazy, huh? If they have no skin in the game they don't act like owners of the company."
But there's a potential problem with equity payments: if a NED is meant to provide an objective, level-headed critique of your startup, do you want them to act like owners of the company?
"...having the outside director invest or receive a significant amount of common stock can detract from the original purpose of having a director not affiliated with either the company or its investors."
Though there's no black-and-white answer to the problem of payment, there's a simple rule you should keep in mind: if you find somebody willing and able to help your company grow, it's worth rewarding them.
A great non-executive director can provide a fledgling startup with experience, advice and connections. In the early days of your business, when the smallest competitive edge can make or break your success, this type of help is invaluable.