It all starts so well.  You meet a VC and deliver a knockout pitch.  They love it, you exchange business cards and they set out the next steps.  First, you have to meet a few other people from the firm: they’re busy so it could take a few weeks to secure the appointments, but they’re genuinely interested and ensure that you are seen quickly.  You meet again for lunch, then dinner, then drinks.  You become friends.  You discuss the wondrous opportunities for your business and ways in which they can help in reaching them. Watch out: you’ve started to fall in love.  You discuss generalities about the deal terms, big stuff like valuation, how much they’ll invest (a lot) and, of course, they’ll want a seat on the board.  You’re excited; this will transform your world.  In no time, you’re planning how you’ll spend the money, looking at new office space and thinking about recruiting new team members.

One of the senior partners you needed to meet with was travelling, so you wait six weeks for the meeting.  It’s promising too; he wasn’t as excited as the junior guys, but he likes them to be autonomous, and allows them to pick their own deals.   The senior partner suggests you meet a friend of his who runs a big company that, he says, would make a great partner for your business.  It sounds helpful but you know he’s checking out what his friend thinks of you.  The company is based in Melbourne; you have to travel and the meeting takes two more weeks to set up.  All goes well and after a week you hear the team at the VC wants to move forward with your deal.

Phew.

Next comes due diligence.  This starts with a long list of requests and a promise that, once all the information is together, this won’t drag out.  They assure you’ll receive the term sheet within two weeks.  You pull in your team and work late — very late — to assemble the material quickly.  It may include questions like, ‘who holds all these shares on the cap table?  Is there anyone here without an employment contract, why did you model revenue a particular way, will you really need all those engineers? (Looks expensive.)  You diligently answer all their questions, repeatedly rework your financial model, and make changes to or write new contracts.  More than a month passes; you’ve spent money you don’t have getting help with contracts, accounts and a revenue model to satisfy the VC.  You’ve answered almost every tricky question about your business plan, competition and the market that could be asked.  Everyone seems happy and the VC reassures you that due diligence is almost complete.  The term sheet is only days away.  Four months have past since you first met and then there’s one more thing – a meeting, a problem, a question – something that’s going to take more time.   Finally, you start talking about investment terms.

Then something happens.  It could be any number of things, but it’s a knockout blow that kills your deal.

The first time this happened to me, I negotiated for six months with a big name brand.  They proposed to invest $3 million dollars and the association would have catapulted Posse’s profile to the stars.  I liked the executives leading the deal and couldn’t wait to build the business with them.  They assured me they could move quickly, and would reach a decision within a month.  But the months dragged on and more people became involved, asking more questions.  I wasn’t even worried; I was so sure we’d close the deal.  After all, they wouldn’t have invested so much of their company’s time if they weren’t serious.  But the terms they came back with killed the deal; they were nothing like the proposal we discussed when we initially met. They would invest, but placed a valuation of less that half our expectation.  I might have accepted, but our board refused.   Another time (last year), I spent five months attending to the whims of a New York Women’s Angel group.  I answered their questions, recreated financial models and met every relevant person full-time for months.  They said they’d invest over a million dollars, and the process required only four to six weeks.  Then they discovered they couldn’t invest nearly as much as they claimed.  The exercise had been a gigantic waste of time, distracting me from talking to other, serious investors.

I remember venting my frustration during one of these drawn out funding situations to Matt Barrie of Freelancer, who mentors me from time to time.  He said, “Never start due diligence until you’ve agreed on a term sheet”.  With hindsight, it seems so obvious.  If I refused to do any work until a term sheet was worked out upfront, then I wouldn’t have spent months and tens of thousands of dollars pleasing investors who weren’t serious, didn’t have the money, or whose deal expectations were vastly different from ours.

The problem is, refusing to do any work until a term sheet is signed sounds great but is hard to implement.  When you first meet, you’re excited and the investor promises that the process only takes few weeks.  You can afford to invest a few weeks.  Even as time drags on, everything appears to be proceeding well; you’re certain the deal will close.  As more time drags on, costs pile up and cash reserves dwindle. You realise that, with so much time invested in this deal, you can’t afford to start the process again.

To any investors reading this: for the good of the industry, respect the time and resources of entrepreneurs.  An entrepreneur can only afford a few months to launch a business; if you string them along, you’ll distract them from building the business and talking to other investors.  Then if your deal doesn’t go through, there’s a good chance you’ll kill their company and their spirit as well.

I will never get stuck in this situation again.  I’ll never let an investor seduce me into believing that a term sheet is around the corner while I invest time and money into more meetings and answering thousands of questions.  I will ensure that a term sheet is agreed upfront and then start the due diligence process.  Of course, if the VC finds something they don’t like during due diligence they can always back out of the deal, but at least I’ll have established that there’s a deal to be done in the first place.   Even though I know your firm is big and my company is small, I’ll do this because I know that time and energy are my biggest assets.

When I started Posse I didn’t know much about company boards.  A family lawyer helped establish our companies.  He suggested I set up a board and try to find some impressive-sounding people to join it.  His objective was to make the ‘team’ list in my fundraising presentation look more appealing to prospective investors.    So off I went on a mission to meet big name folks who’d look good on my deck.  It didn’t seem to matter how many, the more the better.

Within a month I’d assembled a board of eight, including myself, and we called a meeting.  A friend lent me his board room, a big office in the city.  I expected a casual, friendly affair where we’d chat about business and strategy and they’d agree to introduce me to some potential investors.  I was in for a surprise.  First of all they wanted to know everything.  How much money did we have in the bank?  What were the liabilities, the budget, how many people had visited the site last week, last month, how long did they stay for, how much money had we made?  And so on.  I wasn’t prepared and it was overwhelming.

After a couple of hours of grilling, I gained a sense of what a board expects from a founder.  I’d run my own business for eight years and didn’t report to anyone.  In time I came to appreciate the rigour of reporting.  For the next meeting, I made sure I sent out the cash-flow report, budget, metrics, and a presentation outlining what I wanted to talk about — all in advance of the meeting.

Six months in, our group hit its first challenge.  The business had started well; we’d raised some money and gained traction.  Everyone became excited, then out of the blue one director presented us with a proposal involving a full-time job and a lot of equity.  The group wasn’t sure how to react.  He left the room while we discussed his proposal, and when we rejected it he was hurt and embarrassed.  He quit the board and sent us a huge invoice for his time, which we spent a year fighting and eventually settled.

Some members of our original board were excellent and are still active in various capacities today.  Others drifted off: they had an expectation that we’d be a huge hit within months and when hard work set in they disappeared.  Some stuck around and were destructive when things didn’t go their way.

I learnt the hard way how bad things become when you have the wrong board.  I’ve also learnt how powerful it can be to have the right board behind you.  Here are five tips for start-up founders looking to build and run an effective board of directors.

1. Set expectations up front.

It’s easy to procrastinate finalising deals with advisors and directors.  Everyone is there to be helpful, and at the start it doesn’t seem worth negotiating to pay them a share of nothing.  The problems kick in after few months when things start going well, and you realise you and they have different expectations about payment.  Most start-up directors will expect to receive equity rather than cash, and in my experience the standard rate is 0.5% to 2% vesting over two years.

You must determine what you expect of the director.  How will they help with fundraising, strategy, introductions and the like?  If appropriate, you might want to agree on how much time they’ll commit to your business — although when you have the right people onboard it’s likely they’ll be bugging you with ideas and suggestions for how they can help.

2. Be transparent and organised.

Your board should be the one group of people with whom you can be completely transparent.  It’s their job to help you work through challenges; so they must understand those challenges if they’re going to add value.  I remember at one of the first meetings of our new board, I announced that the product we’d created wouldn’t scale.  We had to go back to the drawing board and try something else before we ran out of money.  No one flinched.  We put a process in place that would devise a better strategy.  I’ve also found that board meetings are much more effective when I’ve put time into thinking through the agenda and have written a presentation to talk through.

3. Make sure your directors have the right experience.

My original board sounded impressive, but many were impressive in the wrong industries.  They had no experience of the challenges of a start-up like ours.  So I received bad advice which led us to hire the wrong team and spend too much too quickly.  A couple of our early directors had never used Facebook or Twitter and wouldn’t even join Posse.

Everyone on our current board has incredible expertise in different areas of early stage companies in our space.  They know what other businesses are doing to grow, engage users, monetize, save costs and much more.  Almost every day, one emails me with an idea or opportunity that I wouldn’t have thought of.  And through them, we can access almost anyone we’d need to help our business anywhere in the world.

4. Keep the numbers small.

We have four directors on our current board, including me, and one regular observer who acts like a director except he doesn’t vote.  It’s a tight group: everyone knows the others’ strengths; everyone is committed to making Posse a hit.  I’ve heard that the reason to keep boards small is to ensure that as a founder you won’t be outvoted.  I suggest that if you even think this, you either have the wrong board or you’re the wrong founder.  For me, the benefit of having a small board is that I can spend time with each person regularly. Everyone is in touch with what’s happening and can contribute.

5. Make sure you like and trust people before inviting them to join.

Directors have much more influence than I originally thought.  They decide who leads the company, what deals to do and when to exit, so you must make sure you all share the same vision upfront.  You must know they’ll do the right thing, and that they’ll stick around and support you when you hit tough times.  I’ve heard many stories from founders whose advisors and directors vanished when it looked like the company might fail.  We’ve had hard times and I can honestly say that our group pulls together and digs in, no matter what the circumstances.

At my first board meeting I learned what directors expect from a founder.  It took me quite a while to work out what founders should expect from their directors.   Our board helps me refine our strategy and operation plans; they’re constantly suggesting new ideas and making introductions; they’ve been involved in fundraising; they hold me to account and oversee the governance of the company.

The names on our board are impressive but that’s not why they’re there.  I’ve learned that a top notch board of great people with relevant experience and a shared vision is a wonderful advantage and has made my founder’s journey easier and more fun.

Don’t do it!  The deals these guys offer may be bad for the entrepreneur and investors don’t like them.  And you miss out on all the benefits of fundraising.  Yes, it’s painful but the fundraising process is the best education you can have for the next stage.

I made this mistake, not once but twice in the first six months of Posse.  It’s hard to say no to these guys because they’re so charming and fundraising can be difficult and daunting.  The pitch that someone can raise a million dollars for you from top investors quickly is very compelling.  For me it sounded too good to be true and it was.  I ended paying huge retainer fees that supposedly covered ‘costs,’ and then 3 – 10% of anything we raised.  These deals are very hard to escape from.  A few months later when I gave up waiting for his contacts and raised the money myself, I was still paying someone a success fee on money he didn’t even bring in.  I raised the money; he collected the commission on my work!

Another reason for avoiding corporate advisors is that professional investors hate dealing with them.  Two VCs actually asked me to write about this in a blog because they don’t want to be the ones to say it.  Investors back people.  They want to know you’re resourceful enough to get to them on your own merit, not by paying someone else to do it for you.  If you’re introduced by a corporate advisor whom they know you’re paying, you’re immediately on the back foot.  It’s not nearly as good as being introduced by another entrepreneur or investor they respect.  And investors want to know that the money they invest goes towards getting the business up and running.  Not paying some guy to introduce you.

In many ways, fundraising sucks.  It takes up a huge amount of time that you’d rather spend building your business, and it’s hard to take knockback after knockback.  But where there’s pain there’s often gain, and with fundraising there’s a huge upside.

- Very smart people will challenge your idea and make suggestions.  In the course of fundraising, I’ve met some of the smartest people out there, with direct experience of building businesses similar to Posse.  These challenging conversations about my product day after day helped shape my strategy.  Many of our best ideas started as suggestions from prospective investors or concepts sculpted by their questions.

- You’ll build a network of people who will help you later.  I often catch up with people I pitched to but who didn’t invest and ask for connections to other businesses or media partners.  I’ve pitched to more than 1000 people so I amassed a pretty large and powerful network.

- You’ll refine your pitch.  By repeating the same pitch over and over, I soon sensed what people found exciting about our product strategy.  I polished my pitch until it shone, which helps when I talk to media or sell to customers.

- You’ll be careful with money.  I’m sure you’ve heard stories of companies who raised tens of millions from a VC and spent it all in a year before falling over.  When you go out and meet people one on one, and they write you a personal cheque to invest in your business, I think you take spending much more seriously.  Every time I notice waste at Posse I can’t help but think of the individuals who invested.  They trusted me to spend it wisely.  As a result, our investment has lasted much longer than other businesses, raising our chance of success.

Fundraising is hard, lonely and distracting.  Since I started Posse in 2010 I’ve probably spent at least half my time talking to investors, planning meetings with investors, answering their questions, preparing my pitch, negotiating terms, drawing up paperwork and chasing people for their paperwork.  When someone comes along and says ‘Your business is great.  I can raise money for you and you won’t have to do the work,’ it’s a compelling proposition.  In my experience, working with a corporate advisor often doesn’t work out; you end up frustrated, wasting time, money and equity.  And you miss out on terrific groundwork for your business.

Before starting Posse I ran a music company, Scorpio, that I founded by myself in 2002.  Four years into that company, I decided I wanted a co-founder.  I said that I wanted someone to compliment my skill set but the truth is, I was lonely.  It’s hard to run a company by yourself.  Even though I had staff, it wasn’t the same as having a partner with whom to share things.  The experiment was a disaster.  We had different styles, work ethics and visions for what we wanted to achieve.  I hated it, and within two years we went our separate ways at considerable cost of time, money, energy, and reputation.

This experience influenced my decision to run Posse solo but lately I’ve considered bringing in a partner.  I’ve spoken to many friends and advisors, some with co-founders and others who’ve done it themselves, to assess the benefits and risks of solo vs. co-founder relationships.  There’s no right answer: both setups work for different people at different stages of their businesses.  As I reflect on my own decision, here are what I think are the top four reasons to work with a partner or go it alone.

Why to be a sole founder

1. You set the culture.  There’s nothing more frustrating than being in partnership with someone who isn’t nearly as driven or hard working as you are. Imagine slogging it out day and night to get your business off the ground while your partner is at the beach.  This not only feels unfair but it also affects the culture of your company: the rest of the team follows the leaders, and if one of the leaders is lazy then it’s hard to create an ambitious and hardworking culture.

2. It’s easier to make decisions quickly.  No one is right all the time, but if you made the leap to start a business then you obviously are confident enough in your own ability to back yourself.  Different people have different visions and different priorities.  Start-ups have to move quickly to gain momentum on a tight time frame.  It’s good to deliberate but it’s important to make decisions quickly.  One of my favourite things about being a solo founder has been my ability to draw on a lot of advice from talented people, make a decision and go for it.

3. You can’t fall out with yourself.  One of the top reasons startups fail is the founders fall out.  They often start out as friends and it’s great when things are going well.  It’s when times get tough (which they almost always do) partners squabble.  Each blames the other.  One isn’t as smart, made the wrong call or won’t put in the work.  It kills confidence with the investors, the team and very often kills the business.   I’ve seen this happen several times with friends’ companies and founder divorce has to be one of the most painful and draining experiences you can go though.

4. Sole founders learn more.  Other than the joy of creating something of value (team, product, and so on) and the prospect of an eventual financial payoff, the great reward from being an entrepreneur is the degree to which you learn and grow throughout the process.  Certainly, being a sole founder is harder.  You are responsible for everything, not just the bits that you like or are good at.  You need to understand financial modelling, team building, product design, sales, marketing, community, HR and operations.  When there’s a problem, there’s no one else to turn to.  You need to solve it.  Although this has been difficult and tedious at times, when I reflect, I’m glad that I’ve done it.  There’s no MBA on earth that could teach me what I’ve learned running this business over the past couple of years.

Why to have a co-founder:

1. You’ll make better decisions and are more likely to reach the right outcome faster.  Two heads are better than one.  As long as your co-founder is smart and approaches problems from a perspective that differs from your own, through a process of debate, you’ll arrive at better decisions.  If, for example, one founder is technical they may approach a strategy challenge from a data perspective while another founder with a background in marketing may be more insightful.  Both approaches are valid and together the two founders are likely to arrive at a better solution than either would achieve alone.   The decision-making process might be longer but a better strategy from the outset will save the company time and money.

2. It’s easier to lead a team.  For the past five months, our team has been split between Sydney and New York.  I’m presently in New York taking meetings by day, then Skyping with the Sydney team at night.  One key role of a founder is to work with, listen to the team, articulate strategy, and keep everyone motivated.  It’s hard to do this when you’re not in the same physical location.  Multiple founders mean that someone can lead investment discussions, someone can run marketing and PR and someone can be with the team at the same time.  With limited time to get a project off the ground, one of the biggest challenges is spreading yourself too thin.  A strong founding team allows everyone to focus on their strengths, and you can get a lot more done.

3. It’s more fun.  If you’re thinking of starting a company by yourself, don’t underestimate how lonely and dark it will be when times are tough.  When I think back to my lowest times I feel lucky I didn’t burn out or spiral into depression.  We’ve all heard stories of entrepreneurs who’ve committed suicide — there have been two high profile cases this year.  I would have loved to have a partner to balance out the hard times and to celebrate with when things went well.  When I look at friends with co-founder relationships that work, it seems like a lot more fun!

4. Co-founders are more fundable.  In the early stages of a business, investors back the team more than the idea.  It’s no secret that professional investors, particularly VCs, don’t like backing first time sole founders.  They know how tough the road is and think that multiple founders will pick each other up when one loses motivation, they’ll make better decisions and achieve more, all of which increases their chances at success.  If you pick a co-founder with complementary skills to your own, you share the same vision and you work well together, you’re much more likely to be able to raise capital.

I’m glad that I’ve gone it alone over the past couple of years.  We didn’t always make the best decisions first time but we managed to learn, pivot and have now developed a killer strategy and the beginnings of a great product.  I’ve grown a huge amount and have strengthened my personal resolve in the process.   Now I’m at the point where I’d like to bring in a partner.  For several of the reasons I’ve listed here, I think it’ll give us the best chance of success in the long run.

If you’re thinking about starting a business with co-founders, make sure you check out my previous blog about how to structure the vesting of founder shares.  Finding the right business partner is like finding the right life partner.  You want to make sure you really know the person and how you work together before you make it legal!

Here’s a couple of other good articles I found on this topic: Business Insider ”Loneliness & Startups’, Mark Suster’s ‘The Co-Founder Mythology’ and The Next Web’s ‘Startups with co-founders rather than a single founder are more likely to succeed‘.

And cautionary tales of nasty co-founder divorces at Foursquare and Pinterest.

I recently joined the board of a Bondi charity that runs the local homeless shelter and women’s refuge.  They’ve faced a few challenges recently.  A bunch of people left, some troublemakers tried to hijack the organisation, money vanished, and it all turned messy.  The charity asked to become involved and although I don’t have much time I was happy to help out, but knew it would take a few smart, committed people to turn it around.  I just couldn’t see where those people would come from.

Miraculously, they appeared!  We had a board meeting on Sunday night and two key people joined the group – a lawyer and a venture capitalist. They had jumped right in at the critical time, taken over key operations and saved the operation.  Looking around the room I couldn’t help but wonder what would have happened if we hadn’t found these two key people and if they hadn’t been willing to commit so much time and energy into the organisation.  Without them, it would have almost certainly fallen over.

It got me thinking about my organisation.  How, when times turned hard, one person magically emerges and makes all the difference.  During the 2½ years I’ve been working on Posse I must have met more than 2000 people.  I pitched to 750 of them to raise our first round of financing!  Many people help, offering a bit of advice and some introductions, but very occasionally, I stumble on a rare diamond lying among a valley of rocks.  The key is to look out for them and value those relationships like crazy when you find them.

When I think back and plot the highs and lows of the past 2½ years, someone’s name stands next to soaring to a high or escaping from a low.  They are people who came along at the right moment; without them, we would have failed.  It seemed so unlikely that I’d meet these people at the right moment, it’s spooky!

For example, one of my first challenges was to build the right development team and product.  I’d spent time and money outsourcing, then building a team that I sensed wasn’t up to the job.  The problem kept me awake every night, and I had no idea how to solve it.  At my moment of despair, I popped into the Tech 23 conference in Surry Hills.  I wasn’t speaking; I just thought I’d stop by for a free lunch and see if I’d bump into anyone interesting.  Someone pointed out Lars Rasmussen and said I should try to find a way to be introduced to him.  I had no idea who he was and I didn’t have time to hang around so I just bowled up, told him my idea and asked who he was.  ‘So you founded Google Maps.  Well, I’m having this problem with building a dev team.’  Lars agreed to have coffee with me, we hit it off (he’s an awesome person as well as a genius) and he agreed to meet my current team and give me some feedback.  Unfortunately his feedback was that we were doing it 100% wrong and I needed to change everything.  Within a few weeks he agreed to join the board, then helped me recruit Alex from Google who recruited the rest of the team.  Lars has been a massive support since then; I can say that without his aid Posse would have shut up shop before opening the front door.

Another encounter on this journey was Richard Baker, then of MLC.  One of our early Angel investors was pitching for MLC to invest in his fund.  He asked if I’d meet with Richard so he could use Posse as an example of the kind of company in which he has invested.  I took the meeting as a favour to the investor, not expecting it to lead anywhere for us.  Surprisingly, the Posse concept excited Richard, and he said he’d like to help out.  I was heading over to Silicon Valley a few weeks later and was struggling to set up meetings with major funds.  Richard had all the contacts through MLC; within a couple of days he’d set me up meetings with Sequioa, Benchmark, Accel, Kleiner Perkins and Andreessen Horowitz – every top tier fund in the Valley!   Months later, Richard invested in Posse through MLC and eventually became a formal advisor.  He’s spent countless days helping design the product, recruiting team members and giving strategic advice.

One of the people Richard introduced me to in the Valley was Bill Tai.  When I first met Bill, we had pizza for lunch and he seemed much more interested in talking about kiteboarding than Posse.  But he was energetic, smart and engaging – just an awesome guy to be around.  At the end of lunch, he said that it was great to meet and that if I wanted to put together a round, he would lead it.  What?  I guess it was a combination of Richard’s recommendation and chemistry, but after one meeting he was in!  We skyped when I got back to Sydney and when I returned to the Valley next month, he introduced me to a bunch of his friends who all invested as well.

Building a powerful network isn’t about having thousands of contacts.  It’s about forming deep relationships with a few people who can make a difference.  Lars, Richard and Bill have been and continue to be critical to Posse’s success.  I speak to each of them at least once a week and it still amazes me how these awesome people are willing to invest so much in Posse and me in so many ways.  They truly are blessings and without them I would have failed many times over.  There are two other people that fall into the same category, but they’re modest so I won’t mention them here.

My point is that in the crazy journey of starting a company you’ll come across many people.  Some will offer advice and you’ll have to work out when to take it.  Some will invest money; some will introduce you to more people.  Most will disappear after one meeting never to be seen again.  And there’s a special group of super angels to look out for.  They’re the diamonds.  You can’t see them coming, but when you find one, they’ll change your business, possibly your life.  I try to recognise the value of these relationships and how lucky I am to have them.   And I’m always on the lookout, excited to discover the next one.