As an Angel Investor, there are always opportunities to become a director, and this is a very attractive proposition. You get to have influence over your investment, which is both fun and protects your investment to some degree because you can influence the thinking at the board meeting.
There are however, downsides to becoming a director, especially in early stage companies. Directors are personally financially and legally responsible for the actions of the company. This means that if the company becomes insolvent and the company owes money, the directors will be chased by the debt collectors. This is a particular problem if you are an angel investor in the company, for two reasons:
- You probably won’t have enough of an investment to control the decisions of the board
- As an investor, you’ll probably have more equity than the other board members (otherwise why else would they have sought equity at the cost of losing some of their business?)
This means that if the company becomes insolvent, debt collectors will probably come after you first, as they always chase the director who is most likely able to pay. This will be particularly frustrating because the board can make decisions that are against your will because you do not represent the voting majority of the board.
Secondly, directors are responsible legally. This means that even if the board acts against your advice as a director, you are still legally responsible for the company’s actions.
Finally, did you know that you can be a director without being a director? For example, if there is a sufficient paper trail to prove that you’ve been acting as a company Director without being on the board or registered as a director in the Companies Office, you can be held responsible as a director if things go South.
Before taking the position as a director, I recommend looking at the company’s financials to make sure there are no liabilities of concern and things are tracking in the right direction. I also recommend considering the risks of existing contracts that might factor in. You might do some Google searches and check the DRO and insolvency registers on the other directors, large shareholders and any shareholders that may be related to any of the directors. You might also take a look at Prover to take a punt a what level of equity other directors have, in case of the event of company insolvency. You might also want to look at directors insurance and consider getting a list of warrants from the company for more certainty around things, such as if any PAYE is owed or other undisclosed liabilities. I’ll start to build a list of warrants at the end of this article.
I hope that helps someone decide whether they want to accept an offer to become a director. Obviously their a positive points that I’ve not listed, but these are the catches that I think might be useful.