by Elad Gil
If the VC is selling part of her stake, she is signaling about the upside of the company to the market and should step down.
Board composition is reflective of ownership stake—i.e., the board is supposed to reflect share ownership. If the VC sells a subset of her position in the company, she will own less of it and therefore should no longer have a board seat.
The company has now returned the VC’s investment. The requirement for ongoing governance of her investment (which they have diversified out by selling) has decreased and she should step off the board.
3. Ask the VC firm to swap out your board member for another partner from their firm. This tends to work only if your company is working really well and the firm wants to maintain a positive relationship with you over time as the founder of a breakout company. Unless the VC partner you are trying to remove controls the whole firm, the firm may agree to swap out your board member for another one to maintain warm ties with you. (Thanks to Reid Hoffman for this insight.)
These conversations, by the way, can be very tough and very emotional. VC board members are humans too, and they may have a lot of ego or emotion wrapped up in a successful company. Even if they have done nothing to help the company beyond capital (and capital is indeed helpful), your VCs may still feel that they fundamentally contributed to the company’s success. When making your case that they should step down, be firm, calm, and consistent.
“Once a company finds product/market fit and focuses on scaling, the skill set, network, and advice needed from a board member shifts as well.”
—Elad Gil
Removing independent board members
Independent directors are generally easier to remove than investor board members. In some cases, you control the independent board seat and can simply ask the board member to step down (see below on “Independent board seat structures”). The simplest way is to explain why you want them to do so. Obviously, though, there are lots of reasons (ego, a difference of opinion, VC investor influence, etc.) that board members may not be willing to step down.
There are two types of independent board members: those whose primary relationship is to you, and those whose primary relationship (and sense of loyalty) is to the VC who invested in your company and helped bring them on board. The VC Crony probably owes a lot more to the VC than they do to you. Additionally, they will have a tendency to vote the way the VC wants or push for things the VC asks them to push for.
These VC Crony independents may be harder to remove, as your investor board members will have a disincentive to support their replacement on the board. In some cases you may need to negotiate with the VC directly for the removal of the independent. Alternatively, if you have a larger board with many members, they can help push for the removal of a non-performing independent.
Independent board seat structures
There are a few ways an independent board seat may be modified (depending on your financing documents). The most common are:
A board vote. Each board member can vote for or against the removal of a board member, and each vote is counted with the same weight.
Stock votes for the seat on an as-converted basis. In this type of vote, each share of common and preferred stock counts as one vote. Everyone votes and you add it all up.
Mutual agreement by common shareholders voting as a class (i.e., the founders) and preferred shareholders voting as a class. Each class of stock needs to agree to the change. In other words, a majority of common stock (usually just founder votes matter, since founders tend to control most common stock) AND a majority of preferred stock (e.g., investors) both need to agree to the change.
Common nominates, preferred approves. VentureHacks has some of the best content out there on the board of directors and how to construct it.17
Depending on the structure above and your percent ownership as founders, you may or may not be able to remove an independent board member on your own. Sometimes you can just get one additional board member or a major holder of preferred shares to vote with you to change or remove a board member, but sometimes you need all the preferred board members to vote your way. If this is the case, removing a VC Crony may be impossible without trading something of value with the VC.
Once you have agreed to remove the board member, work with your lawyer to generate the proper legal documentation and board resolutions to make it all official.
* * *
11 See eladgil.com for a link to a story about Elon Musk and John Doerr. [https://pando.com/2012/07/17/who-made-the-bigger-mistake-in-the-botched-series-c-for-tesla-elon-musk-or-john-doerr/]
12 See eladgil.com for a link to a useful Mark Suster post on board observers. [https://bothsidesofthetable.com/rethinking-board-observers-the-role-of-the-silent-observer-eee4ccecac7d]
13 Many thanks to Josh Hannah, Naval Ravikant, Sam Altman, and David King for providing feedback on the original version of this material on choosing an independent board member. The original blog post is on eladgil.com. [http://blog.eladgil.com/2011/12/how-to-choose-board-member.html]
14 https://theboardlist.com/
15 See eladgil.com for links. [https://www.forbes.com/power-women/#750df0665e25 and http://savoynetwork.com/top100/]
16 See eladgil.com. [http://blog.eladgil.com/2011/03/how-funding-rounds-differ-seed-series.html]
17 See eladgil.com. [http://venturehacks.com/archives#board-of-directors]
BOARD AND CEO TRANSITIONS AND OTHER KEY GOVERNANCE ISSUES
An interview with
Reid Hoffman
Reid Hoffman cofounded LinkedIn, the world’s largest professional networking service, in 2003. He led LinkedIn through its first four years and to profitability as Chief Executive Officer. Prior to LinkedIn, Reid served as Executive Vice President at PayPal, where he was also a founding board member.
Now a partner at Greylock Partners, Reid currently serves on the boards of Airbnb, Aurora, Coda, Convoy, Entrepreneur First, Gixo, Microsoft, Nauto, Xapo, and a few early stage companies still in stealth. In addition, he serves on a number of not-for-profit boards, including Kiva, Endeavor, CZI Biohub, and Do Something. Prior to joining Greylock, he angel-invested in many influential internet companies, including Facebook, Flickr, Last.fm, and Zynga.
Reid earned a master’s degree in philosophy from Oxford University, where he was a Marshall Scholar, and a bachelor’s degree with distinction in symbolic systems from Stanford University.
Reid Hoffman is one of the most respected and connected investors, entrepreneurs, and advisors in Silicon Valley. Lucky for us all, Reid has shared a small part of what he’s learned, penning two bestselling books (The Start-up of You and The Alliance) and an ongoing series of essays on all things startup. Reid has more recently focused on “Blitzscaling” (i.e., the art of growing a company very rapidly), which is also the title of his forthecoming book on the subject of scaling companies. There is also a great series of videos on YouTube from the Stanford class he taught where you can watch lessons on this.
I jumped at the chance to hear his thoughts on boards of directors, CEO transitions, and other topics that founders and executives need to navigate amid the chaotic ups and downs of high-growth companies.
Elad Gil:
You’ve seen quite a few boards in action. What do you consider their primary function?
Reid Hoffman:
Fundamentally, a board is the in-depth control of what is being set for the future of the company. Now, some people say—and it’s right in part—that the only responsibility of the board is to hire, fire, and compensate the CEO, because the CEO is what essentially expresses that forward strategy. The board cannot operate itself, so it’s done by the selection of a CEO and agreement with the CEO and so forth. But there are still parameters. The CEO doesn’t decide to say, “Oh, I’m just going to go and sell the company,” or, “I’m going to go buy this other company,” or, “I’m going to go deploy all my capital on X.” They have to talk to the board about it.
Part of the reaso
n that that conception of the board is incomplete is because a board is not just standing as judge and jury. It’s actually people who are collaborating with you. It’s also an extension of your team. The board is a team of people in dynamic collaboration with the CEO, who, in a startup company, is almost always a founder. If the two founders hired a CEO, that CEO is essentially a third founder. And actually, as you’ve read, my view of the key thing in hiring a CEO is to look at it as bringing on a later-stage cofounder.18 That’s actually the key thing that most people don’t think about in a CEO hiring process that’s really important to do.
When working with a board it comes down to saying, “Okay, what’s the game we’re playing?” Now, in all startups, the game we’re playing is “default mortality.” I use the metaphor that a startup is like throwing yourself off a cliff and assembling an airplane on the way down. In other words, the default is that you’re dead. You have to gamble your assets very strongly in order to create something that has ongoing and persistent value. Everyone is aligned on that in the early stage. Everyone is like, “Yeah, that’s what we’re doing. We’ve all bought into the same game.”
What gets complicated—and this is even before you get public—is when you have played that gamble and now have some assets. Maybe the asset is a team, maybe the asset is a market position, maybe the asset is a cash-flow business. Once you have assets, then the game is different. What’s the balance between managing the asset and not decreasing value versus deploying the asset, potentially at catastrophic risk, to get something better? That balance begins to shift.
By the time you get to public companies, public investors fundamentally think your responsibility is to preserve the asset value. This is part of the reason why turnarounds in public companies, like with what Marissa and Yahoo! were doing, are super difficult. Most people won’t even take that job, because actually, in fact, they would have to gamble a bunch of the assets in order to try to make it work. And yet if everyone’s like, “No you don’t. Just maintain and preserve the current assets as they are,” that’s super difficult to do while also getting to a high level of growth.
One of the things you need to consider, when you’re thinking about the board, is where you are on that spectrum. Are you in the gamble, willing to put real assets on the line, possibly all of them, for a high return? Are you about asset preservation—you’re trying to get as much growth as possible, but your first priority is to maintain the value of what you’ve got while growing it? Or is it a combination, with some real risk, together with upside?
Elad: In your experience, how can a board most effectively manage its relationship with the CEO? And what are some common pitfalls that you see?
Reid: One of the things that a lot of board members make a mistake on is—I use this way of describing kind of a red light, yellow light, green light framework between the board and the CEO. Roughly, green light is, “You’re the CEO. Make the call. We’re advisory.” Now, we may say that on very big things—selling the company—we should talk about it before you do it. And that may shift us from green light, if we don’t like the conversation. But a classic young, idiot board member will say, “Well, I’m giving you my expertise and advice. You should do X, Y, Z.” But the right framework for board members is: You’re the CEO. You make the call. We’re advisory.
Red lights also very easy. Once you get to red light, the CEO—who, by the way, may still be in place—won’t be the CEO in the future. The board knows they need a new CEO. It may be with the CEO’s knowledge, or without it. Obviously, it’s better if it’s collaborative. But this can range from a scenario where we’ve got the current CEO to agree that we’re looking for a successor, all the way to “Bob, meet Sue. Sue is the CEO. She starts today.” It can be that entire range, depending on the circumstances of the company, of the CEO, of the relationship between the CEO and the board.
Yellow means, “I have a question about the CEO. Should we be at green light or not?” And what happens, again under inexperienced or bad board members, is they check a CEO into yellow indefinitely. They go, “Well, I’m not sure...” The important thing with yellow light is that you 1) coherently agree on it as a board and 2) coherently agree on what the exit conditions are. What is the limited amount of time that we’re going to be in yellow while we consider whether we move back to green or move to red? And how do we do that, so that we do not operate for a long time on yellow? Because with yellow light, you’re essentially hamstringing the CEO and hamstringing the company. It’s your obligation as a board to figure that out.
The next thing is, when you think of a board as a team and not just people standing in judgment, its members need to ask, “Okay, what are the things that we do to add value?” One of the things that good board members do is go into every board meeting thinking, “What’s the thing that I can add?” Because a board is governance, but especially for early-stage companies, a board is also people that have serious expertise, capabilities, and networks that you couldn’t hire into the company. Given that, the big question for a board member should be, “How do I bring value to the company?”
“The board is a team of people in dynamic collaboration with the CEO”
—Reid Hoffman
Some of it is as simple as this: I’ll sit there with the company, they’ll present a pattern to me—like, here are our efforts, strategy, work, operations, etc.—and I will give them feedback. I might say, “Okay, I’ll introduce you to someone.” That’s one thing that you should certainly do. But that’s kind of like saying, “Well, the way that I’m going to be an executive is I’m going to show up, and when you present stuff to me in a meeting I’ll respond to it.” Just as we expect more of executives than that, you also have a more active responsibility as a board member. One of the metrics to hold up as a board member is to say, “Before I go into the board meeting, what’s the thing that I can bring that’s most helpful?” You might even do this more frequently than just at board meetings. It might be weekly. Because part of the reason why the company has me on the board is because I’m engaged in all this other stuff. I have this depth of industry experience, I have these network connections, I have my own brain cycles. How can I show up saying, “I’ve thought about this, and here’s something that I think is the best possible thing I can lay on the table.”
Now, it might be as a board member you say, “I think you should build product X,” or, “you should build feature Y,” or, “you should execute strategy Z.” Those are possibilities. But they should always be phrased as questions. For example, you might ask, “You know, I’ve thought really hard about the strategy that you guys have been doing, and the following thing strikes me as a risk. Do you think it’s a risk or not? I thought of a way to measure it, or to mitigate it. What do you think?” If you do it that way, it’s a conversation.
If the team is really, really good, you will very rarely discover something that’s totally new to them. They may very well respond, “We’ve thought about it, and X, Y, and Z.” And you say, “Oh, okay, great. I brought the best possible thing. You’re already on top of it. Let me help you through it.” But that cycle is still good.
On the other hand, because of your breadth of experience, your network connections, and so on, the team might say, “Oh wait, actually we hadn’t thought about it that way, and that is important to think about.”
Then, of course, it also gets down to priorities. For example, frequently when I bring up an idea like this in a board meeting, I’ll say, “Look, I don’t know. You should feel totally fine to say, ‘That’s interesting, but it’s not on the short list right now.’” You have to be careful as a board member, because it’s really easy to screw things up, in terms of the company’s priorities. One of your positions has to be “do no harm.”
“As a board member, say, ‘Before I go into the board meeting, what’s the thing that I can bring that’s most helpful?’”
—Reid Hoffman
Elad: How does this dynamic change, though, if
the board has lost faith in the team, or more specifically the CEO?
Reid: Part of what happens is deciding when to make the call that the CEO is the wrong one. The CEO may make their own decision that they’re the wrong CEO. But when do you make the decision that the CEO is wrong? Frequently in startups this is a catastrophically bad thing. The board’s decision that the CEO is wrong essentially means, “We made a really bad investment decision.”
That being said, one really important thing for startups to succeed is to have someone who has the commitment, the moral authority, the dedication, the “I gotta make it work” drive. Usually hiring an external expert is a bad play, because they lack those critical things.
Elad: You’ve written some great articles on CEO succession and how some founders can step aside.19 But if you’re a smaller or younger company and you come to the realization that the founder is the wrong CEO—or the founder decides “I’m the wrong CEO,” often you don’t have depth of bench within the organization. It’s hard to recruit somebody externally to take over that role. Even if the company is growing rapidly, it may still be too early. How do you think about that dynamic and bridging that?
Reid: The key dynamic—and it’s super hard—is one I learned through LinkedIn: you’re actually looking for a cofounder. You’re looking for a cofounder who may have a different skill set than the people who are part of the initial “family” or “tribe.” But you’re looking for, essentially, a cofounder.
