by Elad Gil
There are various tests for cofounders. Like, “Would you do this job if we paid you half of what we’re paying you? Because you’re really committed to this thing?” That’s not to say you should pay them half, but you want someone who sees this as the thing they want to do. If someone came along and said, “I’ll pay you twice as much as you’re being paid now,” they’d say, “No thanks. This is the thing that I want to be doing.”
People with that much commitment are also willing to take more risks. Because all startups, they go through “valley of the shadow” moments, where everyone’s saying, “Oh, that’s really screwed up, that’s in a bad space, that’s really dumb.” Does this person say, “Well, hey, it wasn’t my idea?” That’s a professional manager. A founder goes, “No, I know I can make this work. I’m going to make it work. I’m going to take the extra risk, the extra difficulty, the sweat, the criticism. I’m going to play it through.” So those are the traits that you need.
People frequently say, about hiring a new CEO, “Well, I’m hiring a skill set.” Skill set’s important—which level you’re at, your ability to make it work. The reason you’re hiring a new CEO is because there are new skill sets that are critically important. But if someone doesn’t have the founder’s mindset, they’ll be fundamentally, at best, in asset management. They’ll make sure that things keep running, keep going on a trajectory. But the ability to change the curve means taking a risk that a founder would take. That requires moral authority, but it also requires mental willingness—including risking hearing that, “You really screwed up, you’re doing this really badly.” You have to be willing to go through that in order to make it happen.
Elad: One of the things you mentioned earlier was that adding board members is adding to a team. So how do you think about board member selection? How do you approach that process and what do you look for?
Reid: It depends a little bit on stage, but there are a few key ingredients: First, you have to look at the whole board as a team. Part of how a board can be dysfunctional is that even if you have a good player, but they pull in a different way and add in a different element, then the team breaks.
At some point, you may very well go, “That person needs to be either changed or ejected.” Sometimes when I’m looking at a startup and there’s a problematic board member, I know that the primary role of the next board member—if the problematic board member can’t be changed—is to be a catalyst. You’ve already addressed in one of your posts how to trade a VC off a board, but that’s frequently very difficult.
Elad: It’s very hard, yeah.
Reid: The path that I usually suggest is to find a board member who changes the dynamic in a very healthy way. That’s usually another venture capitalist, someone with a lot of throw weight. Somebody who makes people say, “Oh, that person’s smart and capable.” And when they start going, “This is what we’re doing,” then the other board members will shift in that direction. That’s how I usually solve that problem. So that’s one key ingredient: You always think team dynamic.
Now, the second part of the team dynamic is that a board has to very much catalyze the CEO. I look at whether a prospective board member really extends the abilities of the CEO. Do they have a good partnership with the CEO? Roughly speaking, one of the tests I use on the CEO side is, would you want to spend an hour or two a week working with this person? You may not get an hour or two a week, but would you want to do it, trotting out the hardest problems? If that’s the case, and they would add a lot to the CEO, it kind of doesn’t matter whether they have, for example, payments expertise or organizational expertise. That amplification of the CEO really, really matters.
Sometimes the CEO says, “I don’t understand the banking industry and I’m doing this banking thing. I need to be spending the hour or two a week with someone who really understands the banking industry. I need that capability.” Or, “I know that we’re an enterprise company, so we need enterprise sales. And I don’t really understand enterprise sales that well, so I need someone who helps me grow and do the enterprise sales stuff well.” There will be a different set of things that will be important characteristics. But the key is that partnership with the CEO, which then spreads to the executive team.
The next thing you look for is: What are the key zones of expertise, networks, ways of thinking that add the most value into the company that you couldn’t hire for? Because if you can hire it, great, hire it. Add it into the genetics of the company. But there are a bunch of people like, for example, me or Peter Chernin—you can’t hire us into the company. That’s not doable. In that case, the board is the way you do that.
That’s the kind of thing that you look at when you’re building a board: What’s really adding to the company and adding to the CEO? It’s not just management of the assets, it’s also helping the amplification. And helping the amplification is helping the CEO, and the exec team, play the game the right way.
This interview has been edited and condensed for clarity.
The role of the CEO: Managing your board of directors
Managing your board effectively can help you and/or your company:
Get strategic and operational feedback on key areas.
Source and close candidates, particularly executive hires.
Assess talent at the company ongoing.
Get help with fundraises, and ensure that your board members are aligned to help you close additional capital. (This isn’t always the case!)
Be coached as CEO.
Ensure the right person is in place as CEO.
Board meeting structure
Your board meeting structure20 is likely to change over the course of the company’s evolution, as you move from an early-stage venture struggling for product/market fit21 to a more mature organization preparing to go public. For an early-stage company, board meetings may be primarily about reviewing a handful of fundamental metrics (e.g., “Are we running out of money?” and, “is our product working?”) as well as broader strategic input, organizational advice, and hiring help for the CEO and executive team. Later-stage board meetings tend to broaden to include advanced strategy questions (e.g., M&A and other conversations).
The larger the board is the harder it will be to manage it and keep it both focused and productive. Just as scaling your team from 10 to 10,000 people changes how you communicate with and manage them, growing the board also changes the conversations and communication styles you need to use at the board level. The hard part is ensuring that meetings remain productive and useful for the company.
Remember, board meetings exist to (1) help the company and (2) provide proper corporate governance for all classes of stock.
In order to make a board meeting effective, the CEO should try to do the following prior to the meeting:
1. Send out the board deck and other materials at least 48–72 hours before the meeting. You want people to have a chance to review it in advance.22
2. [If you have three or more non-founder members only] Call board members in advance for a 30- to 60-minute 1:1 briefing. This allows board members to give input (and, in some cases, vent) in advance of the board meeting.
3. [If you have multiple board members only] Plan a board dinner the night before, or lunch/dinner right after. While optional, these dinners are an opportunity for board members to form bonds with one another and potentially with you and your team in advance/after the meeting. This works best if your board members are from another geography and need to fly in—otherwise they may not have the time or interest.
Board meeting agenda
Once you’re in the meeting proper, it will likely include the following items:23
1. Board business. This should be short. Get it out of the way quickly.
2. Big picture summary. A short, high-level overview of the state of company.
3. Quick review and discussion of key metrics. You’ll want to pay particular attention to those metrics that impact company strategy. These metrics should all ha
ve been in the slides sent out 48–72 hours earlier.
4. Follow-up items from last meeting. You can also do this section after the strategy topics. Really what you want is a large block of time to focus on strategy.
5. Discussion of 2–3 key strategy topics important to company. These topics and background on them should have been in the slides sent out 48–72 hours earlier.
The bulk of your time should be spent on #5. Your board members should have reviewed the materials in advance. If you have a larger board, you should have called each member prior to the board meeting for a quick discussion/queue-up of the strategic topics. This allows you to avoid a long rehash of metrics and background that eat into the discussion time.
You can have various members of the executive team attend all or parts of #2–4. Navigate carefully, though: invitations to board meetings can start to become politicized and a sign of the relative importance of members of your executive staff. Be thoughtful about who to invite and why.
“The reason you’re hiring a new CEO is there are new skill sets that are critically important. But if someone doesn’t have the founder’s mindset, they’ll be fundamentally, at best, in asset management.”
—Reid Hoffman
Board observers and random people showing up to board meetings
Some venture firms will ask more junior members of their investment teams to show up along with them at board meetings. Or, they may bring more senior partners to sit in if your company is doing well. Don’t tolerate random people showing up. A board meeting is not open to whoever the venture firm wants to include. If the firm wants an additional member to attend—e.g., a junior partner who can help with follow-up for your company (and these people can occasionally be quite helpful)—negotiate parameters with your VC partner. What are the expectations on the junior person’s role at the board meeting? Will the board observer have the right to speak up? What specific items will she help with?
Mark Suster has a good post on board observers.24
Other board interactions
Depending on your relationship with board members, or on their inclinations, board members can help you with a variety of items outside of meetings too. You might ask a board member to spend extra time with a member of your team or to work with a key function to help it run smoothly. For example, a board member with significant experience taking companies public or managing public companies as CFO could help coach your CFO or her team. Board members can also be valuable for 1:1 conversations with you or your executives on key strategic questions, management and organization, or other items. Board members can also help with interviewing or recruiting key executives.25
* * *
18 See “If, Why, and How Founders Should Hire a Professional CEO,” on Reid’s blog. [http://www.reidhoffman.org/if-why-and-how-founders-should-hire-a-professional-ceo/]
19 See Reid’s post on “If, Why, and How Founders Should Hire a ‘Professional’ CEO.” [http://www.reidhoffman.org/if-why-and-how-founders-should-hire-a-professional-ceo/]
20 Mark Suster has a good post on holding better board meetings. See eladgil.com. [https://bothsidesofthetable.com/why-you-re-not-getting-the-most-out-of-your-board-abf9e8b891d9]
21 What Marc Andreessen calls “the only thing that matters.” See eladgil.com. [https://pmarchive.com/guide_to_startups_part4.html]
22 For good examples of board decks, see eladgil.com. [https://www.sequoiacap.com/article/preparing-a-board-deck and http://resources.iaventures.com/#board]
23 Sequoia’s Bryan Schreier has a useful post on preparing a board deck. See eladgil.com. [https://www.sequoiacap.com/article/preparing-a-board-deck/]
24 See eladgil.com. [https://bothsidesofthetable.com/rethinking-board-observers-the-role-of-the-silent-observer-eee4ccecac7d]
25 For more readings on board meetings, see eladgil.com. [http://www.bothsidesofthetable.com/2013/12/09/why-youre-not-getting-the-most-out-of-your-board/ ; http://www.joangarry.com/executive-session/ ; http://venturehacks.com/archives#board-of-directors ; https://www.sequoiacap.com/article/preparing-a-board-deck/]
PART 1: MANAGING YOUR BOARD
An interview with
Naval Ravikant
Naval Ravikant is the chairman and a cofounder of AngelList. He previously cofounded Epinions (which went public as part of Shopping.com) and Vast.com. He is an active angel investor, and has invested in dozens of companies, including Twitter, Uber, Yammer, Stack Overflow, and others.
As one of Silicon Valley’s most respected angel investors and entrepreneurs, a veteran of some of the Valley’s biggest startup success stories, and an investor in many others, Naval has a uniquely broad perspective on startups.
In this part of my two-part interview with Naval, we spoke about the intricacies and delicate issues involved with managing boards.
Elad Gil: On the board side, is the idea to only raise from people who won’t take a board seat? And how do you think about also getting rid of earlier board members as part of late-stage financing?
Naval Ravikant: Companies are this weird thing. The whole point of a company is to try to be efficient and get stuff done. And when you go through human history, you find that when you want to prevent an entity from having too much power, you defuse that power by having committees or groups. Go back to the Romans; they had the Senate, and all the senators had to agree. But when the Romans went to war, when they wanted to be efficient, they elected a dictator. And that dictator then took charge of everything and went off and fought the war—and usually ended taking over all of Rome afterward, so it kind of backfired. But the Romans were aware of that model, and the trade-offs.
In companies, you have a dictator at the top, a CEO, or the founders. Then all of a sudden it turns back into a butterfly network, and now you report to a board, a bunch of people. And inherently, the founder-dictators tend to be very risk-prone. They have a lot of vision, they have a lot of drive, they know where they want to take the thing. They like to make risky moves and bets and pivots and turns.
But boards don’t like that. Boards don’t like to be dragged along. It’s a group of people. It’s groupthink, it’s committee-think. No committee ever built anything great. So related to that, no board ever built anything great. Boards can be helpful; they can be sounding boards. But you do not want the board to be running the company. And the larger the board, the more you’re going to find yourself spending time just keeping them up-to-date and in sync.
I know there’s this belief that venture capitalists can add a lot of value on the board. And they can—under very specific circumstances and situations. They’re experts at financing, they’re experts at knowing the external market, they might have deep domain expertise in one particular thing that you might encounter.
But by and large, your average VC board member is on ten boards, so they’re taking ten different board meetings every month or two. On top of that, they’re spending half their time looking at new companies. They’re also managing their investors and LPs. And, let’s face it, anyone who’s been in the venture business knows it’s not really a full-time job. Maybe for the best VCs it is, but your average VC does not work the hours that your average entrepreneur does. Your average VC is a retired entrepreneur; your average entrepreneur is not a retired VC. So they just don’t have that much time. You’re spending most of your time keeping them up to speed, and then you’re hoping to get some value and wisdom out of their expertise and years and years of learning.
You don’t want your board to be too large. The larger your board, the less it is going to get done. Every experienced board member will tell you that they favor private company boards of five or six people or less.
You can keep the board small in multiple ways: one is, don’t give up more than one board seat per round. The most common mistake I see entrepreneurs make is this: they want to get two investors involved, they do a two-VC round, and they’ve got two board seats from one round. That adds up really fast. Because then when you get to series C, series D, s
eries E, you’ve suddenly got a six-, seven-, eight-person board.
Second, you can actually put it in the early term sheets that the investor will leave that board seat when another board seat comes in later. First Round Capital, I think, is famous for doing this. They’ll usually step out of the board when the next round takes place.
Elad: Yes, but they tend to do that since they’re a seed-focused firm. How do you do that for people who are traditional series A, B, C investors?
Naval: Well, the smart ones—I’ve seen Fred Wilson do it—will actually step out when the company is getting closer and closer to going public. You can also try to just negotiate it early on. And you can do it in the new rounds. Let’s say that you’re raising $50 million in a hot growth round. You could go to your series A person and say, “Hey, this is your opportunity to get off the board and recover your time. We’ll leave you with the protective provisions that you negotiated, so you’re not going to lose anything. And I’ll keep you on the mailing list and I’ll send you the board decks, so you get the updates remotely. But you don’t have to sit on that conference call every month. You don’t have to do the board meetings.”
Elad: The primary thing I’ve seen people be willing to do in circumstances like that is effectively get partially bought out. Then it’s an excuse to get them off. Because I feel that a lot of early-stage investors, if the company is doing really well, they want to maintain association with the company, both for their personal brand and as a vehicle to buy other things in their portfolio that aren’t working as well.
