I recently did a talk on creating and navigating your first board of directors with friend and colleague Tim Miller, the CEO and Founder of Rally Software which was acquired by CA in 2015. We spoke to a group of Techstars founders that were thinking about creating their first board, or optimizing the board they already had. I sit on several boards, some highly functional and some dysfunctional, while Tim Miller has both had to manage his own board AND sits on others’ boards. We both pulled best practices together and I thought I would share them with you here. Before I dig in, for anyone interested in the topic, there’s a great book published by Brad Feld & Matt Blumberg called Startup Boards. This book was incredibly helpful to me as I navigated my own role as a board member, and it’s a great resource for founders too.
Special shoutout to my friend Ari Newman, Managing Partner at Massive who served as an editor, contributor, and sounding board for this series.
I’ve divided this into a series of 4 blog posts:
- Framework: How to think about your board, which is this post.
- The People: Who you should have on your board and how to best work with them
- The Board Package: The board documents themselves
- The Meeting: How to run your meetings for maximum efficacy
Section 1: Framework: How to think about your board
Board of Advisors vs. Board of Directors?
The difference between a board of advisors and a board of directors, while mainly legal, can have an impact on how the players behave. A board of advisors doesn’t have a legal or fiduciary obligation to the company unless you explicitly give it to them. You as the CEO can dictate the number of people who sit on a board of advisors, you can increase or decrease its size at whim (subjective to whatever legal agreements you might have in place with them), you can have meetings when you want (or never), and you can hire and fire them at will. It’s easiest to think of a board of advisors more like a personal board of mentors who meet regularly. Actually, if you have a great board of advisors in place, and you largely treat them as you would a healthy board of directors – where you meet regularly, report on key performance indicators, and discuss opportunities and challenges the business faces, your board of advisors can get be a massive accelerant to the business, and to you as a leader. I believe it’s never too early to have a board of advisors, they’re appropriate for all stages and all types of companies. If you’ve never raised money, you absolutely should have a board of advisors.
However, once you’ve raised money for your company, sit down for this hard truth, your company is no longer just your company. Yes, I know it’s your baby and you live and breathe it, but now it belongs to you and the people you sold part of it to – which means they’re entitled to some oversight of their investment, and that’s where a board of directors comes in. A board of directors can keep a company on track, can be a tailwind for the company, and can be a set of checks and balances for the founders. For instance where 2 founders each own half of the company and one founder ends up with an opioid addiction (seen that one), or one founder decides to take off and study yoga in India for a year and no vesting was agreed upon (yep, seen this one too), or one founder was embezzling money and the other founder couldn’t quite bring themselves to see the signs (you guessed it, part of that one as well). Yet many founders dread creating a board, they’ve heard war stories where the founder has been removed (it happens), or the board is largely dysfunctional (I’ve been on a few of these), or bad behaviors or bad board members cause massive damage to the company. I hate to say this, but for every bad board member story, there is also a bad founder story.
My point is, a board of directors can be a huge asset for you and your company, maybe one of your best assets – but whether it becomes an asset or a liability depends entirely on your mindset around it, the effort you take in selecting and forming it, and how you manage it over time.
If you approach it like a necessary evil, it will become a liability to you. It will develop into a huge time suck that’s dysfunctional and everyone involved hates it (see reporting board, below). However, if you approach it like an opportunity, you can build a collaborative board (see below) that could be one of the largest assets in your company, the element that helps you break through the ceiling of your own capabilities.
Please note, the rest of this series is dedicated to managing a board of directors, specifically with for-profit companies that have raised venture capital and are early stage and not publicly traded, although if you’ve gone the board of advisors route, or you’re simply struggling with your board, much of this information is still useful.
Reporting boards vs collaborative boards
I want to start with some philosophy and framing around how to think about your board. I talk to many entrepreneurs who think their board is a drag on them, a required governance item usually imposed by investors, and who use the board for reporting the required business metrics only. These boards suck for everyone involved – prepping the materials sucks, spending valuable hours on the management of it sucks, the meeting itself sucks, sifting through shallow board docs sucks, and listing to a founder drone on about something their heart isn’t in sucks. The only person winning here is the attorney taking minutes, and I’d wager this is their least favorite hours spent.
Furthermore, often in reporting boards, board members feel the need to ‘prove their worth’ so if all your doing is reporting, you’ll have the board member that’s looking for red flags as a way to add value and will challenge you in the meeting – which will put her at odds with you because you just want them sitting and listening and signing off, right? You’ve literally engineered the atmosphere for antagonism.
Many founders don’t want to form a board for these reasons – and unfortunately – without doing a scientific analysis of board culture, I’d wager that most boards fall into the category of reporting boards. It is a big, fat waste of everyone’s time, expanding our collective misery.
Or… bare with me for a moment… you could build a collaborative board. You could turn your reporting board into a think tank on how to really take advantage of the opportunity in front of you. You can build a board that can help you see around your own blind spots, which you have, and if you deny this then you definitely fall into the reporting board category (which is likely the least of your worries). You can build a board to really be a thought partner with you, and possibly the first group you call when stuff is going sideways. This group can help you work around massive issues when they arise rather than blame you for them and will help maximize the value of your investment (your time, your life, your founder shares). A board like this can sit on the same side of the table with you, rather than across the table if you engage with them appropriately.
I have sat on many reporting boards, and I have sat on a few collaborative boards. Collaborative boards are one of my favorite ways to spend time because they are fun and engaging, and often everyone in the room is learning something. They leverage the collective wisdom of the group to help the CEO become better in his/her role and help the company grow faster and with less issues than the CEO could do alone. We engage in discussions and debates on crucial topics for the company’s survival. We often disagree with the founder, but rarely oppose the founder, and leave the founder to gather the collective wisdom of the group and make her own decisions. I have had many 2am phone calls with these founders, when stuff is going sideways, when there’s a big “oh f*ck” moment, and I cherish every one of these interactions. I have sat in board meetings where the debate is heated, but everyone is heard and respected. I have sat in board meetings where the founder is hearing some very hard news, and each person treats the CEO with respect because the CEO has been treating each board member with respect previously. Every human on earth wants to add value and to be valued. Leverage that need of every human – and you and your company will benefit tremendously.
The choice is yours really, the type of board you have is yours to control and manage. Here’s some harsh love. If you have a reporting board, that is the bed you made. You may not think you chose the people, but you decided to take their capital, which means you gave up the right to choose. You may think they’re arrogant and disengaged, and they very well might be, however, you’re reinforcing their behavior with the way you communicate with them, how you hold the meetings, and what you say (or don’t say) outside of the board meetings. Your behavior, stemming from your mindset, is what dictates whether you have a collaborative board or a reporting board, not theirs. The power is yours and yours alone to correct. Do you work for the board? Yes because the board usually has the ability to remove you. But the board works for you too because their responsibility is to the company – and if you utilize them correctly, the power to remove the CEO isn’t one they’ll take lightly. This is a healthy balance of power, and when leveraged appropriately, can amplify itself into a 1+1=3 scenario.
Collaborative boards require a CEO who can handle feedback and debate
A note on mindset – if you are the type of CEO or leader who can’t handle feedback or sees it as disrespectful or destructive, if you’re the type of leader who can’t handle people disagreeing with you in public, or if you’re the type of person who always needs to be seen as right rather than getting to the right answer, you’re going to struggle to build a collaborative board. Before journeying down the collaborative board path, or really ANY board path, in fact before you take money from anyone, venture or otherwise, you want to do some serious personal exploration of your motivations here. Getting to the largest enterprise value likely means getting large volumes of input and feedback from smart, experienced people, it means often accepting you’re wrong, or your ideas aren’t as good as someone else’s. It means learning to encourage others to challenge you so that you can receive feedback and input, otherwise, you build a moat of self-serving ego around yourself that your whole company can never really cross.
If you’re ready to explore how to set yourself up as a servant leader, to encourage debate and feedback, to learn to check your ego – reach out and I’ll recommend some books to help you broach the topic. Doing this will help you and your company grow wings.
The Responsibilities of a Board: Legal Responsibilities and Informal Responsibilities
A board of directors is a legal construct outlined in your company’s documents like your articles of incorporation, bylaws, stock purchase agreements, and possibly others. It’s also governed by law, which outlines the responsibilities as the duty of care and duty of loyalty, collectively called fiduciary responsibilities. A fiduciary is a legal obligation to act in the best interest of someone else, and in this case, that someone else is the collective shareholders of the company. This fiduciary is often referred to as corporate governance.
Duty of Care: Duty of Care is an obligation to provide the care that any reasonably prudent person would provide in a similar situation under similar circumstances. What that means in practice is the board members need to read the board documents, ask questions, and understand the issues at hand before making any decisions that could impact the shareholders. It means being alert to problems or issues, it means paying attention in meetings and investigating anything that seems out of the ordinary. In a sense, it’s caring about the business.
Duty of Loyalty: Duty of loyalty is primarily around conflicts of interest. It means that the company must have their undivided allegiance in the face of any conflict, the board member must act in the best interest of the company and shareholders, and the board member cannot make deals or use company information for self-interest or personal gain. This sounds simple, but remember in a board room there is a lot of conflict of interest – the founders might have common shares while the investors might have preferred, a deal that works for a particular board member might harm other shareholders, there might be opinions on whether to sell now for that 1.5x guaranteed return vs holding out for a larger return later, the founder/CEO might not be the best option to run the business anymore – these are all very real-world conflicts that make Duty of Loyalty an important concept that sometimes needs reminding. Conflict is present in every board room; in my best board rooms, it’s named and identified. I have had moments where I say “I’m wearing my board member hat on this decision because it’s collectively better for all shareholders but for me as an individual shareholder it’s painful relative to the deal I have with the company”.
Informal Responsibilities: A great board can really help the company grow, and here are a few ways in which they can be supportive:
- Fundraising: Many board members are investors, or have networks of investors and can make introductions.
- Strategy & Operations: Board members ‘should’ have experience in some fashion (on other boards, as an operator, etc) and the more experience they have, the more they’ve seen. Leveraging your board for input and feedback on strategy and operations is a phenomenal way of ensuring you aren’t limited to your own horizon.
- Sourcing, hiring, and closing executive-level talent: Again many board members have networks, so when you need to hire that new CFO or CTO, your board can help you identify the right search firm, identify talent, interview the finalists and give an opinion, and even recruit individuals that might otherwise be ‘ungettable’.
- Accountability & Organization: This might seem like a drag to a CEO, but it’s actually a performance driver. Making performance commitments in your head just doesn’t have the same power as making performance commitments to a room full of people. It helps YOU outperform what you would otherwise do, and helps you organize your thinking in a way that makes it digestible by others.
- Intellectual honesty and seeing blind spots: We all have blind spots, all of us, no exception, and if you think you don’t then yours is larger than most. Board members can help us see our blind spots and can keep us intellectually honest when we might otherwise be lying to ourselves.
- Feedback: Woven into all of these is the element of feedback. You should seek feedback from your board, and they should be candid with theirs.
Let’s talk about the elephant in the room – the Board’s role in removing/replacing the CEO:
This is often founders’ number one reason for not creating a board of directors, or delaying it for as long as possible. While everyone has heard the stories of founders getting fired, the truth is many, dare I say most, investors want to keep you in the seat for as long as possible including right up through exit. We all recognize that it’s your baby, the blood sweat, and tears you put into it, no one is more passionate about your company than you, and we all want to support you and the company. However, the qualities that make a successful founder aren’t always the same qualities that make a successful scale-up CEO, or maintenance CEO. You started the company because you’re a creator, you love to create things, and you love to build/code/construct/solve problems. And this is all wonderful when the company is, say, less than 50 people because you can still get everyone in a room. You can make quick decisions and move fast and break things. You’re creating on a daily basis! However, you likely hate meetings, you hate processes, you hate many of the elements necessary for a company when it’s at 100 people, and then 300 people, and then 1000 people, and so on. Some founders can evolve as the company does, but it’s somewhat rare as many hate the work as the company grows bigger, so they don’t do it, or won’t do it, or worse, think they’re good at it when they’re actually terrible. And that not only brings you down, it brings the whole company down with it.
Remember, for every bad story I’ve heard about boards removing CEOs against their will, there’s an equal number of stories about founder CEOs doing bad stuff – see the paragraph above about founders behaving badly – but founders won’t share those stories with you. At the end of the day, a board’s ability to remove a CEO is in the best interest of the company and can actually protect your baby, your investment, and your future wealth creation, even if you don’t agree with them. I will agree that some boards erroneously remove founders – it definitely happens, but let’s talk about how to navigate this profound fear and reduce the likelihood of its occurrence.
How to navigate your fear of being fired by the Board:
- Once you raise capital, understand at what point you cross the threshold for being fireable. There are limitations to when a board can fire a CEO, and it has to do with how your governing and fundraising documents are written, how many board members there are, and how much you still own of the company. Get with your attorney to understand what your documents say and write it down so you have a clear knowledge of the threshold.
- Personal exploration – ask yourself seriously if you want to be king/queen, or you want to be rich. I know this sounds like a crude dichotomy, but there’s good intel that suggests not knowing where you land on this spectrum will impact your happiness and possibly the outcome of your company. There’s nothing wrong with either orientation, but know that raising venture capital puts your company squarely on the “rich” path, because that’s why your investors are investing. They want to see their capital grow, and will prioritize that over keeping you in the king seat. If you land squarely on the “king” side, then I’d strongly encourage you to raise as little as possible, get the company to profitability as fast as possible, and create an exit path for your investors. If you fall more on the rich path, then ask yourself how you will know when you’re not the ideal person for the job anymore. This brings me to my next point…
- Ask yourself how you will know when you’re not succeeding in the role anymore. Is it when the company isn’t meeting its projections? Is it when the turnover rate in your company is really high? Is it when you’re the smartest person in the room? Is it when you just don’t know what you should do next, consistently? Write it down.
- Verbally discuss the fear with everyone you’re considering adding to the board, including your co-founder, your investors, and your independent. Ask them how they will know you’re not succeeding in the role anymore. Ask them what metrics they’ll use to evaluate you. Ask them how they’ll communicate with you when you’re ‘falling behind’ in your duties. Ask them to write it down. This will be a hard conversation, both for you and for them, mostly because I doubt many board members can articulate the reasons when a founder CEO is failing in a role – it’s usually just a feeling and the company doesn’t seem to be working. But going through this exercise will open the dialogue and people will be more comfortable coming to you when it’s just not working out like they expected, and you can get a heads up that they feel this way.
- Get a professional 360 done on you at least yearly, ensuring board members, your co-founder, your executive leadership team, and ideally outside individuals (significant other, customers/partners, other CEOs, etc) are interviewed as well. Take the feedback to heart and work on it. Consider getting a coach. Improve your leadership skills. Basically get better at your job over time, and change with the role as the role changes.
- Work on getting used to the idea that your weaknesses will be your company’s ceiling – and if you are blind to that, you will likely bring the company down along with you. Sometimes, stepping aside is the smartest thing, not just for your happiness, but for your company.
You should become a board member at another company
One tactic I highly encourage founders to take is to seek out and join a different company’s board of directors. It’s common for a founder who’s about to navigate their own board to be suspicious and skeptical of the board and board members. The reason is that we’ve all heard horror stories, but another reason is that you don’t have experience with boards, good or bad. Joining another board of directors as the independent (more on that role in the next post) will help you develop empathy for your own board members, you’ll see strategies and tactics that will differ from your own, you will learn what to do and what not to do, and you will generally get more experience seeing other companies operate that will help you accelerate your own growth as a CEO. The time you spend on other companies’ boards will come back to you in spades as learnings, fewer problems and issues, and growth. Spend the time to find another board to join, it’s worth every moment of your time.
Up Next – Navigating your (first) board of directors: The People (Part 2 of 4)
*My lawyers want me to remind you that none of this is legal advice, it’s simply my collective experience and summary of what I know to be true, and that you should consult your attorney for real guidance. You should listen to my lawyers because I’m not one.