When entrepreneurs gather to swap war stories, whether they’re meeting in person or virtually, one of the biggest categories of horrific tales are bad board stories. Every entrepreneur I know has them; I’ll even share a few of my own in this essay. But far too often, the conventional wisdom imparted to entrepreneurs is to treat board meetings as a necessary evil, part of the price you pay for raising money. True, many boards are dysfunctional, but when you build a great startup board, it will be a powerful tool that can help the CEO make the company successful.
This essay, which is based on Part 1 of a two-part episode of the Greymatter Podcast, will cover the fundamentals of building great startup boards. You can listen to the podcast here, or search for Greymatter Podcast in your podcatcher.
What Does A Board of Directors Do?
The structural role of a board of directors is corporate governance, specifically, making sure that the company is managed in accordance with the interest of the shareholders (and if liabilities exceed assets, the interest of debtholders), and in compliance with applicable laws and regulations.
The most important point to keep in mind is that the board’s role is not to manage the company; it’s to provide oversight for the actual management team, especially the CEO. That’s why one common mistake boards make is slipping into management without realizing it (we’ll discuss this in greater depth later on).
With his usual awesome first principles focus, my friend Reed Hastings has articulated that the fundamental responsibility of the board is to hire, fire, and compensate the CEO. While I don’t agree that it is *the* (only) fundamental responsibility, I do believe one of the fundamental responsibilities of the board is to decide who acts as CEO.
Given this fundamental responsibility and the need to accurately evaluate the work of the CEO, it’s important that the board have relationships with members of the organization beyond that CEO.
On many boards, both the CEO and CFO have direct channels with the board so that they can provide the yin and yang (in a well-coordinated way). The CEO lays out the aspirations, objectives, and plans, while the CFO provides a needed dose of caution and detail by analyzing the downside scenarios and cross-checking the various plans against the company’s overall goals.
The relationship between a CEO and CFO is a bit like the relationship between a writer and an editor. They might both be accomplished writers or editors, but for a particular project, each partner focuses on a single role, and their different foci make the partnership stronger.
Generally speaking, healthy boards have exposure to the rest of the management team as well, but interact in ways that do not undermine the CEO. Otherwise, how can they answer questions like, “Is this the right management team? If it is the right team, are they working together effectively? What are the opportunities and risks that management is incurring and managing?”
Beyond overseeing the management team, boards should also provide oversight on key decisions. For example, management should review large financial and structural commitments with the board before making them. Signing an office lease might not seem like a board-level decision, but with early-stage startups, that lease might very well be a financial liability that significantly exceeds the company’s total cash in the bank.
While these formal board responsibilities might seem simple, in practice they are too important to be left to amateurs. And even the professionals are likely to find them challenging at times.
For example, I frequently tell people that hiring a CEO is an activity that usually has–at best–a .500 batting average for improving the company. That’s when the board is competent and careful. When it’s not, the odds are even worse.
Given the risks, importance, and centrality of CEO hiring, you would think that if you asked board members to describe their experiences with doing so, and the principles they’ve learned should apply, that nearly all of them would have detailed, well-thought-out answers. But in my experience, it is stunning how few directors, whether at startups or public companies, actually have good answers to these questions. (Example question: What do you know about hiring a CEO that experienced professionals who haven’t hired a CEO don’t know?) This shows you that, unfortunately, many boards are the equivalent of amateur, rather than professional sports teams.
This is an important reason why venture capitalists (VCs) actually have an important and beneficial role to play on startup boards.
I (and many others) have spent our fair share of time criticizing venture capitalists. And there are many, many legitimate criticisms that you could accurately level against more than half of venture capitalists. But venture capital is the only profession whose members get lots of repeat practice being board members.
I’ve been on so many different boards now that I need to go back and count them up to name the number of different boards on which I’ve served. I’ve encountered many of the different ways boards can interact under different circumstances, whether it’s problem executives, problem investors, CEO misbehavior, financing issues, business crises and more.
Why Is A Startup Board So Important?
Building a startup board is very important, even if those board members are only spending a couple of hours a week on the company. That’s because the board can make or break the company.
Sadly, there tends to be a higher risk of the board breaking the company, than the probability that the board is the key to making the company successful. That’s because the making of the company relies on the founders, the CEO, the executives, the team members–in other words, the people who are putting in 80 to 100 hours per week, rather than the board members who are putting in one to two hours per week.
This is one of the dysfunctions of VC arrogance. When VCs describe themselves as “company builders,” I think, “If you think you can build a company in two hours per week, you really don’t understand how startups work. And if you find yourself trying to build the company as an investor, you’ve made a bad investment. Your actual job is to choose the right entrepreneurs and executives, and then help them be successful.”
To combat this VC dysfunction, I think investors should swear the equivalent of the Hippocratic Oath: First, do no harm.
The first and most fundamental application of this oath is understanding that, for early stage startups, replacing the CEO is almost never an option.
If you’re a VC, and you’ve made a seed or Series A investment, and you think it’s time to fire the CEO, what you should really be thinking is, “It’s time to sell the company or shut down the company,” because you’ve almost certainly made a bad investment.
At this stage, you need a true founder who fervently believes they’re going to make the company successful. You rarely can find that quality in a hired gun.
If you get to the point where you’re thinking of firing a CEO, you’re probably dead whatever you do.
Naive board members might think, “Our job is to hire and fire the CEO, so we should think about firing the founder.” No, no, no. Right now, our whole bet is on the CEO and the founders and making them successful. If you really think you need a new CEO, you should be reevaluating the whole investment.
One of the reasons I joined Greylock is that I shared the firm’s philosophy on investors and entrepreneurs: namely, companies succeed because of the entrepreneurs and executives, not the investors. They, not the VCs, are the heroes of the story. As investors, we are active partners to the founders and CEO. We most often catalyze, challenge, and enable the CEO and founders. Sometimes, to avoid disaster, we might also replace the CEO.
Another way VCs can avoid harming the company and live up to this oath is by not trying to run the company themselves. Unfortunately, I experienced this dysfunction personally at my very first startup, SocialNet.
As SocialNet was my first startup, I began with many bad theories of the startup game. For example, in 1997, I had not realized that you need to invent and reinvent your go to market strategy together with your product idea. I had also not realized that your go to market strategy should be native to your industry: hence, for an online product, you should have an online go to market strategy. And so I failed at this initially, but then learned and was pivoting to an online go to market strategy.
However, from my initial failure, a couple of my “experienced” board members concluded that I was a failure. They assumed command: “Well, I’m much more expert than you, so you should just do what I’m telling you to do. You should be doing television advertising.” As I heard this, I thought, “You’re breaking the company. You don’t know what you’re doing. Initially, I didn’t know what I was doing either, but I’ve been spending 100 hours a week learning what to do. And now, by running the company, you’re actually reducing the value and prospects of the company.”
Even though I recognized that their advice was wrong and disastrous, they thought I was young and incapable. Their key mistakes were (1) not tracking learning curves and (2) thinking that they could run the company from the board.
They were right that I was a baby entrepreneur and had made a lot of mistakes. But when a startup is just getting underway and has no asset value, the board shouldn’t be evaluating whether or not to replace the CEO; it should recognize that it’s made a bet on the founders and try to make them as successful as possible.
The analogy I have in my head is that the startup journey is like going on a long road trip. If you’re a board member, you need to understand that you’re in the passenger seat. You may get to choose whether to change drivers at some point, but no matter what, you’re in that passenger seat and your job is not to drive. Your job is to help the driver–the CEO–steer the car to its destination. Being in the passenger seat and trying to grab the wheel is not helpful, except in exceedingly rare circumstances.
Another dysfunction board members need to avoid on the startup road trip is backseat or passenger-side driving. Board members can and should provide feedback and advice, but in a self-aware and constructive manner.
One of the bright flashing warning signs that a VC will be a weak board member is when that person says, “We VCs are pattern matchers.” When I hear this, I think, “You don’t know enough about this area to be able to articulate explicit learnings so you’re trying to assert expertise and authority that you probably can’t back up.”
When I was starting LinkedIn, I had an early board member who asserted to me with great vigor and certainty that the business model of LinkedIn would be advertising. “Reid, the game is engagement and advertising. Everything else is a waste of time. We should focus on this as an advertising business.” To this board member’s demerit, they’ve never come back to me and said, “I was wrong and you were right. LinkedIn is actually a SaaS and subscriptions business.” Sure, LinkedIn has a great advertising business too, but it wasn’t for many years even a noticeable part of the business.
This director caused distraction by forcing me to spend time defending our correct strategy against this mistaken point of view. In contrast, a good board member would have said, “We should evaluate the question about whether or not advertising might be our principal business model. Here are some of the arguments about why advertising might be a really central business model that we focus on. And if you have an alternative point of view, I’d like to understand that point of view, and help you drive your strategy and execution.”
The mistake isn’t disagreeing with the CEO. It’s disagreeing vehemently and unproductively without any basis in fact. I believe the reason this dysfunction occurs is because too many board members–including VCs–have an overdeveloped ego that requires them to assert their infallibility regardless of reality. A good board member disagrees by saying, “I’ve got a question about your strategy. Let’s discuss it so that I can understand your assumptions, data, and conclusions, and help you refine your strategy and business model. Then we can work together and help make that happen.”
Fortunately, board members can also add substantial value to the company if they accept and excel in their role as part of the supporting cast.
This is not the same thing as being one of those VCs who advertises themself as “entrepreneur-friendly,” but really means, “totally passive yes-person.” This passive VC can lead to other problems.
The board should be an active partner for management; it isn’t just asleep in the backseat as the CEO drives. That includes being willing to challenge the CEO by saying things like, “Hey, I think you got a big risk here.” Or, “Hey, you may not be doing that right.” “Or, “You may need to do that a lot better.”
Being a supportive catalyst or a challenger can make the CEO, management, and company stronger.
The metaphor is, “I’m in the front seat next to you, helping you navigate this journey. Sometimes, that means asking the hard questions, pushing you in a way that makes you uncomfortable, or challenging some of your decisions. But I’m not under the illusion that I’m in the driver’s seat or that I’m the hero of this journey. I am the invited partner in the room who is here to help this company succeed.”
As the company matures, it may even involve having a hard conversation about the need for a CEO change. As we discussed earlier, CEO changes rarely make sense in the early stages of a startup. But as a startup grows and reaches the later stages of scale, the current CEO might not have the skills and experience to steer the company to its next point on the journey.
Obviously, both founders and investors prefer when one gifted leader can guide the company from garage to global titan. And a lot of VCs say, “I never invest in an entrepreneur that can’t be the CEO through the entire journey.” I think that’s wrong as well. How can you know, when the entire company fits into a single compact car, that the CEO will be able to command a 10,000-person publicly-traded company? You can’t. As a board member, your primary responsibility is to do the right thing for the company; optimizing the outcome for the CEO is just a nice-to-have. If you say, “I’ll never replace a CEO,” you’re not fulfilling your fiduciary responsibility to deliver upon the best possible company.
In the end, you’ll know you’ve been a good board member based on the extent to which you helped the founders and CEO succeed. It’s not about hearing, “I loved hanging out with you,” though that’s certainly desirable. It’s about hearing, “this journey would have been so different without you. You increased the impact and value of the company by helping us reach key decisions faster and better that we did before.”
How does the role of the board change as the company grows?
The role of the board changes because the nature of the company changes.
When Chris Yeh and I wrote Blitzscaling, one of the key insights was that each time a company increases in scale, from what we called the Family stage (1-9 employees), to a Tribe (10-99 employees), to a Village (100-999 employees), a City (1,000-9,999 employees), and a Nation (10,000+ employees), the practices, processes, and programs that worked at one stage tend not to work at the next. What got you here won’t get you there, and the rules are changing so quickly that it’s hard to adjust.
Another analogy I like to use is that the Marines take the beach, the Army takes the country, and the police make the country secure. You don’t send a Marine to do a police officer’s job, and vice versa.
That applies to the board as well. At each stage, how the board can help the company and how it helps pursue upside opportunities and manage downside risks will change, and if the board members don’t adjust accordingly, they’ll negatively impact the organization.
As with CEOs, the ideal would be a board member who understands all five stages, and is capable of being a world-class director at every stage. A few of these amazing people might exist, but most of the time, the startup is better off applying one of the Counterintuitive Rules of Blitzscaling: Hire Ms. Right Now, Not Ms. Right. It’s better to bring in a board member who will do an amazing job for the next three years (good enough to cover a stage or two), and then rotate off the board, than it is to bring in a board member who will do an okay job for the next 10.
(The tour of duty for a startup board member shouldn’t be shorter than three years, and with a few exceptions, shouldn’t be longer than 10 years.)
When you’re in a Family stage, generally speaking a company will have very little in the way of board members. You’re barely more than an idea. You might have an angel investor or an experienced executive as a part-time board member. This board role is likely more intense than the “one to two hours a week” we described as the usual board commitment.
When you get to the Tribe stage you’re probably looking for and refining your product-market fit. You can hear a lot more about this process in the Brian Chesky episode (the very first one) of my other podcast, Masters of Scale.
A lot of what a company needs from its board members at this stage is help figuring out the right concentrated bets to place. When I say, “Starting a company is like jumping off a cliff and assembling an airplane on the way down,” it’s because the default outcome is failure. The startup’s asset value is probably zero. No one’s going to buy the company or its assets at this point. And so usually the most important decision is how you’re playing for that upside. There’s not much point in managing the downside when you’re at zero.
If you make the right bets, and start creating some real value, the company usually grows to the Village stage. This transition is the time when the question of whether or not to blitzscale often comes up. On the organizational side, you’re starting to hire real executives, not just managers.
At this pivotal stage, you might start managing your downside. But then again, you might not. While you have likely built some real asset value, you might make the strategic decision to push those hard-won chips to the center of the table and go all in, because of the potential upside of victory. The board members need to participate in or even facilitate a collective decision-making process which considers what’s right for the shareholders, what’s right for the employees, and what’s right for the customers.
When you get to the City stage, if you haven’t already, you’re certainly going to start prioritizing downside risk management as well as upside opportunity. You have now created substantial value which makes the company important to its ecosystem (including your customers), while your employees are significantly motivated by that asset value.
The board needs to balance investing in the future to rejuvenate the company’s value with not taking risks that might endanger the asset it’s already created.
By the time the company gets to the Nation stage, it’s either public or operating much like a publicly-traded company. Ironically, this sense of stability introduces a new set of risks. The way that public board members are hired and compensated, including their backgrounds, tend to focus on risk-management to the exclusion of pursuing new opportunities. This is especially dangerous for technology companies (and these days, nearly every company is becoming a technology company!) because the adoption process for new generations of technologies drives cycles of invention and reinvention. That’s one of the reasons why I helped Mark Pincus start Reinvent Technology Partners to bring a focus on reinvention and upside to public company markets as well.
Of course, the critical characteristics of what makes an effective board member aren’t driven entirely by the stage of the company. Rather, each stage has strong tendencies which makes it a useful guide for applying a “rule of thumb.” A Family stage board member doesn’t have to worry much about executive recruiting, but that is a major focus for a City stage board member. But the board’s role and its effectiveness is ultimately driven by the challenges and opportunities facing the management team, like whether the company is purely focused on playing offense, or whether it also needs to defend what it has already accomplished.
Should the CEO and Chairperson Roles Be Combined?
The first thing to remember is that boards are very much a team sport. Yes, the chairperson of the board has certain legal powers and responsibilities, such as setting the board meeting schedule and agenda. But the chairperson is not the all-powerful “Head Coach” of the board. Governance is collective, not the purview of a single person. Instead, the chairperson serves as a “team captain”; a leader, not a dictator.
In fact, some of the best-run boards are run by a Chairperson/CEO who is able to focus the board on the key issues facing the company. And some of the worst-run boards are run by a Chairperson/CEO who uses their position to protect their personal fiefdom. Combining the two offices does not guarantee success or failure.
Many people have a mental model in which the CEO reports to the board, and the board hires, fires, and compensates the CEO. Thus they fear that allowing the CEO to also play the role of chairperson gives that CEO undue influence over the board, and in the worst-case scenario, allows them to set their own salary and make themselves “president-for-life”.
There is some truth to this; many of the worst-run public company boards are run by their CEOs. But this is a case of mistaking correlation for causation. Those boards aren’t badly-run because the CEO is the chairperson; the CEO is the chairperson because those boards are full of passive, disengaged board members who just want someone else to do all the work.
The truth is, adding the chairperson role does not necessarily grant the CEO much more additional power or influence. But it does allow the board member who is most knowledgeable about the company to structure the discussion. It’s for this reason that the best-run public company boards also tend to be run by Chairperson/CEOs.
How I Learned About Building And Managing Startup Boards
Most of what I learned came from trial and error, which is why I wanted to share these hard-won lessons.
Frankly, when I first entered the startup world, I didn’t have any real idea of what boards did. Worse, when I looked for good writings on the topic, I couldn’t find any. Most of what I found simply said things like, “You have responsibility for hiring, firing, and compensating the CEO,” without providing the necessary guidance on how to actually do it.
My first experience serving on a startup board was with my first startup, SocialNet. As I said before, I was a baby entrepreneur with little experience, and I ended up experiencing all the dysfunctions of a classically dysfunctional startup board, with board members who had been CEOs who thought they knew more about startups than the entrepreneurs (including me). We were making mistakes, for sure, but rather than helping me learn from them, the board members decided they should just start running the company by issuing commands and telling me what to do. Total common fail.
While I couldn’t change that board, I was relaying what I was (painfully) learning to my friend, Peter Thiel, who concluded that before he and his PayPal co-founder Max Levchin brought in VCs, they should each bring in their most experienced and knowledgeable startup friend as board members. For Peter, that was me, and for Max it was Scott Bannister. It’s unusual to have two independent board members before bringing in the first VC board member, but it worked out well for PayPal. And when we did bring in a VC, John Malloy, who was at Nokia Venture Partners (now BlueRun), was an excellent board member from whom I learned quite a bit.
After these first two experiences, both positive and negative, I started joining other startup boards. Each time, I tried to refine my theory for how to be a good board member. I believe that each board member should figure out why they would be particularly helpful as a A) a board member B) at this specific company C) with this specific CEO and these specific founders. It’s not enough to just think, “I’m smart and helpful.”
My initial theory was that my value came from being a consumer internet expert with special expertise in virality, since I was one who invented some key viral marketing practices. That experience was helpful; my theory wasn’t wrong. But real life taught me that there was another important way for me to add value.
What I quickly learned when I joined my first board that had other VCs as members (who weren’t there because I chose them), I realized that one of the most highly valuable things you can do as an independent board member is to make sure the board runs well. Board performance should not be left as the sole responsibility of the chairperson.
Part of the reason for this key role for independent board members is the inherent divergence of interest between management and investors. For example, how much equity should the company grant to its employees, including its managers? Sure, the goal is to increase the size of the pie, but because the maximum ownership is 100%, equity division is a zero-sum game. That’s just one of many ways where management and investor interests aren’t fully aligned.
Now, if you’re lucky, you’ve selected smart investors who are reasonably objective rather than partisan. Smart investors understand that startups are collaborative, and that being too partisan in claiming value actually destroys value and reduces investor gains.
I’ll give you a minor example of an investor who was too focused on his own interests rather than being objective. In the early days of the Web 2.0 boom, I was on a board where the investor turned to the CEO and said, “I would like you to generate a report right away on comparable metrics and valuations based on similar companies from a few years earlier.”
I thought to myself, “Of course that would be really valuable to you as a venture capitalist, but is it actually valuable to the company?” Board members shouldn’t ask their companies to do their (unrelated) work for them. To paraphrase JFK, ask not what your portfolio can do for you, ask what you can do for your portfolio!
So I spoke up and said, “No, don’t do that. That would be a mistake, and Board Member, I’ll tell you afterwards why.” After that meeting, I met privately with that board member, and pointed out that if that data was truly valuable to the company, he should ask one of his firm’s associates or analysts to prepare that report. That way, he could add value as a board member, rather than distracting the company.
In closing, remember that board members are your co-navigators in the startup journey, but their role is not to manage the company. Their most critical role is to be a supportive catalyst and provide oversight for the actual management team, especially the CEO. We’ll return soon with the second part of this discussion, during which will explore how to choose your board members (and how it differs for independents and VC board members), why startup boards are going to be more diverse in the future, and why even first-time entrepreneurs have the power to choose their board members. We’ll conclude by naming three great board members I’ve worked with, and why they were so valuable to their companies.