198: How to Build a Board of Directors
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In today’s episode, Steli and Hiten talk about building your board of directors. Steli and Hiten share their thoughts on the right time to create a board and what to look for in those who want to be a part of your board. Steli and Hiten share cautionary tales of what might happen if you overlook who sits on the board. They also share key advice and tips that act as preventative measures to potential conflict—like doing your due diligence and laying out your expectations as a board of directors from the get go.
Time Stamped Show Notes:
- 00:05 – Today’s episode is about how to build and design your board of directors
- 00:28 – While this will be predominantly for startups raising money, this is also for those companies who have already raised, but still need to build their board of directors
- 01:24 – Ideally, when you’ve finished a seed round, it is not the right time to build a board
- 02:19 – In the beginning, you just have to focus on your business—a board can be a distraction
- 03:06 – Your investor turned board member might pivot your business in a direction you do not want
- 03:26 – Hiten says true investors just get out of your way because they know that in the early stages, things can still change
- 04:07 – Steli says that the board should not be heavily involved in the business
- 05:52 – Steli says the agreed upon time to create a board is when you get into the series A
- 06:30 – When you have a lead investor in a series A round and are raising millions with a firm putting in 50-80%, that is when you usually begin a board
- 07:03 – You want to have an odd number of board members for voting purposes
- 08:09 – Hiten says it is ideal to have 3 people on the board – 2 founders and the lead investor
- 08:50 – Steli says the dynamics of the company shift when you have a board
- 09:10 – The board helps you make decisions on crucial matters, so you have to be selective
- 10:05 – Steli asks Hiten how he chooses board members and manages the dynamics between board members
- 10:38 – Hiten says your expectations must be clear between the investor and founders
- 11:17 – It’s good to ask the investors what they’re expectations are as board members
- 12:06 – Kissmetrics used a diagram for seven months to explain to the board the development of their infrastructure
- 13:28 – One of the best practices is to prepare a board deck, send it 24-48 hours before the meeting, and then discuss the deck in detail during the meeting
- 14:20 – In a previous episode, Steli and Hiten talked about using a deck as an internal tool in managing the business
- 15:23 – Steli says there is a possibility that those who sit on your board might be different from the people you have built relationships with
- 16:45 – Steli says based on experience, he’s had to replace a board member and it worked out well in the end
- 17:04 – Steli also knew of a negative experience where a replacement was “new” and created disruption
- 17:13 – Hiten says it is difficult to get rid of a board member
- 18:14 – It is important to institute a system and maintain control of the meetings
- 18:23 – You have to be careful about who is on the board
- 18:36 – Hiten says one of the biggest problems in business, today, is dysfunctional boards
- 19:02 – Steli says founders cannot rush or be complacent about who sits on the board because they will have real power
- 20:10 – To collaborate on pitch decks and board decks, go to GetDoGo
- 20:49 – End of today’s episode
3 Key Points:
- In the early stages of pre-seed and seed raising, having a board may just be a distraction from actually building your business.
- It is important to choose the right members for your board, as they will have power in making crucial decisions.
- It is difficult to get rid of board members, so just do your due diligence in choosing the right people.
Steli Efti: Hey, everyone. This is Steli Efti.
Hiten Shah: And this is Hiten Shah.
Steli Efti: In today’s episode of The Startup Chat we’re going to talk about how to build or design your board of directors. This is for startups. This is not just for startups that are raising money, but I assume it’s predominantly for these. This is maybe an interesting question. How many startups that are self-funded actually build a board of directors that go beyond their founders, and at what stage does that make sense? If you have any kind of success or if you raise money as a startup, you’re sooner or later going to be faced by the question of building out your board. That’s such a foreign thing for most founders to do. Most founders that are going to put together their board of directors will do that for the very first time and they’re not going to be doing it with any high level of frequency. I feel like there’s a lot of mistakes that probably are being made there and there’s a lot of founders out there that are just curious about this topic.
Hiten Shah: Yeah, I totally agree. It’s like one of the most interesting topics that founders struggle with. I mean, you usually don’t have to deal with it till you get to later stages, so that is something worth mentioning. One thing I’ll start with is ideally when you have a seed round, or the earliest stages, you actually don’t want to consider having a board. Sometimes it’s actually a red flag if you raise a half a million dollars or something and someone wants to get on the board. I’d love to discuss that for starters, Steli. When should you get a board?
Steli Efti: I love it. Timing, right? When is the right time to get a board? Okay, you hinted at it already to some degree where it’s not the right time when it’s super early or slash when you are just raising a seed round and some of these investors or maybe angel investors want to join your board. That should be a red flag. The obvious question here is: Why? Why wouldn’t you want a board of directors as soon as possible? Aren’t they helping you? Aren’t they going to be part of the team and helping you with management and with decision making? Why would you want to delay that to a later stage? What’s the core reason for that?
Hiten Shah: Yeah. In the beginning, you have to just be so, I almost want to say inwardly-focused in your business that a lot of outside input from people who aren’t your customers or your team ends up being a distraction, to be really, really honest about it. At the same time, if an investor thinks they can really help you and they want to be on the board and they want to make you have board meetings and all that and you’ve raised like half a million dollars, you’ve probably got an investor that’s just so, and I know we’ve talked about this before, but so deep into your business that it might be detrimental because at that stage everything can change overnight. Literally, your whole business needs to pivot and things like that, and then the investor’s bought into a model, they’re on the board, and they’re going to try to push you in directions that might not make any sense for your business. Who knows best at that point, your investor that’s on the board just because you raised 500 grand and they put in 100 or 200 of it, or you and your team and your customers? That’s where that distraction is not really worth it. I would say that if you get a board of directors super early it’s usually a distraction. I’m going to call out a firm who I know really well, just to mention a name, but True Ventures tends to actually not get on the board in the earliest stages of your business and they do early stage rounds. That’s their whole model. The reason is, they give you … They might have a board observer if you want or they might just let the founders have it. Most of the time, they just have the founders be on the board and they basically get the F out of your way. I have a ton of respect for that because they realize the earliest stages, things change and having board meetings and all that could be a big distraction. That doesn’t mean to say that they don’t get involved or don’t want to help you, but it’s just like they want to give you the room to explore and find that product market fit.
Steli Efti: I love that. I think that there’s a difference … Just because somebody doesn’t sit on your board of directors doesn’t mean they can’t be incredibly helpful. It doesn’t stop people from giving you advice when you ask them. It doesn’t stop them from jumping on a phone call when you need them. It doesn’t stop them from showing up at your office and brainstorming with you. It doesn’t stop them from making introductions, doesn’t stop them from being an advocate for your product. If I’ve invested in your company, nothing stops me from being as useful and as valuable to you as you need me to be without having the formality of a board seat. I think putting together a board just makes things very formal, right? You have to have a certain kind of way to go about it. It needs to be documented a certain way. You give these people power, real voting power, and all of a sudden I think that formality, the early days it’s just more slowing things down and more harmful than it’s useful. But I don’t think you’re losing anything. If you have investors that want to be involved and you think they can really add a ton of value, the seat on the board is not what gives them the ability to help you. They’ve invested in your company. They have a vested interest in its success, and if they want to be a champion and help, they can. You don’t need to have a formal board to do that and accomplish that goal, right?
Hiten Shah: Not at all. Not at all.
Steli Efti: Okay. We know super early you should be either inwardly focused on the team and the things that you guys want to do, or the people that you want to be closest with are your customers, or your users. Then everybody externally, you can tap into when you need them but a board is probably not the right structure in the super early days. So then, when is the right time? When is the right time … Obviously, once you get to the series A, I don’t know if it’s the right time or not, but it’s the agreed upon time. It’s kind of a given that if at least a venture fund puts in money in your company in a series A structured financing, they will want to have a board team. But I’m wondering, just because I raised that question earlier and we didn’t talk about that at all, if you look at self-funded companies as a separate grouping, is there right timing for them as well? Let’s compare the two. With venture funded companies, we know that the series A is the time that you’re probably going to need to put a board together. When is the right time for a self-funded company? Maybe there is never a right time. What’s your thinking there? What have you seen work well or hasn’t worked well?
Hiten Shah: Yeah. Usually, when you have a lead investor, let’s say like a series A round, then you’re raising millions of dollars, so $2, $3, $4 million dollars and someone’s putting in like … Not someone, but a firm is putting in 50 to 80% of that round. That’s when you usually get a board. These days, sometimes you don’t even get a board at that stage, but most of the time you get a board of directors and you have to set it up. The idea there is an investor’s highly invested and they’ve put in a bunch of money and the board system gets put into place at that point. The general thought process there is, and what people say is a general rule, is ideally you want a odd number of people on the board. The reason is if there’s an even number of people, two people can … Boards have a lot to do with voting on things. It could be voting on firing somebody, as extreme as that, or voting on taking venture debt. There’s all these other things that people can vote on. We don’t need to get into that here, but there’s a lot of … Could you share your responsibility that gets added the second you have a board and investors on it and all that? Usually you’ll have a lawyer that comes to your board meetings just to take the notes or someone else can take the notes, but there’s a process, right? It’s very structured. There’s books on this, but at the end of the day the tips that I don’t hear are more about board management. I would love to get into that at some point. Maybe it’s another episode. In terms of when to get a board and what to do, odd numbers are important because then if votes happen and then if it’s like five people on a board, it’s two votes versus three votes. If it’s three people on a board, it’s two votes versus one vote and it’s hard to have a standoff where it’s two and two if there’s only four people. Usually what I’ve seen, typically, in the first round where you start getting a board, usually a series A, is there’s three people on the board, ideally two founders and the lead investor. I’ve also seen it where it’s the lead investor, maybe an independent director and then one founder, depending on the situation. That’s the most common thing I’ve seen.
Steli Efti: Yeah. That structure is really important. I think that a lot of founders just, what they realize once they go through the process of … Typically at the beginning the founders are the board members, the board directors. It doesn’t matter if it’s two co-founders or three. Then, once you add external people, people that were not there as co-founders of the company, it really shifts the dynamic in the company from you as founders were kind of a team and had a lot of decision making power to now, I don’t want to say you have bosses, but now things have changed and it’s much more the board that can decide over if you’re doing a good job or not, if you’re going to keep your job or not, independently from what your equity situation is, than it was before. It’s kind of a big shift in the power dynamic of the company, hence, why it’s so important to be selective. I think that most founders strive to find a balance between bringing directors that will not just be yes men or yes women and add value to it and maybe even challenge things at times, but not to the degree where they will take over the company or undermine the core values or the core vision or even the founders. To a big degree, as a founder, you have self interest. You don’t want to add people to the board that will work against you and at some point push you out of situations. You mentioned a little bit about board management. Maybe just on a very high level, obviously it all starts and ends … A big part of board management is board selection, I would say, which is picking the right people. How do you think about that? I assume that it’s to a large degree the same way that you would think about picking your co-founders or picking any kind of really important relationship where you want to make sure that you really truly understand them, their motivation, you really make sure that there’s alignment there. A little bit maybe about your experience on how to pick the right directors to join versus the wrong ways of picking people, and then we might want to share a few tips, a few thoughts on how do you then, on an ongoing fashion, manage the dynamics within the board?
Hiten Shah: Yeah. The word that comes to mind for me is more expectations. Expectations are really important in any relationship. I think they’re more important in an investor founder or set of founders relationship than anything else. That has to do with your lead investor and the one that’s on the board more than any other investor typically. I’m not saying every investor, you should understand their expectations. There are generic ones like, “Hey, we’re giving you money so you can make us money. You make us money if you go public or if you sell the company or something like that.” Those are the basic two options, honestly. You have to know what you’re getting into, and then it’s just a conversation of expectations. It’s like, what do you expect of me? Things I would ask these investors is like, once you’ve signed the term sheet and all that before your first board meeting, is, “How do you like the board? Do you have an example deck that you can send me or walk me through? Are there best practices you have? Is there things that you don’t like and things you like?” The reason I say that is there is very specific advice I give about boards. For example, don’t change every slide every time. Build on your slides. Create slides and then literally repeat them. For example, at Kissmetrics we had major infrastructure challenges for probably 18 months, to be honest. It wasn’t like customers could see them, but we had lots of issues in the back end that were preventing us iterating the product. So we created one diagram that had red, yellow, green, and all of our infrastructure. It’s not like any of the investors understood the infrastructure itself. Maybe a couple of them did, but not really, or any of the board members did, but we were able to show yellow, red, green. Everything started red and yellow and eventually by the end of the 18 months in the last board meeting where we really solved it, everything’s green and then we stopped using the slide. That slide showed up in about seven or eight board meetings in those 18 months, and it was awesome because it helped them understand where we were at, what we were doing, and how things were going and whether we were making progress towards that goal. That’s a very specific example, but think about your financials. Think about the cap table. Think about all those things you need to share. I see too many founders try to get fancy with every board deck, when all you really need to do is focus on the sections that are important that are repetitive and make them repetitive and make them build on themselves of what happened since last time, but don’t forget to show the historicals in the past. It’s just funny, I don’t see them do that. Outside of that, it really just boils down to who is an investor and what do they expect in that board deck. There are some generic rules again, but some investors have hot buttons, like, “Hey, I always want to know what’s going on in the product.” That’s a generic thing, but some investors have that, but not everyone does. If your investors and your board members don’t care about your product as much or don’t care about the details in it but they want to know the high level metrics and stuff, focus on that. If they do care about you sharing that, focus on that. One other thing that I’ll share, just a big tip, maybe it’s my last tip on the board stuff because I’m sure this stuff is going to go much longer, Steli. But it’s basically this: One of the best practices which not everyone follows is that you want to talk about, in the board deck you want to send it beforehand, 24 to 48 hours before, and then you also want to make the bulk of the conversation not repetitive about what’s in the deck, but more so a very important key discussion you want to have with your board. Because then you can make it really fruitful, they feel like they’re adding value, and then the onus is on you to have a great discussion about the biggest challenge you’re having. Honestly, some of the most invested people in the room in your company are there all at once. So you want to make good use of their time, and usually having that one topic that’s most important and that’s really challenging for you is what you should spend the bulk of your time on. Very few founders do this, but it’s when you really turn board meetings into being really productive.
Steli Efti: I love that. In the prior episode on how to raise issues, we talked about this super successful founder that’s a friend of yours that figured out that actually putting together a really strategic deck and doing it the right way was not just kind of just do a piece to investors, but was also incredibly valuable as an internal tool to understand their own business better and where they should go next. I feel like if you manage a board correctly and if you do these board meetings correctly, that deck is something you could internally use that’s something that allows you to check in with how things are going on a larger level. To your later point, if you do the proper work to make sure that people are informed, the directors are informed when they come to the table, then you can focus on having real discussions verus having everybody come to the table to go through a deck together and basically waste time repeating something that people could’ve read on their own and then not have as much time to actually get real discussions or real decisions out of the situation. There’s one thing that I want to add that I want to touch on in this episode before we’re going to wrap it up, which is this idea that things might change and get out of your control. I know that, in some cases, when a VC firm invests, that lead investor that you work with might get on the board and then sometimes VCs change firms. That VC now changes his firm but the lead investor that round is still the old VC firm, so they might replace the board seat with somebody else that works at that firm and somebody else that you didn’t build the relationship with. He or she was the person that was initially the person championing the deal and all that. All of a sudden now, this incredibly important seat on your board was replaced by a new person. You may have control over that, but maybe not. This is not that rare, but it’s something that most people are not aware of, that they never even imagined that could happen. I want to just maybe a few words on this kind of a scenario. What happens when something drastic changes on your board that was outside your control and there’s now a person that you don’t know. How do you deal with that? What do you do? How to think about that?
Hiten Shah: It’s tricky, right? I think a lot of those things are very contextual to the specific situation that somebody’s dealing with. Again, I don’t want to get into a long thing about it, but I’ve found that to be very, very, very specific to the situations that someone’s dealing with. I don’t know what you’ve seen, though.
Steli Efti: Yeah. I’ve seen good and bad. I’ve seen the situation happen where nothing bad happened and it was a new investor that was on the board, but ultimately it kind of worked out and the person was very thoughtful and still somebody that added a lot of value and not really disruptive. I’ve heard of the situation where a board seat was replaced by somebody new and that created all kinds of issues and that person was very disruptive.
Hiten Shah: It is really difficult to get rid of a board member. Let’s just put it out there, because I think people don’t realize that. I don’t mean an investor board member, I don’t mean an independent board member, I don’t even mean a founder board member. I mean all of them.
Steli Efti: All of them.
Hiten Shah: Right? Because it takes votes and stuff. If you’re not taking this stuff seriously as to who’s on the board and why, you might be in for a lot of pain. I’ve dealt with this personally. I’ve never shown anything about it, but it sucks. There’s a lot of emotion and stuff associated with it. People feel proud to be on your board, and there’s a responsibility there, not just a fiduciary one, but there’s demands, right? You make people show up for a two or three-hour session every month, every quarter, every two months, whatever your cadence is. They have to show up. There’s even been times when you get to the point where, as a founder, you’re like, “Crap, my investors are on the phone the whole time they’re in the board meeting, or on their laptops. I don’t know what they’re doing.” Then you want to institute things like get rid of your phone. You can’t have your phone when I’m talking here. Those things are hard to do too. That’s why this whole thing about expectations and being super careful about who’s on the board is super important. Right? That’s without me getting into the context and the specifics of how fucking bad it can go. It isn’t about how great it is, because the majority of boards are so dysfunctional. It’s actually one of the biggest problems in business today, and this extends all the way to public boards too. That’s my mini-rant for you on this one, Steli.
Steli Efti: That’s a very powerful way to end. I’m like, “Whoa.” But I’m happy about it because I do think that getting founders a little shook on this topic is not the worst idea in the world. Just to make sure that you realize how severe and how important and how crucial these things are, so you can’t just rush these things. You can’t be laissez-faire and be like, “Yeah, I don’t know if he or she’s the right person for the board, but whatever. I don’t want to deal with this anymore. Let’s just wrap things up.” These are really important relationships. Once people sit on your board, they have real power and it’s very difficult for you to move things around or change that decision down the line. You can’t just think about this as an MVP. You can’t just think about this as something that, well, if it doesn’t work we’ll pivot it. We’ll change things.
Hiten Shah: Oh, no way.
Steli Efti: Take it very, very seriously and take the appropriate amount of time and care and thoughtfulness to make the right decisions. I love that rant and I think it’s super important. Founders need to hear that, so I appreciate you sharing that. Now it’s kind of hard for me to wrap this up with this, but I do think that we should … There is a tool out there that recently launched that allows founders to actually work on their … It’s mostly done for pitch decks and for raising money which is for people that are interested. Board seats and board directors is going to be probably relevant, but I’m assuming you guys’ tool for collaborating on pitch decks or collaborating on decks in general could be used also for board decks, right?
Hiten Shah: I’m glad you mentioned that, yeah. It is definitely a use case we’re seeing already, and one we didn’t fully grasp or think of, but we knew if we put it out there people would start using it for things like too. Yeah, it’s called . It’s a new product that I’m building with a partner of mine, and it’s totally free to use. The idea is that it helps you get feedback from people you care about on your pitch deck or even a board deck, and then you can even share it and understand who’s looking at it and all that kind of stuff.
Steli Efti: Sweet. Well, definitely go and check it out. This is it from us for this episode.
Hiten Shah: Cheers.