High Growth Handbook

by Elad Gil

  2. Agree on the spec with your investors. Once you have defined what you want, discuss it with your investors and get agreement on the spec. This helps you call bullshit on them (e.g., when they offer up a friend of the firm with no relevant background) and lets them call bullshit on you and keep you honest (e.g., when you suggest your best friend from high school).

  3. Create the list of options. Make a prioritized list of people you would most like to add to the board. You can use an executive search firm which specializes in board members or ask your investors, advisors, or other entrepreneurs for suggestions. Your board members are optimally people that you wish you could hire for the company, that are truly out of reach otherwise.

  4. Spend time getting to know the potential board members. You will get a lot of pressure from your investors to finalize the board, but don’t be afraid to push back and make sure you take the time (many months) to find the right person. You would not rush to hire a crappy engineer “just to fill the spot.” With a board member (who will be more of a pain to remove than a bad employee) this becomes even more important.

  Have some questions and topics ready to discuss with potential board members:

  Ask them to discuss key directions for the company. Do they align with the vision and approach you want to take? Do they have key insights or interesting feedback?

  Ask how they will help the company. Where will they pitch in? What are they good, or bad, at providing?

  Ask about their goals and aspirations. What do they want to do with their career or life? How does the role on your board impact this?

  Ask them to do something for you. Try to put them to work and see if they will help with something relevant to their experience. You could hire them as a consultant for a project in your area of expertise. Or, for a more lightweight test, ask them for an introduction to someone in their network, ask for their help and advice on structuring a deal, or have them spend some time advising you on a current strategic issue you’re facing.

  5. Check personal rapport and attitude. This is really important. You as the founder(s) should have great personal rapport with the independent board member. He or she should be someone you feel you can trust—who you would feel good about calling at midnight on a Friday—and someone you think will be able to help you grow the company and, ideally, grow personally. This board member should be someone who, if circumstances were different, you would be excited to start a company with.

  When assessing a potential board member’s attitude, there are a few things to avoid:

  The condescending, gray-haired operating executive who sees you as a “bunch of kids” and who views herself as part of the “adult supervision.” This typically leads to unnecessary oratory by the board member or the founder getting fired as CEO and replaced by some visionless “operator.”

  The micro-manager who confuses being on the board with being your boss.

  People interested in the role for the potential financial reward rather than the excitement of helping you build a business.

  People who simply want to “join a board” so they can increase their own personal stature or start to take more board seats themselves.

  People who want to join your board so they can network with, or get to know, your investor board members. (This can lead to disaster, as they will side with an investor over you to curry that investor’s favor.)

  The VC crony. More on this in the sidebar. It is important and common enough to deserve its own section.

  AVOIDING THE VC CRONY

  Venture capitalists will often push cronies, or people who owe them, onto your board. Effectively they are trying to turn the “independent seat” into an additional seat that the VC controls. There are a few common ways to spot a VC crony:

  The VC has worked with her a lot in the past or sits on her board, or she is an executive the VC has placed in a company before.

  She has worked at multiple companies backed by the VC.

  She sits on a few boards with the same VCs.

  She does not have relevant experience, does not understand your product, or makes generic comments rather than insightful ones.

  She is likely to get placed in her next job by the VC (e.g., a VP of Sales who wants to become CEO).

  You can decrease the likelihood of adding a VC Crony if you follow the steps on this post (and convince your VC to follow step 8 below).

  6. Check alignment of vision. Does the independent board member understand where you want to take the business? Is he or she aligned with that vision and direction? You want someone who will support that vision rather than second-guess it. Similarly, you want someone who will take a long-term view to building a great company (assuming that is your intent), rather than focus on a short-term flip.

  Look at prospective board members’ backgrounds: What has happened to the companies they have started or run? Did they sell early, and if so why? What other choices have they made in their careers, and how thoughtful are they in hindsight about those decisions?

  7. Check references. What do people who have worked with your prospective board members think of them? Are they high integrity? What are they helpful at? If they are already on boards, what do the entrepreneurs they work with think of them?

  8. Finalize who to add. Optimally you will take a “common nominates, preferred stock approves” approach to adding the independent board member. Just like with the Supreme Court—where the president nominates the justices and Congress approves the nominations—the balance of power lies with the nominator (thanks to Naval Ravikant for this analogy). Your VCs may have some great suggestions for board members (and you should definitely ask for their opinion). But ultimately you want to be driving the final “election,” and to do that, your biggest point of leverage is in who you nominate.

  Like any other member of your team, the independent board member may eventually lose their usefulness beyond a certain scale of company. A public company board tends to look and act differently from an early stage startup board. If you control the independent seat, you may want to change people out if their skills and insights lose relevance.13

  “Your board members are optimally people that you wish you could hire for the company, that are truly out of reach otherwise.”

  —Elad Gil

  The chairman of the board

  Typically, the only real “legal” capability of a chair (depending on charter and state of incorporation) is the ability to call for a board meeting independently of the CEO (assuming the roles are split).

  In early-stage startups, the title “chair” is pretty meaningless; most won’t have a stand-alone chair.

  In later-stage companies, the chair may play a board-coordination and influencer-leadership role, especially if the size of the board of directors has ballooned. For example, the chair may funnel feedback from the other board members back to the CEO in certain cases, or help with the agenda-setting and follow-up from board meetings. In these cases, you can think of the chair as the equivalent of the board’s “tech lead”—i.e., someone who can set the tone and agenda of the board without direct management responsibility for it.

  In most high-growth companies, the chair role is filled by the founder, who is also the CEO. If the CEO is not also the chair, this role is usually filled in one of two ways:

  1. Often, the chair role is taken by a founder who is no longer active in the company’s day-to-day operations but who has a large financial stake and/or in-depth knowledge that could be helpful to the company. For example, when Jack Dorsey stepped down from his first stint as CEO of Twitter, he assumed the chair mantle. Alternatively, if the board hires a professional CEO, an active founder may assume the chair role (and often is called “executive chair”—see below for more). For example, Jim Clark was Chair of Silicon Graphics when Ed McCracken replaced him as CEO.

  If a founder is still CEO, it is very weird to have an additional operationally active, non-CEO founder as the chair. This usually suggests a power struggle between
the two founders.

  2. Sometimes a VC or early investor will take the chair role when he or she makes the investment. For example, Don Valentine (who started Sequoia Capital) was the chair of a number of companies he invested in, and Oren Zeev is the chair of Houzz, after being the first investor in that company’s seed.

  “Executive chair” is a title usually given to a chairman of the board who is actively engaged with the company on a day-to-day basis, but not fully operational (for example, an executive chair may not officially manage any functional areas or organizations). The executive chair will often be focused on one or more strategic areas for the company. When Eric Schmidt stepped down as CEO of Google, he took on the executive chair title and spent much of his time on government relations and overall corporate strategy for the company.

  Board diversity

  You want to fill your board with directors who share a common sense of purpose and who strongly support the mission and direction of the company. You want people who will stay calm and weather the inevitable storms, and who can provide operating advice, financial expertise, a deep network, or other skills. You want people who are high-performing and driven.

  In parallel, building a team of directors with diverse backgrounds—in terms of ethnicity, gender, sexual orientation, and other factors—may help your company in many ways. That diversity can be a benefit when it comes to recruiting, providing role models or mentors for your team, and broadening the network and perspectives of the company.

  Many technology company startup boards start without much diversity. Most venture capitalists are white and male. Since VCs often take the first external board seat at a company, most startup boards start off without much venture capitalist diversity. Similarly, many independent directors are the CEOs or top executives of large companies—many of which lack diversity in their highest ranks.

  Ways to source diverse board candidates

  There are several tactics—including a small number of emerging resources—that can help you find women, minority, or other board members:

  “The makeup of your board should change as your company scales from a young organization seeking to develop a meaningful product to a more mature startup in high-growth mode.”

  —Elad Gil

  1. Get a diverse set of angel investors early on. Build these relationships early in the life of the company, and by the time you need to add a board member you will already have numerous bridges to great independent board candidates. You will get to know their thinking firsthand and will be able to build relationships with them that allow you to convert them to board members later.

  For example, Color Genomics, which I cofounded, has over a dozen female investors. Color’s first external board member was Susan Wagner, cofounder of BlackRock and a board member at Apple, BlackRock, and SwissRE. Sue started off working with Color as an angel investor, and we were lucky to eventually convince her to join our board after she got to know the company and its mission.

  2. Pitch diverse venture capitalists. Pitch women and minority venture capitalists as part of each round of funding. This increases the likelihood you will have a more diverse board.

  3. Tell recruiters and investors what you are looking for. If you hire a recruiting firm to help you with your board search, you can specify diversity as a criterion that is important to you. Similarly, your investors are often involved with the hunt for board members; ask them for help and introductions.

  4. Check theBoardlist. Sukhinder Singh Cassidy recently launched theBoardlist as a resource for suggesting and finding female board members.14

  5. Review “most powerful” lists. There are numerous “top” and “most powerful” lists for women, African Americans, Latinos, and other groups. These can be segmented by geography or other factors. Go through these lists and find someone to introduce you to potential members.15

  Board evolution over time

  Setting up your board of directors is not a one-and-done endeavor. Your board’s composition will no doubt change over time as members come and go—and at certain key junctures in your company’s life cycle, you may need to nudge that evolution along.

  The makeup of your board should change as your company scales from a young organization seeking to develop a meaningful product to a more mature startup in high-growth mode. At the early stages, certain board members may be valuable in your quest for product/market fit or your next round of funding. Later, though, you will need board members with operating experience, a network of potential later-stage executive hires, and broader strategic insights.

  We’ll talk more about how to ask private company board members to step down in the next section (TL;DR: It’s hard to pull off). But whether you’re building a board for the first time, or simply adding a new member, always come back to these “hiring” guidelines. Whatever your company’s stage, bringing someone onto your board is a critical decision—one that can help the company, founders, and executives mature, or one that will cause frustrating headaches.

  Removing members from your board

  Unfortunately, there are times when things just don’t work out with a board member. This could range from board members being benign but useless (e.g., spouting generic advice that does not matter) to being actively destructive. I have heard of board members leaking information to the press, fomenting political factions among the staff under the CEO, derailing a company’s financings, or pushing for strategic directions that make no sense. I have seen cofounders leave more than one company due to poor advice from board members, as well as board members who poach executives from one startup to join another of their portfolio companies.

  While it is typically straightforward to remove a misbehaving employee, a poorly behaved board member may be harder to “divorce.” In general, investor board members are harder to remove than independents.

  Removing VC board members

  Once they join your board as part of a financing, investor board members are notoriously hard to get rid of, as they usually have contractual rights to the board seat written in their financing documents (i.e., your series A, or series B, C, etc., paperwork).16 Removing a VC board member can generally only happen at a time of transition or leverage (a financing event, major change in company direction, IPO, etc). Additionally, the VC may have extra economics in the investment for taking the board seat, or view the seat as something that builds her stature in the broader world. So how do you get rid of a misbehaving board member? There are a few tactics you can try, depending on the stage of your company, the leverage you have as an entrepreneur, and your relationship to the VC and her firm.

  1. Change the overall composition of the board to reflect the maturation of the company (and boot the VC off as part of this shift). The makeup of your board should change as the company scales from a young organization seeking to develop a meaningful product to a more mature startup in high-growth mode. At the early stages, board members may be valuable in your quest for product/market fit or your next round of funding. For example, board members may know of new distribution tactics or other strategies that are working in their portfolios, which they can share with you (e.g., “Facebook is suddenly working well for mobile app distribution”). However, if they lack operating experience, a network of potential later-stage executive hires, or broader strategic insights, it might make sense to replace them and other board members as your company starts to scale rapidly.

  Once a company finds product/market fit and focuses on scaling, the skill set, network, and advice needed from a board member shifts as well. Similarly, as a company starts to plan to go public it will need to add more independent directors and more operators, as well as more specialized board members (e.g., a former CFO for the finance/audit committee).

  When shifting into high-growth mode, you can ask multiple early board members to step off the board to help enable the transition to a successful later-stage or public company. This approach prevents any one request from being viewed as a personal criticism of a
ny one board member—rather, you are changing the slate as the company matures. If an early board member can be especially helpful in your later stages, you can retain this board member or alternatively convert her to an independent seat.

  While the request to step down as the company matures may be a logical one that should increase the value of the company overall, some may refuse—because they benefit from the stature of being on your board, for example, or want to protect their investment in your company until the company has a liquidity event. But if one or more of the other board members step down as part of an overall board reshuffle, it puts pressure on holdouts to comply as well.

  Alternatively, as a later-stage funding round occurs you can ask an early investor to step down so that you can create a seat for a later-stage investor. Many early-stage investors may refuse. However, you can point out that the investor coming in brings new and necessary skills, networks, or advice to the table. Remind existing members that there is a need to keep the board to a constrained size and also to start planning toward an IPO (assuming one is in sight in 18 months or less).

  In general, simply asking an investor board member to step down is unlikely to work.

  2. Buy them out. It takes 5–10 years for most companies to have a liquidity event. Many investors will be raising additional funds from their own limited partners (LPs) along the way, and they’ll want to show a return to get the LPs to invest more in those future funds. This means you can offer VC board members an opportunity to sell a subset of their stake in your company in exchange for stepping off the board. This stock sale could happen either via a secondary event (see the chapter on late-stage financings) or as part of a later-stage primary funding round. If the investor does want to sell stock prior to a full liquidity event such as an IPO, you can make the following arguments for why a stock sale should be tied to her stepping off the board: