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STARTUP BOARD OF DIRECTORS: How the power works

"What can I expect from my board of directors? That is a question I am often asked by first time entrepreneurs.

This week I'll comment on that topic and give you help anticipating and managing your board.

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When you understand how the power works on your board of directors, you can operate with more realism and effectiveness.

Here is how power works in real startup boards of directors:

• Investors expect to dominate. They have more startup and managerial success than the founder (usually). That is how they became successful venture investors. They are on your board for one purpose: to make the value of the new enterprise rise as fast as possible to as large a number as possible. They are very eager to do that with your company. If you hinder that, you will feel the heat of their wrath.
• Serial entrepreneurs overcome with results. Veterans of startup boards of directors know the CEO will thrive as long as results are delivered. That is the ace power card the CEO has to use with the board. Results bring power to the CEO. Explanations of why things did not come out well lead to the exit door for the CEO.
• Investors do not want to run your startup. Time is the enemy of VCs. They cannot buy it or make it. Managing a startup is a huge use of their time. They want the CEO to run the business. Yes, they may get critical and they may step over the line (start to micromanage), but they do not want to get sucked into the black hole and get the reins turned over to them to manage the startup.
• Your ability to think more creatively overcomes strong suggestions. Better ideas win in power struggles. VC icons like Don Valentine founder of Sequoia Capital, tell each CEO they fund to expect a lot of ideas from the Valentine -- and that he expects the CEO to produce better ones. This pressure is part of the creative process of managing a startup and is expected at every meeting.
• You win power struggles as long as the employees are supporting you. Great morale in your workers -- especially your core management team -- is a powerful asset to use in power struggles. As long as the employees believe you can lead them to success, you have a very strong card to play when needed. They do not want to watch the board get rid of you and hire a stranger. So it takes a lot of bad decisions and rotten behavior on your part to get them to start to wish you were not there. That's one reason serial entrepreneurs are alert to the morale of their employees.
• Work outside the board meetings is how big decisions are made. The old joke is that board meetings are supposed to be boring. Why? Because everyone expects to arrive knowing how the official decisions are going to be made at the meeting. During the weeks between monthly board meetings the CEO will be discussing one on one with board members the sensitive, the important decisions that came up in the last board meeting. The choices are reviewed and the CEO works to get unanimous agreement on each before the next board meeting.
• Independent board members are expected to keep the peace. These people are the go-between person chosen to handle sensitive issues between the CEO and the board of directors. In addition to their startup and domain expertise, the independent person is typically skilled at working out practical solutions to tough people problems. This may call for spending time with the CEO and the techie founder to iron out a working relationship. Or it may be necessary to talk to one of the board members who is out of line with his criticism of the CEO. Such independents are special to startups and important to how well the board operates.
• Boards do not vote on decisions. Everyone is unanimous on every decision. No investor insists on voting his number of shares. Such thoughts are in the heads of naive people. Instead, all key decisions are made during the weeks before each board meeting. Yes, the lead investor has a lot of influence on the decisions, but still he will not vote shares at any meeting.
• Always able to raise cash is key to balancing power. CEOs learn "the man with the gold sets the rules." Without cash the company dies. If you only have board investors, you lose your balancing power. So serial entrepreneurs are always looking for viable alternative investors to the current ones. That gives the CEO confidence he can choose to accept or not accept any strong advice or command given by an existing investor. It is one reason serial entrepreneurs say that "competition (to invest in my company) is the entrepreneur's best friend."

BOTTOM LINE: As you may have realized from the above, your job calls for managing the board of directors. It does not happen for you. It is not done by investors or the independent on your board. You are the one to do it. So study your sources of power and weakness. Think about how you can do well when managing your board members. It will be one of the key elements of building your unfair competitive advantage. It is what serial entrepreneurs have learned to do so well.

I wish you The Best on your Adventure!

STARTUP BOARD OF DIRECTORS: What you can expect

"What can I expect from my board of directors? That is a question I am often asked by first time entrepreneurs.

This week I'll comment on that topic and give you help anticipating and managing your board.

• The board is your new boss. Even if you own over half the shares, you will still have to debate with the board of director members what you are going to do, how well you have been doing and your compensation and all the troubles the startup is running into. That's legal. It is in your incorporation bylaws. You cannot get around it. As soon as you have formed a board of directors for your corporation, you get a new boss.
• The board represents the investors, not you. This may sound difficult, but that is the way corporations work. The board is responsible for making decisions in the best interests of the shareholders. You are considered one of the shareholders, so that is in your best interests. But if you start messing up managing the company, then you are exposed and can be terminated. The investors expect good, positive results. Either you deliver or they will find someone else to do so.
• The board votes using special privileges. Preferred shares are what investors get when they invest cash in your startup. That gives them control of the voting of the important decisions of the startup. Voting on your job is one decision, your compensation is another and the big decisions about what the startup is to do next is another. All the rest of the people in the company get common shares, the less expensive shares used for stock options and founders' shares.
• There are no surprises. All the powers of the investors are spelled out in the terms of the deal with them that you signed. The details are in the "term sheet" you got when they offered to invest in your startup. Hopefully you read the documents, discussed the consequences with your lawyer and are now living with the results. There is no excuse for you to be surprised if you did your homework.
• You are not CEO forever. As soon as you have one investor, you are exposed to termination for lack of results (or other sins). No longer is it "your company". No one on the board expects you to be fired, nor do they plan on it. But you should start planning on your successor the day you have your first board meeting. That is most likely to happen.

If you do not like what you have just read, if you insist on being CEO indefinitely, then do not seek outside investors. It is that simple. The startup will be yours as long as you wish.

But if you accept cash from an investor, the game changes. Now you have to execute and deliver. You are in the spotlight, on the hot seat, expected to do amazing things with this startup. If you doubt that, ask the investor.

BOTTOM LINE: Knowing what you get with a board of directors can help you decide on when and who you choose to form a board. That will give you realism and wisdom. Boards are not all bad (I'll discuss their good side tomorrow). A great board can help you convert your idea into a great, enduring startup. In fact, it can help you build an unfair competitive advantage.

I wish you The Best on your Adventure!

How to Manage a Real Startup: Nr 6 in a series

This is a draft of a chapter of my new book. Your comments are welcome.

CHAPTER 1

Doing a startup is like building a bicycle while you are riding it. Awkward, demanding, risky, exciting, fun and rewarding. Nothing else is like it. There is no school that teaches that.

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(Chapter 1 continued)

As you may have surmised by now, the psychology of startup execution is special. Startup CEOs never feel safe. The bicycle is forever tottering. It’s parts work but awkwardly and do not always do what they were designed to do. The business will not run smoothly. It is never “a well oiled machine.” The ground being traveled on is always very rough. There is no easy way path. That impacts the guts of people. Their safety zones. The things they rely on to feel good about themselves. Startups make people irritable and short tempered. They can be downright ornery. The rollercoaster up and down is terrifying every time. Like real war, fear is a close companion to startup warriors. And yet they still love doing the startup.

Startups are also fun. They are a great relief from giant company politics. Startup people are optimists, positive on what can happen. They see the glass half full. They come to work daily with eager anticipation for what exciting things will happen. They expect surprises and thrive on them. Negative events are just another challenge. Together they form a special cadre. Their startup becomes a special mark to them, a brand they created, a place great to work at, where people do amazing things because they liked doing them and think they are exciting. Together they will execute, aiming at creating a great company that does great things together. That merges into a culture and begins to define and differentiate your startup. Some serial entrepreneurs think building company culture is central to their success.

The one thing that does not change is that startup execution is special. Very different. It is not taught in MBA school. MBAs can make great entrepreneurs, so don’t mistake what I mean. I earned mine at a great school, Cornell University and some of my best friends are MBAs. And there are a lot of MBAs leading new enterprises. But startup execution is unlike any other execution. It’s like building a bicycle while you are riding it. If you want to do a startup, you’ll just have to try it to learn it. And then get used to it. I hope you like the ride.

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More tomorrow.

GREAT VCS RESPOND, FAST: Pick investors who give you unfair share of time and mind

Today I got an email from a board member who is amazingly quick when replying to board decisions and action items. He is Dick Kramich, the dean of New Enterprise Associates NEA.

I've had the privilege of knowing Dick from the early days in Silicon Valley. He is an icon of VCs and of the rare few who take time to encourage entrepreneurs and the global venture community. As a result, NEA has attract outstanding individuals who have become world-class partners and helped build some of the greatest new enterprises (gorillas)of our time.

I thought you would benefit by thinking about the distinguishing characteristics of a great venture capitalist and board member. It will help you as you screen the VCs you consider as you seek investors for your startup. Here are some of the things I see in Dick:

• Humility with confidence. Dick is positive without being arrogant. He is confident yet open to ideas of others. Meetings are discussions, not  dictated one-way sessions.
• Suggestive and positive, not critical and negative. As issues and problems are discussed, Dick has a special way of suggesting a positive solution. He does not spend a lot of time chastising management for getting into a mess. His suggestions are immediate and practical.
• Swift responses. As fast as the decision approval is needed, I find emails from Dick among the first to arrive. VCs are terribly busy and travel a great portion of their time. Dick responds swiftly in spite of the intense demands on his time. He usually bets me to the keyboard or Blackberry. The startups gain competitive momentum because of swift decision making.
• All yours. When you are in meetings with Dick, you feel as if you and your company are the most important to him. You get undivided attention. Full time. The quality of time spent thus becomes very high and so do the quality of decisions.
• Best of the best. When you need access to business people, investors, partners and so on, Dick does not hesitate to not only suggest, but arrange for the contact to be quickly made. I've been on the way to the parking lot and found him already having make the email or phone call.
• Creative with boldness. Dick knows world-class startups are built with creative ideas from people with courage. His natural level of thinking lifts the rest of us up to his level and we get stimulated to be extra-creative and innovative.
• Intuitive wisdom. As I think about the competitive maneuvers of startups I've seen him invest in, I recall how he gave his opinion about what to do after the analysis was completed. It is there that he seems to know the best move among the many, with uncanny intuition. Years of learning, from mistakes as well as winners, has given him much wisdom and perspective. That is priceless to a startup CEO.
• Constructive toughness. Dick knows when the hard decisions must be made. It may be management stepping aside, a re-financing in times of trouble, and so on. He faces reality with clarity and has the will to make the best of difficult situations.
• Generous. Dick invites young people to join gatherings, events, and meetings so they can learn. He spends his precious time (and money) on things that uplift others in the venture community. At the moment, he is living in Shanghai to be closer and more able to add value to the youthful venture community there.
• People are number one. Dick looks for outstanding people, constantly. He has stunning talent working with him at NEA, they form a global brain trust. I find he is uncanny at seeing the skill sets in entrepreneurs. His ability to detect the best (and the not best) adds special value to his support of first-time startup CEOs and their core teams, especially as they go through the hiring process.

All VCs have money, networks of contacts, ethics and ideas about how to make your startup successful. What stands out are the few who have some of what I have noted above. Yes, I know a couple of others. But because the emails today triggered my thinking about Dick, I have shared my observations with you by using him as my example.

BOTTOM LINE: Pick your board members carefully. You get more than money with a venture capitalist. And you have to live with that person for half a decade or more. Some of the best are represented by the Dick Kramlich's of the world. They are few and far between. But look for their characteristics in the VCs and angels you are planning on using. When you find the right ones, they'll help you build power into your unfair advantage.

HOW TO WORK WITH YOUR VCs: Treat them as members of the family

What an amazing past 14 days I have had with startups! Wow!

• Launch of public beta (Nurien.com )in Seoul, Korea for an amazing game startup
• Completion of documents to raise $25 million B round for a hot stealth mode new enterprise
• Attack on startup that is taking away market share from a stogy old-thinking public corporation
• Startup gets surprised and sued about disputed patents by corporation with a lot more cash
• Angel declines to invest at last minute in a struggling startup
• Board members dispute compensation of first-time founders
• CEO struggles with board meeting documentation and processing
• Discovery of VCs investing in competitors narrows list of candidates for future financing
• Hot marquee customers suddenly sign up

All those are events that impact your board of directors. You are on it and are expected to lead it.

Q: "So how do you manage your business when those things happen? "
A: "I suggest you treat them as part of the family."

Here is what I mean about how to work with your board when big news arrives:

• Keep them informed = no surprises.
• Communicate the bad news immediately = do not hesitate
• Celebrate the good news = uplifting moments are precious and energizing
• One bad day is not the end = most days are not terrible
• Ask for advice  = all at once, not 1:1, keep everyone part of the dialogs
• Conference calls work great = do them quickly, keep them short, as soon as discussion is needed
• Remember your lawyer = keep the legal people in the loop, listening in as much as possible
• Keep information to a minimum = if you need to talk a lot, schedule a conference call
• Expect it, this is normal = it is going to happen, all of it

BOTTOM LINE: Your board of  directors is not your authoritarian parents. Treat them as family members, not dictating bosses. Family help you, so get their help. They can do more when you give them time to think. Include them whenever you wonder if you should, they'll tell you thank you and keep rooting for you. When you learn to do this, it will show how wise you are and add a large element to building your unfair advantage.

BOARD OF DIRECTORS: Seek wisdom & perspective

Seek wisdom and perspective from your board members.

Do not pick fights.

Board meetings in startups are intended to guide progress. Often they are learning experiences for both management and outsiders. Rarely should they be sessions of dispute. If you find your meetings ranking, you have not done enough to prepare the members for the meeting. Sensitive issues must be addressed before people enter the room. Call on the phone. Do lunches. Talk in person. Before the BOD meeting.

Startups run into surprises day by day. Unlike giant corporations, tiny new enterprises will find fresh, major decisions needed by the week. There is no time to call for a board meeting. Just pick up your mobile phone and start calling. Pop a short email so board members can respond on their Blackberries while in other meetings. That is how it is done.

Conference call meetings of the board are common. It keeps everyone on the same page with the least effort. These are half hour to an hour maximum. Crisp, focused on a single issue, decisions are made and the CEO knows what he has to do next. Don't overuse these meetings. Keep them reserved for those decisions that require everyone to meet immediately, together.

Ask your board members for their opinions and listen. You don't have to always do what they suggest. Reserve your decision for moments of contemplation after the phone call or after the meeting. But listen. I have many scars to prove the value of listening to board members (because I did not). Adrenalin, macho values, corporate political instincts all get in the way. Fear is the great enemy. Confidence is your best friend.

Wisdom and perspective are special and rare in startup board members. Treat them with respect. Get the best from them.

BOTTOM LINE: One of your greatest resources is your board of directors. Pick them wisely.  Use them well. Seek out their wisdom and perspective. Treat them with confidence. Learn how to get the best from them. When you do, your board meetings will be less fearful and more richly rewarding. Then you'll add a key element to your unfair competitive advantage.

BOARD OF DIRECTORS: How to pick the people

You will have to live half a decade with your board of directors. So pick carefully.

People are on the board of directors. Does that sound trite? Well I mention it because so few first-timers weight the pros and cons of the person that comes with the venture capital money. Yes, VCs come with agendas, attitudes, styles of working with CEOs and a lot more. They are complex, just like you.

Do not expect BOD people to always be on your side. Most of the time the BOD people are cheering for you. In fact, the VC icon, Don Valentine, founder of Sequoia Capital, said "The best thing a VC can do is be a cheerleader." However, I've been on boards where one or more VCs are in desperate need of "a liquidity event." That means "Sell this company, right now, for whatever we can get for it." The VC may need the cash (put in personal millions and needs to get some of it returned ASAP). Or VCs may need credibility in a campaign to raise a fresh round of money from investors. When a VC gets desperate, you and your company are simply one of several pawns in a very serious game of power brokerage for maximizing hard cash ROI.

Did you get checked out via references before the VCs invested in your company? Of course.

Did you check out the references of the VC person who will be bugging you at every board meeting and who will not hesitate to call you from Shanghai to yell about something you did that he thinks you did is stupid? I do not mean check out the companies the VC firm has invested in.  I mean talk to people who have worked with this person in a life prior to being a VC. And talk to people in the companies he is on the board of. Talk to more than just the CEO. Speak to founders who often are board observers and VPs whose compensation and presentations are criticized by board members. And go to lunch 1:1 with the VC before you accept his money. Once his money is in, you will have a hard time firing him if you do not get along. Then you'll grind your teeth before each board meeting and have a gut wrenching three hours that you regret each month. And you'll fear looking at your phone to see if he is calling again today.

Picking wisely brings the best out from the board. You want the great people who have managed real companies before becoming VCs. They have reputations for being fair, balanced and have helped build companies that are famous. Their industry connections are exactly what you need to get your foot in the door with customers, strategic partners and recruiting great employees. Now they have become VCs and pass on tips and encouragement. They behave more like coaches than stern authority figures and greedy, short-sighted investors. They are trustworthy and wise. They are priceless. I have several examples of how board members with their wisdom turned foreboding disaster into winning dominance. Valentine and Lamond did amazing things that turned Cisco into the world-class gorilla it now is.

A good friend of mine and very successful entrepreneur, Steve Benjamin, believes that "There is only one great decision a man has to make in life: marry a great woman." The startup corollary is "For a winning company, startup CEOs only need to make this decision: Choose a great board member."

There are billions, maybe a trillion, dollars of venture money out there available to you. There are only a few great board members available.

BOTTOM LINE: Pick people, not venture capital firms. Check out reputations before engaging VCs in deal discussions. When your intuition signals this person is not good to work with, leave. Life is too short, too hard. Startups need extra encouragement, just like an infant. Family wars create circumstances that warp the child as it grows up. Learning to wisely select board members for your startup is one of the most valuable elements of constructing an unfair competitive advantage.

BOARD OF DIRECTORS: Friend or Foe?

You the founder CEO have a new boss: The board of directors. Is that true or false?

True: The legal hierarchy places the board of directors above the Chief Executive Officer and reserves all rights except for those specifically delegated to the CEO in writing (the bylaws of the corporation). Thus, the CEO has to get prior permission to act on many things.

False: The CEO is running the company, is expected to lead it to success (or ruin) and the power is in his hands. Thus, the CEO does what has to be done and informs the BOD after the fact.

So how does it work in real startups? Here are some observations from my all-too-many years working with startups:

• Board members do not want to run the company -- but they have to under emergency conditions. They want the CEO to succeed. Only when the CEO  fails does a board member have to step in to a temporary position to keep the company going until a new CEO is found. This happens often in startups. Why? Because most startups fail. One top tier VC taught me this when he said "For me to take time out to step into the CEO's shoes is like trying to fill a black hole in space: it is an enormous drain on my time and energy that I want to get rid of as soon as possible."
  
• Venture capitalists dominate power on boards of directors. Neutral fifth or seventh board members (such as me) are there to officially balance voting power (e.g. In a five member board, settling voting ties between 2 management and 2 VCs), but such voting never happens. If there is a big dispute, the issue is resolved outside the board meetings (and may include lawyers). Issues are resolved and later everyone arrives at board meetings knowing exactly what will transpire at the meeting. There are no surprises. That is how the board got its name: "Because at board meetings, everyone is bored." The wag that told me that understood: Settle differences before entering the meeting and everyone will be more productive.
  
• Serial entrepreneur CEOs know they must manage their boards of directors. Savvy about their businesses and the need for upcoming rounds of financing, experienced startup CEOs focus on communicating frequently, informally, outside board meetings, with each board member. And homework is assigned to board members. It is recorded and examined at the next board meeting (e.g. Call the CEO of Giant Inc; Email the Wall Street report on the market segment in China; etc.). No surprises. Work. Results. I recall a fresh CEO hired half a decade ago who immediately got a grasp of his new company because of homework assigned to each of his board members. Every member was excited to deliver, and they did. It worked great.
  
• Perspective and wisdom are the special skills brought by outside (non-management) board members. They will know where industry trends are going, who is a leader and laggard, what person is going to become a candidate for employment because NewcoXYZ is about to be acquired by Giant Inc., and so on. They will know what competitive terms are for the next round of capital to be raised. Their scars will bring wisdom about marketing, strategy, pricing, employee motivation, selling tactics and a ton more (if you have the right board members). Ignore their perspective and wisdom at your own (career) risk. Even the most arrogant CEO I have worked with treated his board with respect because he valued perspective and wisdom from board members. He went IPO in four years and now it is a multi-billion dollar winner.
  
• Board members stay, CEOs don't. When the startup gets into serious trouble, the board will ask the CEO to step aside. The case of the floundering founder is common. Yes, part of the trouble is due to the board waiting too long to replace the struggling CEO. But most boards give extra time for the troubled CEO to fix the company. If not, the end is swift and quiet. Founders will be offered alternative positions (Chief Yahoo, Jerry Yang, founder and first CEO of Yahoo is the classic example). Non-founders depart. It may sound shocking, but CEOs are so commonly replaced that they should plan on a stay of only a few years. My research says co-founder CEOs last less than three years, most less than two. Cold facts, but true.
  
• When fear is driving you (the CEO), it is time to depart. Fearing the board is a sign of insecurity that will quickly become evident to the entire board of directors. The cure is to embrace the board, listening instead of defending, seeking advice instead of stopping it, and encouraging transparency and access to all employees at anytime by any board member. That is confidence at work. It will be reflected in your work. I recall a few years ago one CEO I coached offered any and all employees the chance to observe any board meeting (legal matters and compensation sessions excluded). Most did.That is confidence.
  
• Adviser boards are not boards of directors. A small group of experts experienced with your markets and technologies can be of significant benefit to you, the CEO. They are very active, often including consultants paid for project work (as well as the standard retainer and stock option). I have worked with life science companies that have done amazing technical work with such boards of advisers who gathered monthly for years to assist the company's technical staff. Internet companies I have observed use a wide ranging collection of advisers who rarely meet as a group. Advisers do not manage anyone. They talk to people, a lot.
  
• Serious boards of advisers and the odd outside board member get cash retainers ($1,000-$6,000 per month) and a stock option (that could be worth at least $1 million at IPO). That is serious compensation. So pick wisely. Do not take large investor cash amounts from such advisers. If you have to fire them it is awkward. Your non-VC board member is often a co-founder and will work with a retainer and the stock he got as a co-founder.

BOTTOM LINE: Boards need to be managed. Managing is all about getting people to do things they do not want to do. That is why we call our superiors "bosses". The board may often be pushing you to do things you do not want to do. That is how life works in startups with aggressive VCs on the board. But you should also be managing them. That makes life better for you, the company and the board. When you understand this, it will be a significant part of your unfair advantage.