Nesheim Online

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.