One of the highest-stakes decisions that founders make is hiring board members. I use the word “hire” on purpose, because that’s not the way founders usually think about the process of fund raising. I would suggest that re-framing the process to be exactly the one you use when hiring executives is the best way to make sense of the process.
At least through IPO, many of your board members are going to be investors. For many companies, you are hiring people who will likely be with you for five to ten years. It probably doesn’t sound outlandish to put the same time and attention into hiring your board as you do with your execs, yet too often that seems to be an afterthought, because it’s entangled with the need for cash, the challenges of dilution, and concerns about control.
Before going any further, let me explain why I think boards are important to startups. In the best case, where things go well from the start, you don’t need a board. In my experience, there are exactly zero startups where everything goes well from the start. Take Google’s struggles to figure out how to monetize search, Facebook’s struggles with mobile, Apple’s long drought before inventing the iPhone, etc. Board members can be the only ones who stick with you during these tough times.
In general, board members aren’t that great at helping you with your core business, that is — whatever you are doing now that is working. You are spending 100% of your time working on that, and they are spending 5%. Their experience doesn’t translate directly, because every business is very different at the micro level. What they are very helpful for (if they are good), is helping you see around corners and make critical decisions. Things that seem difficult to you, like whether to spend time on a specific partnership, can be places where their experience and networks give them better insights.
My first company, NetGravity, grew at 3x per year for several years, and, during this time, I always felt like I was a downhill skiier in the fog. I didn’t know what was coming up, but it was always coming up fast. My board would worry about things based on what they had seen before. In general, think about board members’ value as directly correlated to whether they have seen your stage before. Someone who has been a founder at your next stage is the most valuable, a former executive is the next most valuable, followed by an investor who has sat on several boards.
Many times the board’s experience wasn’t relevant for us, but sometimes it was. One negative example is that our space was one of the first to pioneer SaaS models. I loved SaaS because of the recurring revenue, but many of my investors had only invested in software companies. That lack of experience kept us from launching our SaaS product for years (thank God we did, because it ended up making up half our revenue in only 18 months). But on the other hand, we had a competitor, DoubleClick, that was growing top-line revenues quickly, but their core business was selling advertising, which was a huge money loser. Watching a competitor grow top line faster than you is really scary, but my board helped me to realize that, because NetGravity was growing very quickly with huge gross margins, we could ultimately win. So we took our time, kept growing profitability, took the company public, and ultimately sold as the market was beginning to realize that business models mattered. Without my board, I probably would have had a hard time resisting growth for growth’s sake.
I’ve also realized that one of the main reasons that founders worry about control, is because we are all very independent people, and often the reason we started companies is because we hate working for other people. So the idea of hiring your bosses is deeply at odds with that need for independence. Get over it. You are going to have a board, it’s just a question of whether it’s a good one or not. Being pro-active about hiring your bosses is going to make the fact that you have them much less painful.
The final reason that founders rarely give for trying to keep their boards weak, but I think is real in those who haven’t led or managed much, is that they don’t like conflicting opinions. Or at least they don’t like listening to them. This is reflected in the 10–1 voting rights that some founders try to get. That mentality boils down to ‘OK, these guys are still my boss, but I don’t really have to listen to them.’ Throw that idea out. The best companies work as teams, not individuals.
Founders often worry about getting kicked out of their jobs, but over decades, it’s become clear that this is a decision of last resort for the board. I’ve seen boards give founders many tries to get their business working before bringing in a new boss. That almost never goes well, so if you hire a good board, they are likely to understand that the ship goes down with you.
So before talking about the way I’ve seen the best companies build their boards, let me tell you how not to do it, which is the way I did it at NetGravity.
We raised our Series A from Hummer Winblad, and they suggested I talk to Mike Moritz from Sequoia as a second investor in that round. Mike liked what we were doing, and was quite clear that he wanted to own 20% of the company if he were going to participate. That would have meant giving away almost 40% of the company in Series A, which I balked at. I then took a second investor in that round instead, who was willing to take a small piece of the company. That investor turned out to be incredibly difficult to work with and made the next four years a constant struggle to just keep my board aligned with what we were doing. If I had to do it all over again, I clearly would have taken big Series A dilution, because I think that would have helped me build a much bigger company (we sold NetGravity for $750 million so it wasn’t bad, but much of the reason for selling was the toll that board management took on me over the years). My investors didn’t get along, so I was forced to referee them in every board meeting. You would think that I would be a firm advocate of weak boards, but that is not the lesson I learned. I should have put serious thought into getting the right people on my board, rather than just letting it happen through financings.
So what do I wish I had known going into that Series A that I now know?
First, money is a commodity, but an investment comes with a partner from a firm. That partner can be a huge value add, be neutral, or act as a big hindrance to success. Obviously Sequoia, even then, was one of the top venture firms. But even more importantly, I should have known (and cared) that Mike Moritz was the type of person you wanted as a partner.
Second, dilution sucks, but usually hiring the right board members gives you a big advantage in recruiting your team and in future fundraising, not just resulting in better people, but costing you less equity. Often I see entrepreneurs focused on the last 5% dilution in a round when choosing firms. You would never use that same logic when hiring a VP of Sales. If you can hire someone much better at 25–50% more equity, you would usually do it.
Third, and I’m sorry to say this after working in tech for 30 years, 80% of board members either add no value or serve as hindrances. But that really shouldn’t come as a shock, because the same is true when you hire executives. You likely interview 10 people and end up with two finalists. Maybe some of the others would have worked, but you are selective and want the best. The same is true with your board. By not paying attention to who you hire, you are very likely to have a board chock full of the wrong 80%.
Fourth, control issues are baked into the terms of financing anyway, so if you want to retain control of your company, you should just opt out of taking venture capital. I haven’t seen many equity financings that didn’t have series votes on change of control, future financings, IPO, etc. So you are already giving up control of your most important decisions. The reality is that, if you hire the right board members, they are going to do everything in their power to help you succeed, because they know there is no one better than you to make your company a success. So if you think something is crucial, it almost never comes to a board vote.
And, by the way, the reason those terms are in there is to prevent you from making some pretty bad decisions. I can think of a dozen companies that have sold far too soon, because they didn’t hire board members that could give them good advice. But even in that case, most boards will still defer to you on a sale, because the alternative is a company that you are no longer excited about building.
So, let’s say that I had known then what I know now. What I really would have changed is that I would have researched the partners at firms, and found friends who had worked with them, before even reaching out to them. Like an executive search, I would have targeted around half a dozen that I thought were the best, reached out directly to them, told them why I thought they would be great for our company, and how I saw the fit. Then find a good quality person to introduce you and follow up to that email telling that investor exactly why you think they would be a great fit. You would be surprised how much it differentiates you to do your homework here.
Just as when you recruit executives, it’s good to understand the norm for equity. Right now, it’s about 20% for your Series A lead, decreasing to 10% in subsequent rounds. Why is that? It’s more or less because the most precious resource to a venture partner is time. They need to align their time with their investments if they want to be active and helpful. Over many decades, the heuristic is that they can sit on about 8 boards at once with active participation. To generate the fund returns they need, they want to own about 20% in the companies where they lead Series A.
Of course this percentage is negotiable a couple of points either way, but it is very similar to hiring your VP of Engineering. Based on the stage of company and momentum, you might hire your VP of Engineering for 2–3% of the company, but you probably don’t want to give her or him 10% or 5% because you won’t get the right kind of person for your stage. So my advice here is to realize that, if you are trying to recruit the best board members, they have even more inbound interest than your executive hires do, so getting caught up in dilution misses the point. Be in the standard range, but focus more on whether this person’s reputation is that they have significantly helped founders build their company.
I hear some founders say that they will just defer the decision to actively hire the best board members until a future round. The problem with that is that it’s really Series A and maybe Series B when investors can get enough ownership of your company to devote the amount of time you need from them. So deferring that decision generally means that you will not have the same quality board as if you had recruited the best people starting at your first equity round.
Building the best team both in the company and on your board as early as possible will save you from those few decisions you might make which will completely screw up your company. If your team is good enough, it will force you to think differently and better about opportunities as well. So if you are fortunate enough to be executing well at any stage, use that power you have to recruit the absolute best board members that will make you even better.
From a Silicon Valley standpoint, the more founders start to think of hiring their VC’s, the more the behavior of those VC’s will be put under a microscope and start to weed out those who add little value beyond capital. This will ultimately make venture and our start-ups stronger.