In this discussion with Jeremy Glaser, the Co-Chair of Mintz Levin’s Venture Capital and Emerging Growth Practice, we discuss building and managing a board of directors for a startup. We discuss many of the stumbling blocks that entrepreneurs encounter and how to overcome these challenges and setbacks.
Patrick: This is Patrick Henry, the CEO of QuestFusion with the Real Deal…What Matters. I’m here today with Jeremy Glaser, who is a partner at the law firm Mintz Levin. Jeremy is the co-head of the Venture and Emerging Company Group at Mintz Levin.
He is an expert on working with venture firms, startup companies and emerging growth companies. Jeremy has been a guest on the show before. Today we’re going to cover a key topic that’s near and dear to my heart, which is everything related to putting together and managing a board of directors for your startup company. Would you like go give some background on yourself?
Jeremy: I’ve been working with entrepreneurial companies, venture-backed companies, growing companies and publicly traded companies for over 30 years. I love to work with entrepreneurs. I really enjoy things like this. I will hopefully give you some nuggets that help you build a better business, raise funds and get to the ultimate goal, which is a successful sale or IPO. Thank you for having me on the show.
Patrick: Thanks, Jeremy. One of the things that makes Jeremy unique is that he’s also been a member of the management team of a startup company himself. He worked on the corporate law firm side, then worked for a company and then went back to work for a law firm again. I think that provides a unique perspective that a lot of attorneys don’t have.
Jeremy: It definitely changed my perspective on a lot of things. This was during the dot com era. There was fast growth. We were raising a lot of money, working hard towards an IPO. We were working hand in hand with the folks in the technology field, the software engineers, the folks who were really building the product.
It was very eye opening to see the reality of how hard it is to do what they’re doing, the speed at which things go and the importance of getting prompt advice when you need it. It really did change a lot on the way I think about practicing and representing companies. This was 17 years ago, but it changed my perspective on the type of advice, the practicality of it and the timeliness of it.
Patrick: I agree. I’ve witnessed that in my conversations with Jeremy. He brings that unique perspective that other attorneys may or may not have.
Let’s talk about the board of directors. When you’re bootstrapping your company, you don’t need to have a board. Maybe it’s you and your co-founder. Maybe you have a senior advisor that has some expertise in your technology or end markets. A lot of companies don’t start putting a board of directors together until they start raising outside money. Maybe they have an angel round or seed round from angel investors. Maybe they’re waiting until they raise Series A financing from venture capitalists.
Jeremy, you work with companies at all stages. Where you do you see the CEO and founder starting to think about having a board of directors versus a board of advisors?
Jeremy: When you form a company, you need to put a board of directors in place. When you put a board in place at the time of formation of the company, usually that board is the founder and one other executive. Sometimes it’s the founder and the founder’s spouse. While it’s technically a board, it’s not a functioning board. The first time that you get a true working board of directors is when you bring outside investors in. Some companies develop revenue and grow. Then they bring in board members as the company is growing.
Here, when we’re talking about entrepreneurial companies focusing on outside financing, it happens about that time. When that first angel money comes in, often that investor will require that they get a board seat as part of that investment or they’ll put a representative on the board. That’s when you should start having a more professionalized board.
Patrick: Let’s look at a hypothetical example. Let’s say that you’ve pitched to Tech Coast Angels. They’ve put together a consortium of folks that are making an investment in your company. Maybe you have some other angels coming in. Tech Coast Angels says, “We want to have representation on the board.” They pick one of their guys to be on the board with you. Do the founders typically have a lot of say in that? Is it something where they just tell you the person who will be coming along for the ride?
Jeremy: I would hope that they have a lot of say. That’s been a part of the process from the very beginning. I always tell my clients, when you’re going out to get investors, you need to understand that the investor isn’t just writing a check and then disappearing. You’re going to be dealing with them on a day-to-day, weekly or monthly basis.
You’re going to want them to provide more value than just the cash. Particularly if you know there is going to be a board seat associated with that investment, you absolutely need to get to know that person, make sure that you get along personally and professionally. You want to know that they are going to bring a lot more to you than just writing that check. I know it’s hard to raise money.
I don’t want to belittle how difficult that is. But it’s a lot easier to raise money from the right person who is going to help you advance your business and not hold you back. Unfortunately, I’ve seen some investors and board members who are a negative influence, where the company hasn’t taken the time to understand if it’s the right mix of talents and personality.
Patrick: I’ve definitely seen that as well. There is a cascading effect with that sometimes. You get the wrong initial board member on your board and it becomes a deterrent for future investors to come on the board. They look at your cap table.
They look at the corporate governance. They look at the particular individuals involved and say, “I don’t want to be on a board with this man or woman.” It’s happened to clients of mine. They had an opportunity to close a really prominent investor, but the investor wasn’t interested in being involved for those reasons. Do you see that a lot?
Jeremy: I wouldn’t say I see it a lot, but I can think of a specific story. There was a venture-backed company that had a venture capital firm that was not well respected in the industry. They had a venture capital list that was less than not well respected in the industry on the board. It was impossible for the company to raise capital because the other VCs didn’t want to be partners with that fund and be on the board with that individual.
Patrick: On the flip side, I’ve seen it work the other way. With Entropic, we had a guy from Red Point Ventures, John Walecka, on our board. He was involved in the seed stage when VCs were still involved in seed funding companies. A big part of Focus Ventures getting involved in our company, which allowed our Series C, was the fact that Red Point was an investor and John was on the board. That was a big deal for them. It was a huge catalyst for closing that Series C.
Jeremy: That’s a really good point. If you get the right VC, both the firm and the individual, it also helps you attract the next round of financing. People want to be associated with that fund and that individual.
Patrick: Let’s talk broadly about recruiting onto the boards. There is an element of recruiting onto the board when you’re raising capital. Typically, if someone is going to be putting in a large amount of money, leading a financing round or writing a big check, they’re going to be involved with a board seat and maybe some other things related to corporate governance in terms of deal terms.
You want to find those smart money investors. It doesn’t have to be someone with domain or technical expertise in your area, but they have to be smart. They have to be savvy. They have to be helpful in greasing the skids for you to be able to bring on the right service providers and make the right introductions.
They might even have good relations with some of your customers, your customer’s customers or suppliers. Other than those considerations, what are the things that you suggest?
Jeremy: Those are really important. This is what I usually do when an entrepreneur comes in and we’re talking about their board, Often, they will come to me and ask, “I need to add board members. Do you have any recommendations of people that you think would be good additions?” I always take a step back and say, “A board seat is a very valuable asset for your business. You should view it that way.”
You don’t want to waste that board seat on people you can get access to already.” For example, I see people who have their CFO on their board of directors. I see people who have their outside lawyer on their board of directors. I see them with their VP of sales on the board of directors.
To me, that makes no sense. You can get access to your lawyer anytime you want. You can pick up the phone and talk to your lawyer. You can certainly get access to your CFO and VP of sales. What does having them on the board do? You’ve taken a valuable piece of real estate that can be used to give you access to information, experience and insights that you don’t have within your existing team.
I tell every CEO to take a step back. Assess yourself. Assess your management team. Find out where the gaps are. When you see gaps that you need to fill to drive the business, then find board members that fill those gaps.
Patrick: You made two points that are critically important. First, make sure you have a good general counsel that can be your counselor or consiglieri. You can run things by them. Someone like Jeremy is so experienced. He’s seen so many different situations. That’s valuable. There’s not a big axe to grind there. He wants the company to be successful.
Second, it’s the same thing as when you build a management team. You identify the roles and responsibilities. You identify the core competencies. You identify where there are gaps. You build the team based on that. In addition, you want a team, not just a group of super smart individuals. You need to make sure that people work together and have a good dynamic.
Talk to me about that and what you’ve seen. Sometimes there are smart guys in the room, but the team dynamic isn’t good.
Jeremy: I have an example from my 30-plus years of doing this. There was a semiconductor company that had some really big name VCs on the board of directors. At every board meeting, I would walk out at the end and say, “Wow, all the board members are there trying to show each other how incredibly smart they are as opposed to providing advice or guidance to the company.”
It was awful. It was a wasted opportunity. The CEO and I would talk about this after the board meeting and scratch our heads. All they wanted to do was tell each other how smart they are, how successful they are and how much they know about the industry. But they weren’t being helpful to the company at all.
It’s a hugely important issue. When you’re bringing a person on, why do they want to be on the board of directors? What can they do to help you as the CEO and founder of the company to drive your business and get the benefit of their experience in a way that is not them bragging about how smart and successful they are? They should be focused on, “What are the issues that you’re facing? I’ve seen this before. How have I solved these issues before?” I think you need to spend a lot of time to figure that out. You want to make sure that’s why the person is in the game.
One of the other challenges with pulling a board together today when you have venture capital invested is that the venture capital industry has changed a lot in the 30 years that I’ve been doing this. The VCs have become more professionalized. They’re working with much larger funds. They’re sitting on a lot bigger boards.
It’s a lot harder to get their attention on a regular basis outside of the board meetings. I tell my CEO clients, “That’s your responsibility.” Part of your job is engaging with that VC. You picked that venture capitalist because the fund had domain expertise. They had great success in your industry. You picked this individual to be on your board based on the person they are. You need to make it your job to get access to that person, even outside of the board meetings. Make sure that you’re getting the benefit of that.
Patrick: That’s really important. It’s part of having these smart money investors on your board. Maybe they don’t have the specific domain expertise at a detailed technical level but they’ve been investing in companies in this space or in the broader ecosystem.
I remember when Sequoia had an investment in YouTube. Part of Sequoia’s relationship with Google, one of the founders and board at Google, was able to broker the deal of getting YouTube sold to Google. That was something that I saw with a couple of my boards.
You have people on the board who can help you make introductions to get venture financing, a bank line or introduce you to the right VCs that might lead the subsequent financing round. Some of them are also good at making customer introductions. I haven’t seen as much of that in my experience but I have seen the other parts of it. That’s been incredibly valuable.
Jeremy: I think a good venture capital investor and board member should be able to do all of those things. They should be able to introduce you to other financing sources. They should be able to introduce you to potential customers. Unfortunately, the reality is that a lot of board members will tell you that they can do that, but then they don’t.
You need to make it clear when you bring on board members if that’s a requirement. You need to tell them if you expect them to open up their rolodex and help the company grow, not just show up at board meetings and comment on a strategic plan or financials. If they don’t then you’ll need to replace them.
Patrick: It’s hard to replace venture capitalists on a private company board, as you know.
Jeremy: It is. Although, I’ve had CEOs that have been able to get a different partner within the fund if their partner is not performing. If they don’t feel like they’re getting good value, they’ll go to the partners and say, “I need a different partner.” That’s a hard conversation to have but I’ve seen it happen. If it backfires on you, you’re in big trouble.
Patrick: From the CEO perspective, you’re building a team. Not every individual is going to provide everything that you need. That’s why you have multiple people with complementary skill sets. No matter how good a VC is, they’re not going to have the same level of technical or domain expertise or be the operating guy.
Some of them pride themselves on the fact that they’re not operating guys; they’re finance guys. They don’t want to be overly sensitive to management. The important thing is getting complementary skill sets on the board. I didn’t do that in my first company that I ran and I paid a price for it.
Inevitably, when the metaphorical shit hits the fan, you need an outside person for the financial investors to bounce things off of who have deep domain expertise. They’ve been a CEO. They’ve run private and public companies. They know that marketspace.
They have deep domain expertise to say, “Does Patrick not know what he’s doing or is this something that’s outside of our control?” Having that person as a sounding board is important. You’ve probably experienced both cases where you have people on the board with the domain expertise, and then you don’t.
Jeremy: Yes. There is no question that you want to have diversity of experience and a knowledge base. You also need to make sure that there is a board member who is the lead board member. They can help you identify the person on the board with a skill set that will help in a particular situation.
Often, I’ve seen this happen where there is a lead director. Then that lead director will help with creating committees that bring together expertise on specific issues. Very often, it’s in the M&A contacts where you have to sell the company. It’s not going to be easy if you have a six or seven-person board. Maybe you only want to have three people involved in the day-to-day process.
You’ll pick out the folks who have done a lot of M&A and have a lot of experience in negotiating these deals. That will be your committee. A lot of boards set up committees on more of an operational basis. Everyone these days has an audit committee and a compensation committee. Some folks will have a governance committee on the private side.
On the public side, they all have it. This helps with the process of identifying new board members and good executives. I think it’s also important to be aware that you can also create sub committees on operational issues or transactional issues, whether it’s getting the next level of financing done or an M&A transaction.
Patrick: Those are two unique but very important and complementary things. One is having outside board members that are lead investors, that have domain expertise in your area, but that also have people who are a good sounding board. They can say, “What’s the power base going on within the board?” Use your common sense and business judgement in dealing with the board as you do with your customers, suppliers or team. Understand the dynamics that are involved there. I think a lot of younger or first-time CEOs don’t think about it in that way. Then it becomes problematic.
Jeremy: I think they make a number of mistakes. One mistake is this concept that you’re afraid of giving up control.
Patrick: Yes. As soon as you raise outside money, you are going to give up some control.
Jeremy: Sometimes the founder or CEO thinks, “I’m not going to give up control. I’m going to make sure I populate the board with all my buddies.” That is such a mistake, for a variety of reasons. You’ve given up all of these benefits that we talked about. You’re holding on to this in fear of losing control, your job or your baby. That is the wrong thing to do with your board of directors. I advise CEOs to let that go.
You have to view the board as an asset, not as something to be afraid of. That mindset change dramatically reduces the probability that you’re going to end up getting tossed into a different zip code, because you’re dealing with the board in a much more proactive, constructive, positive way. If you do it the way I see a lot of founders do it, where they populate it with friends and they’re worried about losing their job or company, you automatically set up a situation where there is conflict.
Patrick: It is exacerbated by coaches, advisors and people who do what I do for a living that coach founders and say, “Don’t give up control.” I get it. You want to be very judicious in how you structure your corporate governance, ownership stake and different terms and conditions.
If you want to build a great company, you have to share. You have to share the wealth. Building great companies is a team sport. It’s not a solo sport. It’s not only other people on your management team and within your company, great employees, people with incredible skill sets in the core competencies that are important to you, but also having board members that can be additive. Otherwise, it’s like management doesn’t matter.
I was talking to a friend of mine who is a prominent CEO in the tech industry. He told me, “I didn’t end up taking the job with that company, and I’m glad that I didn’t. It ended up having all sorts of problems and went under.” Maybe if you would have gone in, there were problems that you could have solved.
This individual didn’t think about it that way, at least before we started talking. Having the right people around the table, you can course correct and fix things. Of course, you can’t throw people or money at a bad business idea. But typically, you can pivot or transition if there’s something that’s reasonable there.
Jeremy: It’s like what a lot of VCs will tell you. There is the old real estate adage about location, location, location. If you talk to a VC with experience, they will tell you, “We have the same thing. But it’s management, management, management.” People get so focused on the new, cool technology. There is the new cool idea.
We think that’s what’s going to make the company great. The reality is, the shit hits the fan in every company. The difference between the companies that fail or make it is the management team. If you have the right management team, including the board of directors and insiders, they can manage through that process, pivot and find the opportunity and pursue it. There are a lot of examples of companies that didn’t start out with their core business. They made that pivot, and that’s when the success came. That was all about management.
Patrick: I think that a good board can be an extension of your management team, if you bring in the right people who can give sage advice, who have been there, done that and have that experience.
Jeremy: It also plays into the mentality that CEOs need to develop. You need to commit to the mentality of, “I’m going to succeed.” If I’m doing the right things, I can turn this company around or grow this product. I’m not going to be worried about my board getting rid of me. Why would they get rid of me? We’re growing the business. We’re being successful. The minute you go with the mentality of control or fear that the board is going to take you out, you’ve automatically turned yourself in the wrong direction.
Patrick: It becomes a downward spiral. It’s very unproductive. As a CEO, you don’t want to be overly cocky. But at the same time, you need to have confidence in yourself. If you think it’s the right decision, you need to advocate and sell that right decision to your board. If they decide to go another direction that you don’t think is going to work, you need to let them know that.
You need to be receptive, but you are in the driver’s seat for a reason. If you give control of the wheel over to the board and say, “You run it,” it’s an incredibly destructive situation for a number of reasons. The biggest reason is that board members are not there every day. They may have strong opinions, but they don’t have all of the information. There is no way that they could.
They’re making decisions based on information that they’re gleaning, getting from you or someone on your management team without seeing the complete context. That’s a recipe for disaster.
Jeremy: That’s a fair point. You’re the CEO. You ultimately have to make the right decision, and the board is there to give you input. You can walk into a board meeting and say, “Here is information. Here are the challenges that we’re facing. Here are the options. I’d like to get your view of these options.” That’s a perfectly appropriate way to approach a board. I wish more CEOs would do that.
Unfortunately, what I tend to see is one or two other options. One is that you walk in and say, “This is what we’re doing.” You don’t give them any of the information or let them feel a part of the process. Now you’ve put yourself in a position where you’d better be right. If it doesn’t work out, you’re going to quickly get yanked.
I’ve also seen a situation with a very weak CEO. They come in very open ended and say, “What do you think we should do?” That’s not going to work either. You’re the decision maker. You have to use your resources more intelligently.
I have a favorite quote that I’ve shared before. It was by the founder of a very successful software company. He said this about 20 years ago in a room of 400 people. To this day, I still love it and it sticks with me.
He said that, before he makes an investment into any business, he has one due diligence question he has to get answered. Does that founder want to be rich or does that founder want to be CEO? That answer determines whether or not he’s going to invest. If that founder wants to be rich, the founder will make a lot of the right decisions to make him money and have the company be successful.
But if the founder is focused only on being CEO, that founder will be focused on all the control issues. They will make all the wrong decisions and the business will not be successful.
I love that question. I think it’s an important question to ask for any investor. I think every CEO needs to look themselves in the mirror and say, “Why am I doing this? Am I doing this because I like having the title of CEO? Am I doing this because I want to build a big company and make everyone rich, including myself?”
Patrick: I’ve seen that play out both ways, over and over again in companies. That gets into the area of managing the board. A lot of boards don’t want to feel like they’re managed by the CEO. It’s not, “I’m the CEO so I’m the boss of the board.”
In fact, it’s the opposite. The board members are my boss. It’s like any team. You need to have a quarterback and a coach. Typically, the coach is the chairman. If there’s not a formal chairman, you have someone on the board that can coach you and help you navigate through difficult situations.
Talk about your experience with managing the board, some things that you’ve seen that are effective and some things that are not as effective.
Jeremy: I have a very simple statement. No surprises. That sounds simple, yet it’s one of the most difficult things for founders and CEOs to understand. You are making a massive mistake if the first time your board members hear about an issue in the company is when you walk into a board meeting. It could be a good or bad issue. No surprises.
You should never put anything up to your board as a question that you don’t already know how it’s going to come out. If you walk out of a board meeting surprised, you blew it too. I’m a firm believer that you need to have a lead director that will help you.
Either you or that lead director need to make sure that, if you have issues that you’re bringing to the board that you’re going to ask for their vote on, before the board meeting happens, there has already been a conversation. You know what the count is going into that meeting. I can’t tell you how often I’ve seen that blown over and over again. It damages the relationship between the CEO and the board of directors.
The best advice that I can give to every founder out there is, when you’re going into that board meeting, never put something in front of the board if you don’t already know the outcome. As a lawyer, we were taught this. I’m not a litigator but I remember this from back in evidence class at Harvard Law School. We were told that you never ask a question that you don’t already know the answer to. It’s the same thing for a CEO in a board meeting.
Patrick: That was one of the big things that made me effective with my various boards. I did that. I knew the power base. I knew who the key influencers were. You want to make sure that you meet with those folks ahead of time, or at a minimum, have a phone call. They might still blow up in the board meeting for show, but that’s just the way things are sometimes.
The other big thing for me has always been transparency. Transparency doesn’t mean that you tell the board everything. It’s like the movie A Few Good Men. Some people just can’t handle the truth. They want to eat sausage, but they don’t want to know how it’s made. You need to have judgement around that.
With big things that are impacting the business, whether they’re good or bad, providing a level of transparency is very important. You don’t want to scare the board, but you want to keep them informed and aware. If they find out that things have been going on outside their purview for months, then there will be a big blow up. That’s never a good thing.
Jeremy: I completely agree. You also want to under promise and over deliver.
Patrick: When you’re planning, you want to establish stretch goals for yourself and your team. At the same time, you want to set expectations based on something that’s realistic. We would do “reasonable worst case” revenue planning when we did expense planning. We said, “We’re going to run a really tight ship.” Then, if you’re exceeding, you have board meetings as a private company every six weeks.
You can then loosen up the purse strings a bit and fuel the growth. In case things do go bad, you’re not so far out over your skis that things are going to go really bad. In terms of planning and setting expectations, you want to under promise and over deliver. I see the reverse of that so often.
Jeremy: A lot of this conversation is about having the confidence that you’re going to be successful as the CEO. If you want to undermine your ability to be successful as a CEO, walk into board meetings where you haven’t talked in advance. Tell them all the great things you’re going to do in the next quarter. Don’t tell them why things didn’t happen between the board meeting and the end of last quarter. Show up at the next board meeting and tell them all the great things that are going to happen in the next quarter. If you do that once or twice, you will lose your job.
Patrick: I’ve seen people get involved as an investor, and invest based on one set of information. The first board meeting, there is a completely different set of information.
Jeremy: That’s not a good start.
Patrick: Are there any other key insights that you have from your decades of experience with boards?
Jeremy: You need to make sure that the board members are providing a lot more value to you than just money. You need to understand the importance of that board seat to you as the CEO. You want to make sure that every single board seat is serving your purpose and giving you the benefit of guidance and information that you don’t have around the table.
Once you get that board built, have confidence in yourself. Believe that you’re going to be able to succeed. Don’t be worried about them being able to pull the rug out from under you. Treat them that way. Give them the information. Don’t surprise them.
Work with the board as a coherent part of your management team, not as some oversight body that you’re fearful of. If you do all of those things, a board can be an incredible asset for you as the founder and CEO.
Patrick: Even when things do go sideways, at least you’re in a situation where everyone has respect for each other. If you need to make a change, you make a change. Hopefully, you’ve put the right vehicles in place in terms of employment agreements. We’ve talked to your colleague Jenn Rubin about that in the past. Check out those videos if you haven’t seen them.
Those are good practices to have in the event that something does go sideways. In order to be successful and build something great, it has to be a collaborative partnership, not a secret committee meeting. You need to be in the inner circle and have confidence that you can lead the company.
Thank you, Jeremy. This has been very insightful. This is Patrick Henry, the CEO of QuestFusion, with The Real Deal…What Matters.
This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.