It’s tough for any chief executive to enjoy an extended tenure leading a high-potential venture, according to Harvard Business School Professor Noam Wasserman. Indeed, he says, “People like Bill Gates and Larry Ellison, who are able to lead their companies for quite a while, get all the attention because they are rare, not because they are typical.”
Most chief executives, especially those running startups, think that managing relations with their board is as simple as hitting their numbers, whether that’s growing the firm’s valuation, increasing profit, revenue or market share. However, even a gifted leader who is beating performance targets can still get fired if she isn’t in sync with the board on three things — trust, risk and alignment. That’s something I learned from Dave Strohm, who’s seen it all while sitting on boards as a Greylock Partners venture capitalist.
Chief executives often miscalculate who on the board will trust them in different circumstances and, therefore, which board member needs the most attention. Imagine the case of a former engineer turned CEO with a board including a VC with a business background and a former boss who runs the engineering group at a major technology company.
When making the decision to fire the startup’s vice president of engineering, the CEO might think the VC would need more attention than her old boss. However, her old boss is more likely to have strong points of view on managing engineering teams and may even share a professional network with the VP. Therefore, the old boss may not “trust” the decision without being consulted in advance. The VC, on the other hand, is unlikely to have firmly-held engineering opinions and so is more likely to trust the CEO on this issue.
Incorrectly assessing which actions are risky enough to bring to the board’s attention can also cost CEOs their role. In the case of firing the VP of engineering, a CEO has three choices: Fire the VP and inform the board later, consult with board members individually in advance, or take the issue to the entire board to seek its input and approval in advance. The smart approach depends on the board’s view of the risk entailed in this decision.
For example, if engineering is not central to a startup’s competitive advantage, board members are likely to view this as strictly a management decision that the CEO can make without board input. However, if the startup’s edge comes from technology innovation, then firing the VP of engineering could threaten the company’s existence and the board will likely want the opportunity to review the decision before it is executed.
When the CEO and board are not aligned on a decision, extra coordination becomes crucial. First, a CEO should work to have substantially similar goals as the board. However, this is not always possible. For example, entrepreneurs and VCs may have different views of what constitutes an acceptable financial “exit.” A $40 million sale of a startup might be a life changing outcome for the CEO, but inconsequential to a VC’s fund returns. Likewise, when it comes to raising an inside round — new funds come from existing investors — VC board members and CEOs often have different agendas.
Simply stated, CEOs often want a higher price and existing investors want a lower price.
The most amicable way to resolve this difference is to find a new investor to price the round, but inside rounds often occur when no new investor can be found. Smart entrepreneurs create alignment by design before taking an investment.
When Tom Chavez founded Krux, he was concerned he would have trouble convincing top tier venture firms to offer term sheets. His entrepreneur-in-residence status at renowned Accel Partners made them the “heir apparent.” This status ran the risk of scaring off potential investors who viewed Accel as being in a privileged position to match any offer and win the Krux investment opportunity. Worse, if a top tier fund like Accel leads a seed round, the market expects it to lead the Series A if the startup is doing well. Yet again, Krux would run the risk of scaring off potential investors and face a Series A valuation set by an existing board member. To avoid this misalignment, Chavez sought financing outside the “usual suspect” large venture firms in Accel’s competitive ambit.
Instead, he worked with my firm, seed stage-focused Ulu Ventures, and angel investors to raise a $2-million seed round to ensure early investors were aligned with his goals. The market would not expect any of these seed investors to lead Krux’s Series A. Accel did eventually lead the Series A round, but through a competitive process allowing Chavez to assess the market price for his startup with the full support of his prior investors.
By carefully managing alignment with both current and future board members, Chavez was able to stay the course through the firm’s eventual sale to Safesforce for over $800 million. Most CEOs are fired or leave their position between raising VC money and the eventual IPO of the firm. Research by Harvard’s Wasserman reveals that by the time startups are 3 years old, 50 percent of founders are no longer CEO and by the IPO fewer than 25 percent still lead their company. CEOs who want to avoid that fate should ask themselves when making all major decisions:
- Will board members trust my expertise and experience in making this decision?
- Will board members view this decision as posing great risk to the company?
- Are my interests in this decision aligned with the interests of board members?
(This guest column first appeared in Entrepreneur August 2017)