Board-induced Toxicity
Board-induced Toxicity
What Every Founder-CEO Should Know
This post is dedicated to all those Founders and Entrepreneurs who take on the challenge of solving a pressing problem and creating wealth in the process.
The Board constitution at an early stage and up to Series A is an often less thought-about matter. I don’t think this is because the Founders do not care about it. The hands-on Entrepreneur is in execute mode all the time and makes board matters secondary to the problem he/she is working on.
That total, laser-sharp focus on solving the problem sometimes can be detrimental to the venture.
This delusional “notion” of pushing aside Board matters invariably leads to “systemic” boardroom politics more likely to be led by “low IQ” investors revelling and regaling in cheap power politics than actually creating genuine value. Such Board members who are merely “barking” gibberish in Board meetings can’t and won’t deliver results that really count.
Sometime last year, as if on cue, this tweet grabbed my attention:
This is the true story a surprising percentage of the time.
I will take a “billion dollars” out of that tweet because it is a distraction from the fact. It does not matter what absolute value you put on it. And I don’t think Garry Tan meant it that way either.
To me it is an existential question - the venture can die and this is one of the reasons, if not the only reason, for the venture's destruction.
I have seen this theme floating around a number of times. However, the question is, what are the things the startup Founder/CEO should look for? What are the signals? When you do realise they are happening, how do you deal with them, both, at an organisational level and at a personal level?
The sequence of events will change from venture to venture. I will not generalise this, however, I will try and lay out a broader framework for the signs to look for, how to handle them and how to deal with these shocks at a personal level.
I believe in Charlie Munger’s “Inversion principle”. In that spirit, let’s see what NOT to do.
Politics and Business are two separate things. Politics in Business creates toxicity, destroys culture and eventually the venture itself.
When you notice it happening within your organisation, deal with it swiftly and decisively.
The organisational culture is defined by the Founder/Founding Team. Their words and most importantly their actions in day-to-day conduct do matter.
Be “explicit” with the culture and the company values.
However, in spite of the best intentions and best efforts, seeds of toxic politics can be sown in the Boardroom. Biases start creeping in. This is what I call “Board-induced Toxicity”. This article focusses on it and how this can result in the destruction of shareholder value.
Who Should be on the Board?
First and foremost, the Board position is not a badge of honour or a trophy to display for an individual. One is on the Board to help the company grow and not the other way around.
Important questions: What does the company need at any given stage? Where are the “wisdom” gaps at a Board level or within the Senior team? How is the company going to benefit from having that individual on the Board?
Wisdom is not the product of schooling but the lifelong attempt to acquire it.
- Albert Einstein
Beware: The needs will change as the company grows. So you will have to move your Board members and at some stage, if it helps the company.
How Many Board Members?
There is no fixed rule but broadly (and assuming you have investor(s) ):
Founder or someone representing the founding team
One representing the investors
One independent - completely independent - with good market/customer understanding.
A solid person, with an industry network chairing the Board. A good Chairperson will maintain the board's discipline, ensure good governance and help maintain healthy, constructive relations between the Board members.
Beware: Of people creeping via the “Board Observer” role. To me, Board Observers are neither in nor out. They get to attend the board meetings and of course, anyone who attends meetings will have something to say. So I am not a big fan of Observer roles. Better don’t have them unless the Founder/CEO sees a “real value” in having them.
Who Should Attend the Board Meetings?
Strictly, only the Board members. Structure your Shareholder Agreement accordingly - this should cover the Board Observer role mentioned above.
Occasionally, you can invite Senior member(s) of your team but keep that limited only to a specific presentation or a discussion.
Routinely, Senior members of the team should not be there for the entire duration of the meeting and should not tune into the board conversation. The simple reason: some of them are smart enough to work out which way the wind is blowing and they will use that information for their “personal” gain.
Founding Team Dynamics
Often, startups have a founding team. Solo founders are not accepted by some Accelerator/Incubator programmes and these programmes encourage them to pair up or form a founding team.
I do not disagree with having a founding team as it is good for the venture. It takes a village to build the company and in that spirit different skill sets and backgrounds will definitely help the venture. However, the chemistry and the dynamics within a founding team are critical factors determining a venture’s success.
These dynamics matter a lot when things get tough.
Let’s be honest, there are plenty of lows when you are building an enterprise.
What matters is the founding team’s willingness to stick together, be able to have constructive and meaningful conversations, persevere and come out stronger when the going is tough.
What matters is their ability to keep any personal differences, egos aside and be able to have an unbiased conversation.
What matters is their ability to take decisions in the best interest of the company (employees, customers, shareholders).
Often these low points are where the differences start creeping in and the voices get louder.
It is important that the founding team does a reality check, every once in a while, on their competencies and the “skills” they bring to the table. Check what is each member’s track record on delivering/generating value. At a certain stage, one of the founders might feel more “important” than others and that feeling will surely change his/her behaviour in a wrong way.
The venture might have grown since its early days so do check that each member of the Founding team is “competent” enough for a particular stage the venture is at.
The dangerous sign to watch here is, if such a co-founder is incompetent and starts getting cocky. Deal with this swiftly, decisively and immediately.
This is likely to happen if such a co-founder is badly advised and/or influenced by the Board or has no ability to think independently.
Board Communication
I recommend following a simple 3-step filter for all board-related matters:
VERIFY: Trust the Board but verify all board communications at every stage and before and after every board meeting. Someone might “have your back” but don’t allow that someone to “stab you in your back”.
CLARIFY: If the Board communications are at variance from your understanding, always communicate in writing to not only clarify your understanding but also seek clarifications from the board.
NULLIFY: If any proposed Board decision goes against the first principles or standards you have set for yourself and is certainly not within any ethical and/or moral framework, move aggressively and swiftly to nullify such decisions.
Along with the aforementioned filter, having a strong Chairperson will help navigate this kind of difficult “founding team” and “communication” challenges. This is where the Board discussions matter. Having transparent, constructive discussions is vital to finding the way forward.
As a rule, the main Founder/CEO should coordinate the discussions between the Board members with the help of the Chairperson. Watch out if there are “back-door” conversations happening between the board members/investors and such a co-founder and/or senior team. Once revealed, these should be addressed swiftly. Call them out. Do not wait for the situation to unfold.
In any case, such back-door conversations should not be happening. Board members or investors must not do this. That is an essential and non-negotiable condition for a good Board culture.
This is the time the founding team should assess, why did they come together and start the venture in the first place? What are those original principles? Which of those are not to be compromised?
Paid Consultants in Senior Roles
To put it simply when you have paid consultants in top executive roles there is an asymmetry in the risk they are taking and the Founders have taken. If they are paid 100% of their market “day rate” then they do not have their skin in the game.
These Consultants often arrive when the funding round is closed and your VCs will talk about “inexperience” in the team and the need to hire senior people - which is absolutely the right stand. However, what matters is how you fill those roles and who you do bring in.
Also, the company might not be at the right stage to have a full-time senior role. For example, CFO is one such role where the person before Series A might not be needed on a full-time basis. This is when you hire consultants on a part-time basis and pay them their day rate to do the job.
Having the “wrong type” of paid consultants in your Senior Team can cause significant damage to the company. Any Senior Team member who is not 100% aligned, vested and committed to the “core values and the vision” of the company should not be in the team.
Beware of consultants who come with a big swagger and bring a “have-done-this-before” attitude.
I will recommend consultant payments to be in the form of an “on success” fee or on achieving certain milestones and/or a substantial portion should be tied to the stock options. This way they have “proper” skin in the game, and they are taking some “risk” in the venture.
Few of my recommendations for the Senior Team:
Avoid “too many cooks” - might happen when you hire for “future growth”
Blind men and the elephant syndrome (I have written more on this in the post here)
Pseudo experts: These are “half-baked” ones so identify them and get rid of them immediately or cut their role accordingly. These pseudo-experts should not be part of the strategy discussion.
Pseudo-analysis: Pseudo-experts often create or present pseudo-analysis. They can often manipulate the data to prove their own point. So watch out for such biased opinions presented on manipulated data.
Some knowledge but no “wisdom”: Steer clear of them or cut their role accordingly. Again, such persons should not be part of the strategy discussion.
Watch out for the pockets of “sub-cultures” your senior team members are creating. When this happens, deal decisively and swiftly. In a demanding environment, often the “lazy” ones find side alleys out and create a sub-culture which suits them.
The Senior Team must:
Have the same level of passion, integrity, drive and hunger as you have.
Be willing to go through the highs and lows of venture building.
Be capable enough to operate in a demanding, chaotic and uncertain environment.
Founder/CEO: When it is Difficult, How to Deal at a Personal Level?
No easy answers here, unfortunately.
Venture building is a “series of back-to-back marathons” and not a sprint. So avoid draining your batteries completely and do not run on flat for a long time.
Have regular work and rest cycles.
Easy to give advice: Eat well, sleep well, and exercise regularly. In reality, it is hard to achieve this consistently over a longer period of time.
This is where “forming deliberate habits” is important. Also important is to get rid of those bad habits. Take baby steps to build good habits and take an incremental approach - focus on the aggregation of marginal gains (Credit: Atomic Habits).
Personally, I have found, having a good “routine” helps. This routine consists of:
Morning routine: Start with Yoga/meditation or some form of physical exercise. Keep roughly an hour for yourself after you wake up and before you start your work day.
Eat healthy, eat light. Practice intermittent fasting.
Have enough sleep: Be consistent with your sleeping times.
Walk/run 3-4 times a week. Personally, I prefer walks to runs. I think walking is the most underrated exercise. Those long walks will help clear your head and bring a level of clarity.
Make writing a habit: Make pen and paper your friends. It does not matter if you journal/write every day or scribble down your thoughts randomly. Some form of writing is important than the mode of writing or the frequency.
Having good advisor(s) is game-changing. Have someone with whom you can discuss or bounce off ideas. Ideally, the Chairperson on your Board will help you navigate plenty of company challenges. However, having someone outside the Board, Investors and the Company will give you the perspective you need.
However clichéd, this advice is borne more out of my experience.
A start-up takes a lot not only out of you as a person but also out of your family. Unbeknownst to you, your family is also making plenty of sacrifices every single day. Getting used to always seeing you busy; working extra hours; not being around at seemingly normal times; not having holidays for years or when they’re planned, postponing or shortening them; or running a tight financial ship at home are only some of these sacrifices.
After all that, in spite of your best efforts, when things go horribly wrong, it is extremely hard to deal with such a “series of lows” at a personal level. Not having a proper framework to deal with such situations can break the person down.
Remember, entrepreneurship isn’t a James Bond film where a Founder can only be “shaken and not stirred”. Your family’s measured but defining response will ensure that any resultant material blowback (if at all) is tackled successfully.
To summarise, a surprising number of startups die due to wrong Board/Investor dynamics. Losing your venture is a terrible thing to happen to a Founder. So do not underestimate the importance of having the right Board/Investors. The money you raise comes at a cost. Be aware of these costs and decide for yourself whether or not you are willing to pay that cost. What are you willing to compromise and what are you not willing to compromise?
In the same way, the constitution of the Senior Team (including the Founding team) is a deciding factor in the success of any startup. Choose your partners/senior leadership team carefully.
The only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.
If you haven’t found it yet, keep looking. Don’t settle.
- Steve Jobs