HEIDI: Welcome to The Startup Solution and “The Case of the Boardzilla Board Member.”
Hello, I'm Heidi Roizen from Threshold Ventures. The Startup Solution is a podcast where we unpack the “oh shit” moments faced by entrepreneurs and then find the best ways to get through those moments alive — and with a little luck, maybe even better off.
If you’ve raised capital from professional investors, that money likely came with some corporate structure requirements, including board seats for your largest investors.
Boards of directors can be super helpful and constructive, both individually and collectively. And I’m a huge proponent of setting them up to be successful. In fact, If you’ve not already listened to the episode of the Startup Solution called “The Case of the Boardroom Blow-up,” you might want to listen to that now. In it I lay out the groundwork for building good relationships between entrepreneurs and their board members.
But sometimes, even after all that good groundwork, things can still go sour. Board members can become disruptive, even toxic. And especially when it comes to board seats held by large shareholders, it can be very hard to actually get rid of a disruptive board member. In fact, the average board tenure from first investment to liquidity is about seven years — about the same length as the average marriage in America. And honestly, sometimes it seems harder to get rid of a board member than it does to divorce a spouse.
So when things go bad, and you end up with a Boardzilla, is there anything you can do?
Let’s consider what happened to an entrepreneur we’ll call Felicia, involving a board member we’ll call Vince. As always, we use fake names and composite descriptions on The Startup Solution to protect the identities of the entrepreneurs — and that protection extends to board members, too, even when they’re being jerks.
FELICIA: Hey, Heidi, it’s Felicia. Sorry to not do this in person, but I just have to let off some steam. Vince was completely out of line today. It was clear from what he was asking that he hadn’t even read the deck. And when he cut me down — a personal attack like that in front of my entire executive team — that was so cringe-worthy. I had to do some damage control with the team afterward — everyone’s fine, but that was just a heap of extra stress that nobody needed. Anyway, I never want to have another board meeting like that. Could you give me a call so we can brainstorm about what to do so it never happens again? Thanks.
HEIDI: This voicemail came as no surprise to me because I was in the room when it all went down. Felicia had been going over some changes to a product under development, changes her team felt would improve its ultimate market adoption — when Vince exploded about how these changes were happening too late and would cost too much — even though the analysis Felicia had provided in the deck showed otherwise. And worse? Vince ended his diatribe with a pretty personal dig at Felicia.
Unfortunately, this hadn’t been the first time we’d seen Vince act out. He’d done something similar at the previous two board meetings. And it had come to the point where we were all dreading the next one.
So I called Felicia back, to figure out how to either bring Vince around to a better place or, if things couldn’t be improved, how to potentially remove him from the board.
Now, I was quite empathetic toward Felicia. But I wanted Felicia, in turn, to have a little empathy towards Vince, too. Because I believe that finding a solution to any people-oriented issue starts with empathy. So, I walked Felicia through some “inside VC baseball” to help her understand why Vince may have become so challenging.
If you’ve raised venture capital, your money most likely came from a particular fund. You’re in that fund with all the other startups that that VC firm has invested in over a period of time, usually three years or so. And even though you may not even know which other companies are in your cohort, their outcomes may impact you down the line — for example, in terms of how much capital that fund will have for follow-on investments. And this sort of fund-related performance may be creating pressure for Vince, too.
As I said in “The Case of the Boardroom Blow-up,” I think any entrepreneur taking money from VCs should understand the VC business model, and I encourage you to do your homework. But for today’s purpose, suffice it to say that a VC’s upside income, called “carry,” typically depends more on the performance of the whole fund than on any one investment. And, their standing as a partner, even their very position with their firm, depends to a large part on how the deals they’ve led perform.
So, one reason an investor might become hyper-focused on your company is if they’ve had a few failures before you. In the case of Vince, I knew from recent industry news that two of his investments had recently shut down. We VCs are in the hits business, so two failures in a row may not be that unusual — but these had both been high-flyers with tons of money invested. Vince had only been a VC for three years, and to my knowledge, he’d not yet had a win. So, I had good reason to believe that he was feeling some heat.
I’ve actually seen this dynamic work in the opposite direction, too. In one case, a VC board member had had a huge hit and had made tons of money for their partnership. They were in such a good position with their firm that it kinda didn’t matter what happened with any of their other investments. This type of situation can take the pressure off them and you, which can be a good thing. But it can also sometimes lead to their inattention to you, which can be a bad thing. It’s yet another situation where an entrepreneur may be impacted by VC fund dynamics that they don’t have any visibility into.
Another unfortunate behavior I’ve seen is when you have a relatively new VC, and this is one of their first deals. To that green VC, it may feel like they need to be able to answer every question their partners may ask when they’re talking about you. So, they pepper you with questions and requests for data and analysis. And that may help them achieve their goal — but it doesn’t necessarily help you, and actually may cost you extra time and attention.
My point is: sometimes VCs lose sight of the fact that when they're in the boardroom with you, they should be doing everything they can to help make your company successful — instead of sitting there and thinking, “What am I going to report to my partners?” And usually, if you’re having problems like this, a simple one-on-one conversation with that VC can move the interaction to a more positive place.
. . .
So, what did I recommend that Felicia do next with Vince?
Well, I am a big believer in treating people with respect but also in being direct. I suggested she sit down with Vince, one-on-one, and tell him how his actions in the boardroom are negatively impacting her and her team’s ability to be successful. From there, she could either work with him to find a less disruptive path or, depending on her assessment of how the conversation was going, ask if he might want to consider leaving the board. I also offered to have that conversation with him myself since sometimes these go better between investors than with the entrepreneur directly.
Look, this is a hard conversation to have, and, to be honest, it often goes poorly. But I believe, out of respect for Vince’s investment and his work up to now, that he’s owed the opportunity to solve the problem.
And Felicia did try a one-on-one to address the issues. But Vince was dismissive and combative and said the problems were hers, not his. She ended the conversation without asking him to resign since her read of the situation was that it would be pointless to do so and would have likely make things even worse.
Feeling pretty desperate, Felicia asked me if there was any way to go over Vince’s head and appeal to a higher authority. Well, that’s a pretty nuclear option, but let’s talk about it.
To know whether you can eliminate a board member without their cooperation, you need to know the contractual rights to the board seat they are in. In private companies, some board seats are typically held by investors. However, the seat is usually not bound to a particular individual but rather to a person designated by the investor firm that holds the seat. For example, I currently hold two board seats at Threshold portfolio companies, but in both cases, Threshold has the right to replace me. And so, yeah, I, too, have to do a good job in the eyes of my partners if I don’t want to lose those board seats.
Vince held that kind of board seat at Felicia’s company. And so, in theory, she could go to Vince’s partners and say, “I don't think Vince is a good fit for our board, and I was hoping we could maybe switch him for another choice of yours.”
Yup, this is technically doable, But as you can imagine, this approach is fraught with political peril — particularly if no one talked about it to Vince first. So if you’re gonna play this card, you had better have a lot of very specific examples of how your Boardzilla has been disruptive because asking a venture firm to swap partners should only be done after you’ve tried everything else.
. . .
Felicia decided that she didn’t want to go there quite yet. So, we discussed yet another possibility.
There is a gentler way to get that board seat swapped out. And that is to do so at a time of natural board transition, such as a new funding round.
When you're raising your next round, one of the things the new lead investor will want to discuss with you is your board. They almost always want a board seat for themselves, but they also want to ensure that the entire board is functional and productive. And that provides you with an opening. You could say, “I think one of our board members may not have the right skills for our next phase of growth.” Which is polite code-speak for “please write the term sheet in such a way as to eliminate their board seat.”
This is not all that unusual. As companies raise more money, some early investors do tend to cycle off the board for a number of reasons. For example, they may be early-stage specialists, and when the company enters its growth stage, it may be better served by directors more experienced in later stages.
Unfortunately — well, actually fortunately — Felicia still had over two years of money in the bank, so she wasn’t raising money any time soon. But that also meant she had to solve her Boardzilla problem another way.
. . .
Let me cover one more tactic here, though it’s one I’ve also seen backfire. Especially when a company hits an inflection point, the CEO might ask the board to add a member with particular superpowers, for instance, sales leadership, government contracting, or something else the company really needs at that time. Since most entrepreneurs and investors still believe boards should be relatively small, it is possible to ask a board member to give up their seat in favor of one of those subject matter experts. However, if you’re talking about a Boardzilla, they might say, “All right, I'll give up my board seat, but I want a board observer seat instead.”
A board observer seat means that the person is still in the board meetings, but they don't get to be there in executive sessions. They don’t have the same fiduciary obligations. They don’t vote on board matters. And they’re also not protected by legal privilege, so if the company counsel has to talk to the board about something privileged, they have to leave the room.
Board observers can still be useful roles and can be a great way to retain talent when you’re transitioning board seats. But moving Vince to “board observer” wasn’t gonna solve the problem. After all, a board member can still be a pain in the ass as a board observer.
So, how did Felicia solve her problem?
Well, to be honest, she caught a lucky break. It’s not one you should count on, but it is one I’ve seen more than a few times. Two months after that board meeting, Vince parted ways with his venture firm. This did not eliminate the board seat, but it did create an opening for Felicia to talk to Vince’s former partners. She expressed her appreciation for their continued support as well as her desire to have them choose a board member who could be helpful for her next stage of growth. She totally lucked out because the person she wanted to recruit to the board was a former portfolio CEO of the venture firm’s. They loved the idea, and helped her recruit that person to fill their vacant seat.
While you may not get a lucky break like this, there are still some things you can learn from Felicia’s Boardzilla nightmare.
First, think about how you structure your board interactions, both one-on-one and in meetings, to minimize the chance that you create a Boardzilla in the first place.
Second, if you find yourself with a Boardzilla, always be respectful. Try to work things out directly, with empathy, and in private. And you can call on other board members to help, as long as that is also done in a respectful, private manner.
Third, funding rounds are an excellent time to work behind the scenes with your new investor to improve your board because the power of new money often includes the power to change out a board seat or two.
Fourth, if things cannot be resolved any other way, you could ask Boardzilla’s firm about swapping in a different person, one with the right skills and temperament to help the company they’ve invested millions of dollars in. This is an extreme measure, but sometimes you have no other option.
Finally, you may just be stuck. If this is the case, you should continue to work with the rest of your board to set an example of what good governance looks like, don’t take the attacks personally, and move on until you have another opportunity to effect a change.
. . .
And that concludes “The Case of the Boardzilla Board Member.” For the record, this situation is real, but both Felicia and Vince are composites. And no startups or VCs were exposed or harmed in the recording of this podcast.
Thanks for listening to this episode of “The Startup Solution,” a podcast from the venture capital firm Threshold Ventures. We hope you have enjoyed this episode, and if you did, please leave a rating or review in your favorite podcast app. I’m Heidi Roizen.
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