Guide to Building a

Great Startup Board

Credit: Reid Hoffman via Greylock

Last week, we explored the topic of startup boards of directors. We covered

what a board of directors does, why it’s so important, and how the role of the
board changes as the company grows.

The primary goal of this conversation was to explain how and why a great
startup board can be a powerful tool to help the CEO make the company
successful.

This week, we return to the topic to cover how to choose your board
members, why startup boards will be more diverse in the future, and discuss
some of the great board members I’ve worked with in my career.

This essay is based on Part 2 of a two-part episode of the Greymatter Podcast.

How Should You Select Your Board

Members?
In many cases, the CEO is the only member of management who serves on
the board. But every so often another founder also sits on the board.

If that’s the case, it’s essential that that founder and the CEO have a very tight
relationship and coordinate closely to avoid allowing members of the
organization to use that alternate channel to the board to get around the
CEO’s decisions.
Selecting your investor board members should be a careful and thoughtful
process, even if that means it requires more work. One common mistake is for
entrepreneurs to simply select whichever venture capital firm is offering the
highest valuation. That approach can actually destroy the long-term value of
the company if it results in selecting the wrong board members.

As an entrepreneur, the basic question you must ask yourself is whether the
prospective board member can help you achieve the upside – and also
manage the downside. Too often, entrepreneurs (who are inveterate
optimists) focus too much on the upside when picking investor board
members.

There’s a few things to keep in mind as you consider possible candidates:

● Know who you want in the trenches. Nearly all startups go through a
“valley of the shadow death” moment when founders and investors
realize that the company is facing major, even existential challenges.
Maybe it’s an economic challenge. But it could also be a non-financial
challenge, like being a social media company and facing attacks from
multiple points of the political spectrum.You want your board
members, both VCs and independents, to be people whom you want
with you in that valley. You want board members who will help you
address the emergency, rather than panicking and focusing on
preserving their own brands.
● Look out for passive members. Another mistake that many
entrepreneurs make is to pick passive, do-nothing board members as
a way to minimize the hassle of dealing with the board. At least that
approach doesn’t destroy value, but it is a huge missed
opportunity.One of the things a financing round brings is an
opportunity to strengthen the startup’s overall network. This is one of
the reasons why the best practice for a startup is to raise investment
rounds from different lead investors rather than simply doing internal
rounds, even if an internal round requires less work. It’s worth the
additional effort to add more people – and their network – to the
team.
● Know the pros and cons of independent board members. The final
category of board members are the independent board members.
Unlike management or investors, independents do not have a major
 financial interest in the company.They tend to be more helpful with
capturing the upside versus managing the downside, since they are
better positioned to help a startup connect to new opportunities,
rather than cutting costs (management) or injecting millions of
dollars of need funding (investors).

INDEPENDENT BOARD MEMBERS

One of the really important roles for independents is to serve as a catalyst and
bridge between management and investors.

For example, a classic example of the conflicting interests of management

and investors, which an independent board member can help mediate, is the
approval of equity grants to management and employees.

Management typically argues for larger grants (which is in their self interest),
while investors argue for smaller ones (which is in their self-interest).

For example, one of the speeches I’ve heard most often, and from many
different VCs is, “Founders should never receive additional equity grants. They
already have their founder’s shares.” I disagree with this, and when I am an
independent board member, my ability to see the merits of both arguments
helps me build a compromise.

Founders should receive additional equity grants, but not to the extent that
an incoming CEO or executive would. The purpose of the equity grants are
not to motivate the founders (the investors are correct, that the
overwhelming majority of the founders’ stake comes from their founder’s
shares) but rather to acknowledge their work. Anyone who is on an equity
incentive plan should be able to earn equity for performance, including the
founders.

It’s the independent director’s job to provide this kind of balanced

perspective on conflicts. I’m reminded of the parable of the blind men and
the elephant. One feels the trunk and concludes that elephants are like
snakes. Another feels a leg and concludes that elephants are like trees. The
independent board member can see the entire elephant, and while
acknowledging the perspectives of both management and investors, can
help them see the whole picture as well.

Another role for independent board members is to provide flexibility in board

composition.

SETTING TERM LIMITS

One of the questions that people don’t ask often enough is: When should a
board member naturally time out? Or when should a board member be
fired?

The challenge is that it’s very difficult to fire an investor board member,
because a venture round’s legal paperwork typically entitles a lead investor to
a board seat. Maybe you can exchange the general partner who sits on your
board with another general partner from the same firm, but doing so tends
to be very difficult.

So if you don’t want to remove management board members, and you can’t
remove investor board members, that leaves the independent board seats as
the only source of board composition flexibility. This is one of the reasons why
independent board members should be on an explicit tour of duty, with a
specific term, which makes it easier to make changes without having to “fire”
a board member.

Finally, the independent board member slot can be a way to “hire” an

essential skillset into the company that wouldn’t otherwise be possible. This
could be an industry luminary, or it could be someone who is the perfect
person to complement or strengthen the CEO and executive team.

A final piece of key advice is to remember to reference check your board

members. I’m a firm believer in the power of reference checks–after all, the
references are basing their evaluations on hundreds or even thousands of
hours of interaction, not a handful of interviews. But reference checking a
potential board member is different than reference checking a job candidate.

The questions I like to ask are:

 ● Was the potential director your best board member?
● What were the strengths and weaknesses of the board member?
● What was the greatest benefit of having them on the board?
● What was their greatest weakness (as a board member)?

How Can I Build A More Diverse

Board?
In the state of California, SB979 is requiring every public company with a
principal executive office in the state to have at least one board member from
an underrepresented group by the end of 2021.

And companies with five to eight board members will have to have at least
two diverse board members by the end of 2022. Companies with nine or more
board members will be required to have at least three such board members
then.

But in addition to the legal requirements, there are also good business
reasons for increasing board diversity.

● It changes the status quo. The first reason is to break up the old white
man network. Boards often select their members based on
homophily, so if current board members are overwhelmingly older
white men, and they tend to select new board members who
resemble them, without some kind of intentional change, the status
quo will perpetuate itself. Requiring diversity is one of the only ways to
break this feedback loop.
● It brings new perspectives. But the reason diversity matters, beyond
equity and fairness, is that diverse board membership provides
additional perspectives that help the company navigate a
fast-changing world. Diverse board members are more likely to be
aware of the changing currents in the world, and will be sensitive to
different potential landmines and different breakthrough
opportunities. Thus board diversity helps startups capture more
upside and avoid downside.
Even relatively early stage boards should be thinking about diversity, because
they face particular challenges on this issue. If the only board members your
startup is adding are investors, then investor selection is the only way that you
can add diversity to the board.

And because white, East Asian, and South Asian men are so overrepresented
in the VC community right now, your investor board members might be
limited in how much they contribute to diversity.

I’m glad to report that the industry is changing; Part of the reason why
Greylock works with All Raise, and other such initiatives, is that we believe
that if you aren’t part of the solution, you’re part of the problem.

And even if you can’t achieve board diversity during the early stages, you
should be planning how to achieve it with your independent board members.

ADDITIONAL THINGS TO CONSIDER

Even though SB979’s requirements only apply to publicly-traded companies,
it’s obvious it’s going to have upstream effects. If you’re a privately held
company and you’re getting ready to go public, it’s probably not ideal to say,
“Let’s add a diverse board member right before we go public.”

First of all, you are putting it off until the last possible moment. It’s much
better to have people on board all throughout where you’ve been building
that relationship. The other benefit is that the first question a public company
asks when considering a potential board member is, “Well what other boards
have they served on?”

Serving on a board is like getting one’s passport stamped. And the more
people with diverse backgrounds who are getting that stamp, the easier it
will be in the future to fulfill these requirements.

Finally, whether for the board or for your company, it’s not enough to hire one
diverse person. This isn’t fair to the person, and won’t accomplish the goal of
making the organization welcoming to diverse people.
You need to hire N diverse employees or add N diverse board members,
where N is greater than one! You may not be an exact reflection of society, but
you’ll show that you are trying.

As with any hire, culture fit is essential. Why would a diverse board prospect
want to serve at a company that didn’t share his or her values?

What do you think is more appealing to a great candidate: “Come help us

respond to our critics even though we’re not a good fit for your professional
plans,” or, “Bring your talents, vision, and perspective to this company
because when you add those to what’s already here, we’ll have a
championship-level team”?

What Are Common Board Mistakes

You Should Avoid?
The most common mistake is to believe that the CEO works for the board.
The logic seems to be that because companies are hierarchical, and
individual contributors work for managers, managers work for executives, and
executives work for the CEO, then presumably the CEO works for the board,
and is the equivalent of their employee.

This doesn’t mean that the board is subservient to the CEO either – being a
good partner doesn’t mean being a pushover. The objective should be to be
clear, concrete, and helpful–not submissive.

One of the metaphors that I use when I’m training people to be board
members is that the relationship between the board and the CEO is like a
traffic light. The light can be green, yellow, or red. Your responsibility as a
board is to be super clear on which color currently applies.

● When the light is green, the relationship is good. The CEO makes the
decisions, and if the board gets involved beyond the crucial “below the
waterline” decisions that could make or break the company, it’s
probably a value-reducing distraction.
 ● But, if you’re not comfortable with the way the CEO makes decisions,
that is a clear sign that the light has turned yellow. The yellow caution
light is a signal that something is wrong, and needs to be resolved
quickly.As a board, you should explicitly discuss the concerns that
triggered the yellow light, and decide on what you need to learn to
move back to green or on to red within a fixed timeframe. As with a
traffic light, the yellow light is purely transitional and time-limited.
When a board stays on yellow indefinitely, it destroys value.
● Of course, the board should hope to return to green. But if it proceeds
to red, then there are only two things to do: Replace the CEO or sell
the company.Notice that even under red light conditions, the board
isn’t running the company or telling the CEO what to do. The CEO is
the leader and decision maker; if you believe that CEO’s decisions will
lead to the failure of the company, the board must either change
leadership or look for an exit.

Whatever the color of the light, the language that board members use
matters. When I’m on a board, you will rarely hear me say, “You should do X,”
unless it is a very specific legal issue.

For a business issue, I’ll say something like, “Here are three reasons why
advertising might be this company’s most important business model. This is
why advertising is a really good business model. This is why it applies to this
company. And this is why it’s worth considering a change. I’d like to hear your
reasoning on this topic.”

When the CEO listens to you, does the CEO hear, “You work for me; I get to
hire and fire you, so do what I say.” Or does the CEO hear, “You’re the leader.
Take the lead, and I’ll try to help as much as possible.”

NOTE: As a practical matter, early-stage companies likely lack the ability to

attract a good outside CEO candidate anyway. I feel like laughing (and crying)
when I hear board members say things like, “We should hire a CEO like Jeff
Weiner, Satya Nadella, or Reed Hastings.”

Yes, if our early-stage startup that has zero revenues can convince one of the
iconic CEOs of the entire industry to leave their job running a multi-billion
dollar enterprise, we should do it. But get real. Most companies won’t get
within 1,000 miles of being able to recruit such a person.

When you consider the talent the company can actually attract, the current
founder/CEO is nearly always the best bet. If they fail, the company is probably
doomed anyway.

How Much Control Do Entrepreneurs

Have Over Who Joins Their Board?
Part of being an entrepreneur is understanding that there are many things
beyond your control. You always have choices, but the results may depend on
external factors like competition or market. Financing can be one of these
things.

For example, let’s say you’re an entrepreneur and you get one financing offer
from one venture capitalist. That’s a no-brainer, right? You have to take the
deal…right? Wrong. I remember one time when an entrepreneur asked for my
advice on this very situation.

My response was probably the harshest reference I’ve ever given a venture
capitalist. I told the entrepreneur, “You might want to consider shutting your
company down rather than accepting money from that person.”

The reason you’d rather shut down your business than accept an investment
offer is that if an investor is so incompetent and malicious that they’ll
eventually destroy the value of your company, you’re better off failing now
rather than slogging through another couple of years. At least you’ll be free to
try something that might actually succeed. Fortunately, I haven’t had to give
this advice very often.

But let’s say that for whatever reason, you end up taking money from a VC
who turns out to be a bad board member. As we’ve previously discussed, it’s
very difficult to fire a VC board member.
Given this fact, the best way to improve the situation is to recruit another
board member–whether investor or independent–that can serve as a
counterweight to the problem board member. It’s a lot easier for a CEO to
stand up to a board member if another board member has your back.

To pull off this technique, you need to recruit a board member who has the
character, board experience, and “throw weight” based on reputation and
previous accomplishments to get the bad board member to back down.

REAL-LIFE EXAMPLES OF GREAT BOARD MEMBERS

I’d like to take a look now at a few great board members I’ve worked with over
the years and what made them so exemplary.

LINKEDIN
David Sze was my most effective and helpful and competent board member
at LinkedIn. His performance as a board member is the reason I chose to join
Greylock when I transitioned from entrepreneur to venture capitalist.

David helped make LinkedIn a better product and company. For example, at
one point he said, “I think we’re crossing a line. All viral products are
somewhat spammy, but I think we’ve become too spammy in the following
ways, and here are some techniques we should be using instead.”

We were one of his star portfolio companies, but he was willing to call a spade
a spade because he knew it would make the company stronger.

He also brought a valuable perspective that helped us think more broadly

about the environment around us. Part of the reason we raised our Series D in
2008 is because David came to us and said:

“One of the things we do at Greylock as a partnership is we talk about the

state of the markets so we can help our portfolio companies make financing
decisions. We think that the market’s superheated and heading for a crash.
We don’t know exactly when, but we’re telling all our portfolio companies
that they should do a preparatory fundraise.”
Based on David’s advice, we raised our Series D in September of 2008. Those
with long memories may remember that in October and November, the
subprime mortgage crisis caused a stock market crash and destabilized the
financial system. And because of our preparatory fundraise, we were
comfortably financed and easily rode out the market turbulence.

Notice that David never tried to seize the steering wheel; he stayed in the
passenger seat and was an awesome navigator and support.

I could tell that David would be a great partner as a board member from the
very start of his involvement with LinkedIn.

When David led our Series B round, he told me that when you’re reference
checking for an important role (in this case, my ability to be a good CEO for
LinkedIn), you haven’t checked enough until you have found at least one
negative reference. Now that’s something I already knew.

But David took things a step further–he walked me through the references,
including the negative reference. It was his way of building our partnership.
Right up front, his technique established transparency, trust, and the ability
to talk about difficult subjects.

In addition to David, I’ve worked with so many great board members, I’m
apologizing in advance to any of the amazing board members that I don’t
mention next. You know that I love working with you and I’d be a happy
reference at any time! But alas, I only have time to discuss one VC director
and one independent director.

AURORA
One of the great VC board members I’ve worked with is Michael Volpi of Index
Ventures, who serves on the Aurora board with me.

Michael does a really good job of asking the right questions while still being a
great passenger side partner. For example, when he makes an assertion, he
makes it clear what level of information he has to support it.
Sometimes, this means saying, “You should take this really seriously. I have X,
Y, and Z experience in this matter, and here is why it is an important issue.”
And then other times he’ll say something like, “I’ve got this question, but I
don’t really know the answer.”

And finally, like all great board members, he rolls up his sleeves and gets
involved in the detailed work. For example, one of the major deals we made at
Aurora is acquiring Uber’s self-driving research unit.

Michael, who built a legendary M&A practice at Cisco Systems, was super
important in that process, helping the board and team thinking about
questions like, “How will we integrate this acquisition? What are the right
ways to think about management? What are the key priorities we should
focus on?”

KIVA.ORG
One of the great independent board members I’ve worked with is Julie
Hanna, whom I brought in to be the chairperson of Kiva.org. She’s now the
second-longest-serving board member at Kiva, and has contributed to the
organization’s success in so many ways. Alas, I only have time to discuss two
of them.

First, Julie is very rigorous about making sure that the board is managing its
own performance, not just the organization’s. She asks us to think about the
OKRs of the board as a group, and as individual board members.

All of us have to take the time to ask, “How can we operate better? What’s the
way that we can help Kiva more? What’s the way that we can help Neville, the
CEO, more?” We’re a learning team, not just a board.

Second, Julie does an amazing job of spending time with the other
executives in the organization. She finds out what is really going on in the
organization to help the CEO and board make the right connections.

She might say, “This board member should talk with this executive,” or she
might say, “We’re having this problem between this founder and this
executive, so I’ll have dinner with them, and I might involve this other board
member later on.” As a serial founder and CEO herself, she understands how
to work with the management team in collaboration with the rest of the
board.

Conclusion
I hope that you’ve seen that a great startup board can help your company
succeed. It takes hard and thoughtful work to build such a board, and I hope
that the advice I’ve shared helps your own effort to do so.