Oct 8 2012

Startup Boards: Would you like a flatscreen TV with that termsheet?

In November 2008, T.A.McCann, (or TA) an entrepreneur based in Seattle was getting restless. (We’ll save the Sleepless in Seattle analogy for another story ;-)

It was time for him to raise his first round but what kept him up at night was (besides the funding) the board-CEO chemistry. This was TA’s sixth startup, and he wanted to make sure he did what his gut told him – seek out those investors who understand the business and not just bring money. And can stand alongside and support his entrepreneurial roller coaster ride!

TA did not start searching for money and made a few moves that show his entrepreneurial acumen. And a lot of entrepreneurs can draw some lessons from his story – he is one of the few we know who proactively built his board.

TA did his homework well and knowing Brad is an avid runner, asked him via a tweet for some suggestions on places to run in Boulder, CO. A few weeks later, on a cold December morning, Brad and TA, not necessarily dressed in their best attires meet at 6:00 am and head out for a run. Five months later, Foundry Group led a $6.75 million Series A investment in Gist alongwith Vulcan Capital. (Read the WSJ blog on how Gist’s new funding began with a twitter message)

Brad joined the board along with Steve Hall of Vulcan Capital and a classic three member startup board was formed. As we interviewed TA for Startup Boards book, we found a simple theme that governs and creates a good startup board dynamic:

1) Startup boards function like a team: All three were actively involved in all decisions and walked alongside – there was no hierarchy. “It would have been very weird if we had the formal stuff of motions, votes, call to order and such” says TA. We were like a team.

2) No painful board slides: TA would prepared a pithy 2/3 slide presentation where the board would discuss top 3 issues and how they could help. “It was not a presentation in my view but more a framework for discussion – 80% of time was spent in discussing the hard issues —- and yes, it was productive” says TA.

3) Making tough decisions and delivering strong outcomes: The board and TA (as CEO) would often not agree on everything. “For example, I wanted to find a way to get some revenues and the board wanted to push for adoption – we were split straight in the middle on this decision. But we picked a path and the board supported me at every step. I had to earn their trust by my actions – these are accomplished only after you deliver meaningful outcomes” TA says. “The hardest part for any CEO is to admit I dont know” he adds, but if you build a trusting board-CEO relationship, this becomes easier.

With TA, it was a text book case – a great CEO, a supportive board and good market timing – in late 2011, Gist was acquired by RIM / Blackberry. Three years after the first round of investment, everyone celebrated the outcomes. Read TA views here in his blog How VCs can be awesome board members

As CEO, you need to know how your investors can

(a) function as a part of your team,

(b) how they behave in the time of crisis,

If you build your board proactively, you can be assured of supportive behavior in tough situations. We all have had our share of bad relationships – screamers and unstable minds who crumble under pressure, or worse threaten to fire / sue / emotionally blackmail you. One CEO we know was threatened of shareholder action after a down round. Entrepreneurs who focus too much only on the money (scoring a high pre-money) and not enough on the board-CEO chemistry run this risk – a non-trivial issue by any means.

In such situations, you get the money but end up dealing with all kinds of unknowns. Its like getting married only for the dowry (lots of cash, a flat screen TV, some gold or even a convertible beemer) and having no emotional connection with your partner. So if you chose to focus only on the money, at least follow the best practices of dowry — ask for a flat screen TV with that term sheet!