October 9th, 2012 Founders@Fail: Bringing Bad News to Your Board

On Tuesday, October 9, 2012, OLC attended Founders@Fail held at General Assembly regarding bringing bad news to the startup's board. The panelists included Rudina Sesari of Fairhaven Capital, Owen Davis of SeedStart and Danny Schultz of DFJ Gotham.



http://www.fairhavencapital.com        http://www.nycseedstart.com/       http://www.dfjgotham.com

Beginning the Founders@Fail event, the moderator asked a question directed at all of the panelists seated in front of the audience. "What should the founder expect from the board?" he asked. Owen Davis answered first. "There's no real answer," he said, "but at the end of the day, to founders who lose sight of their goal, the board will not be your friend." Davis went on to list the roles that the CEO, or in this case, the founder has to play: "The roles that a CEO needs to play, at least, to me, are setting vision, making sure there's money in the bank, and recruiting or networking." Rudina Sesari added, boards need to be supportive and aligned with the founder-CEO. "Misalignments are detrimental to the company," she said.

The moderator asked, "How can a founder effectively manage exit strategies?" to the panel. Danny Schultz answered, "It's not easy for both sides [referring to the board and the founder]. You can go in gung-ho to help with recruiting and strategy, but young CEOs and early stage companies don't know." He went on to add that any moment that helps ease the process of startups should be cherished. "It's a difficult dance for CEOs to manage," Schultz said. Expectations for the CEOs created by the board for the "best possible outcome can't legitimately favor one [alignment] over another." The board's responsibility is to take care of the shareholders and to "maximize value," as Schultz put it.

The next question involved a hypothetical situation, which involved tense affairs between the founder and the board. Davis tackled the situation head on, explaining that there's no formula to solve these situations, that the CEO is not the ultimate diplomat. "The role of the CEO is to tell the board what to do. The CEO is the one running the company," Davis said. "The CEO can ask, that's collaborating, but really, he's runs the ship."

Regarding how to run the startup, Davis described unwritten rules that may sound counterintuitive at first, but "they are there for guidance." Sesari added, "The board is a governing body. Ultimately, they support the CEO, but this also depends on who is your CEO and who is your founder. It's a very connected world out there, and if something bad happens, tell the board within 24 hours. Communicate with your board." The conversation moved on towards building trust with the board and to "not do anything that undermines that trust," as put by Schultz.

CEOs should be assertive "because nobody knows the business better than the CEO," Schultz said. He recommended that CEOs should give options to the board to better collaborate and hear recommendations from them. "We back you because we felt that you and your [hypothetical] team were decisive." Although options are recommended, Schultz advised against telling the board everything. Davis added to never exceed 10 slides for a board deck. "Having the capability to understand the right amount of information is something that a CEO should know," he said. "It's about knowing what's relevant."

Schultz advised against changing the format of the board meeting as it might "create tension and distrust. It shows sloppiness and you might be hiding something from us." Keeping the format of board meeting constant creates an atmosphere of stability, and the ever-changing formats would only keep the board from understanding and comprehending the information, as well as develop feelings of mistrust between them and the CEO.

Sesari warned future and present entrepreneurs to be ready to distinguish optimism vs. realism. "Entrepreneurs need to be passionate, a little bit naive and optimistic," she said, but without being able to distinguish realism from optimism will be a hindrance for startups and board members.

To wrap up the question, Davis reiterated that there is a relevant amount of information that will be helpful. He did add, "a board meeting should not be about updating, it should be about updating minimally and asking big-picture questions as the meat of the meeting."

The moderator took the opportunity to ask what happens when founders lose focus. Schultz began the conversation by saying that the packaging should be consistent. "There should be no repeats—relearning—what is on the deck. If possible, call the board members beforehand [so that they know what the meeting will be about]." He also said that founders should know their numbers. "Know your cost acquisition, the budget, the expectations of the quarter..."

Sesari added, "Connecting is there, text messaging, emails, phones.... Having a good relationship [between founder and board] is important. When both are good, the board will be much more willing to hash out plans." She also included an independent consultant to the mix saying that a good independent "can give great values." Essentially, the independent becomes a shoulder for the CEO, or the No. 1 person for the CEO that can open up doors for sales. The independent also adds legal values. "Have a good relationship with the independent," Sesari said. "They're just like any other member of the board."

Regarding independents, Schultz added that an independent might not want to play referee between CEO and board because it all comes down to the CEO sitting down and talking with the member in conflict. "Although," he said, "you can enlist the help of other members or the independent."

Davis said, "Angry hostile board members are better than board members that don't do anything. The ones that don't do anything are just taking up an important board seat."

In response to Schultz and Davis, Sesari said, "Boards help measure the company and opens doors to potential new hires or replacements. Some founders scale all the way to the exit, some don't." The board can help or give ideas. When prompted about exit strategies, Sesari admitted that it was a difficult topic of discussion especially since the founder plays a large role in shaping the company. "The founder can fire himself and let the board take over. The founder or CEO needs to learn how to let go. Ultimately, you're there to make money," she said. She acknowledged the difficulty of letting projects go, especially since they've become part of your life. Sesari, however, was firm in advising the founders within the audience to maintain some distance between them and the company.

To wrap up the panel, the panelists gave short insider tips to help startups. For Sesari, honesty was key. "Be honest. Maintain your trust level between the board," she said. Schultz addressed confidence. "If you show your board members or investors that you can tackle problems with out fear, you will inspire confidence throughout the company," he said. Finally, Davis added, "Take lead and work will follow. Remember that your job as CEO is to take the lead."