Essential Tips for Starting & Scaling Ventures from Serial Entrepreneur Lara O’Connor Hodgson

Before starting three ventures of her own, Lara O’Connor Hodgson worked as a consultant, helping others grow their businesses. Along the way, she learned valuable lessons about starting and scaling a business that can help any founder facing key decisions. Do you need a business partner or should you found the venture alone? Hodgson shares her process for finding and selecting a co-founder—including how she determines whether to add a partner. Are you wondering how to divide founder equity in a fair manner? She offers tips on assigning value to co-founder contributions over time as your venture grows. For those whose ventures are about to scale, Hodgson provides practical tips on what to expect. As CEO and President of her latest venture, NOW Corporation, she doubled the company’s growth twice in four years, serving 150 small businesses in the past year. Based on her experience, she shares her insights on navigating change, building your team, and managing your board. A lightly edited transcript follows the video.

Lara O’Connor Hodgson interviewed by Matt Fischer and Marilyn Morgan Westner on topics related to the founder’s journey on November 7, 2018, at Klarman Studios, Harvard Business School.  

Essential Tips for Starting & Scaling Ventures from Serial Entrepreneur Lara O’Connor Hodgson

How do you decide whether to launch a venture on your own or if you’ll need a partner?

I think when you’re starting a business, maybe the most important decision you make is whether to do it on your own or to do it with a partner or partners. And I’ve done it both ways. So when I think back to why I made a decision one way or the other, it was really more about what I was trying to accomplish with the business and where I was as a leader. When I started a business where I just had a very discrete problem that I was trying to solve, I kind of knew what the outcome was and I marched ahead. But as I started businesses that were a little more complex, complex either being the channels to the customer, the scale strategy was more complex, with NOWaccount even technically it’s more complex. What I realized is that partners play a really important role. But I think most of us pick them for the wrong reason.

Which is more important, finding a co-founder based on skill sets or mindsets?

The first time I picked partners, I went out and I was really trying to find skillsets to round out my skillset. So I thought I’m not deep in technology, I need a technologist; or I’m not deep in the legal side, I need a legal person. What I came to realize though is skillsets can be hired. And so if you’re really just trying to acquire a skillset, you’re probably better off hiring that person. You can give them an extremely senior role. They could have a C-level role, they could even have sort of a profit sharing. But to make them a partner is a separate and discrete decision because that’s someone that you’re going to live with for a very long, infinitely for the business, right?

And I think what I realized is that in a partner, the role they should play is not to bring a skillset but to do two things for you. One is provide balance because a lot of times entrepreneurs are optimists. We see opportunity in things. And so we chase after it. Sometimes you need a governor. You need somebody to just say, “Whoa, timeout. Are we thinking about this the right way? Have we looked at other opportunity, other alternatives?” And I think a partner plays a better role than an employee at doing that. Employees bring skills but a partner brings a different thought process and mindset.

The other reason that I think that a partner is important is being an entrepreneur is one facet of your life. And having a partner helps you balance not only the business but the rest of your life. It’s interesting people often think that they should go start a business with their best friend. And I always say, hope you didn’t want to keep that best friend, because that’s too close. And again, you’re trying to create sort of an optimization in your life of the personal side, the business side, the family side, the educational side, your community work. If your partner is with you in all of that, it’s too close because you don’t have your own corner to go back to.

I think where your partner needs to be is someone you know well enough to trust, well enough to know their character, well enough to know that your drivers of success in life align with theirs but not so close that they are part of every facet of your life. It’s too close. And so, where I’ve done it well is the last two businesses. With Nourish, I have a partner, Stacey Abrams, who a lot of people know now because she’s running for governor of Georgia. Stacy and I met in Leadership Atlanta. We did not know each other before. But through that one year experience we saw each other in highly stressful situations. We saw each other when we were made uncomfortable. We saw each other bring forth not only knowledge but have to make character-based decisions. And we both became sort of a mutual fund society.

We didn’t agree on a lot to be honest, but I completely was inspired by her goals in life, what she was doing to change the world, how she brought her skills to the table. And likewise, she was with me. So when we started the business it was perfect because we respected each other but we weren’t too, too close. And then with NOWaccount, Stacy and I had the ability to start another business. We already had Nourish and we met a gentleman named John Hayes who brought, was at a different stage of his life but our goals were very much the same in terms of the impact we wanted to have on small business. And so the three of us decided to come together to start NOWaccount. But in no situation were we doing the same things on top of each other, and at the end of the workday, we go back to our own lives, as perfect.

Should a co-founder be passionate about the idea or problem-solving?

I have found that whether you’re by yourself or with a partner, you are more effective if your passion is in the problem you’re solving than in what you’re doing. Because if your passion is in the “what” that you do, you stop listening. You almost have this sort of ego in the solution as opposed to really being continuously curious about the problem. I do think it’s important for both partners to have a passion for the impact, for the solution, for what they’re trying to achieve. Because if you’re both driven by solving a problem, then you’re constantly reevaluating it, which is really important.

But I also think it’s important with your partner to expand your view horizon. So what I mean by that is most of us approach a problem and at best we have a 180-degree view of the problem. It’s the side we come from, right? To the extent you can find a partner who through their life experiences can view the problem from something larger than your 180, even if your 180 becomes 270 or in a perfect world 360, then that’s the best of both worlds because you’re both driving to solve something, but you’re not duplicating each other’s sight horizon.

NOWaccount is a perfect example. Stacy and I were coming from the view of the customer. We had a small business, we had a problem, it was taking forever to get paid. We just wanted the pain to go away. But we approached it from the experience of the small business. John, our partner that we teamed up with NOWaccount, he had started a factoring company. He had spent the last eight years trying to solve the problem from the other side. So it wasn’t so much that we had complementary skill sets. That’s nice, but that we can hire.

What was amazing is that as we solved the problem, it was almost like the three of us were constantly walking around a circular table and the problem was in the middle because we could look at it from so many different angles that we could remove all the friction. And I think that’s why fast forward eight years, what we’re doing is not that different from our business plan. And that’s rare that we were able to see it. Most people look at it and say, “Your solution is so elegant and so simple. How were you able to do that?” And I think it’s because we had that 360-degree view.

When you’re evaluating a potential co-founder, what key questions do you ask?

When you first meet somebody and you’re thinking, wow, this person might be a good partner for me, we all tend to sit down and we talk about all the possibilities and we get excited and we almost like create this exponential frenzy of excitement. What we tend to not spend time on is the what ifs around when things go wrong. I think a lot of the questions are more, remember a partner is long term. And so, you really have to force yourself to say, “Where are we going to be five years from now? Where do you want to be five years from now?”

And that doesn’t just mean socioeconomically in terms of how much money do you want to make, but where do you want to be in terms of your family? Where do you want to be geographically? Do you have other family responsibilities or aspirations that we should just talk about? They may not even be relevant today, but just to know, right? I mean, you might have aging parents that you foresee yourself taking care of in a few years. You might have children. You might want to have children but you don’t. You might have a spouse, you might not have a spouse. You might want to live on the beach. And so, those things that seem a little silly and maybe even not unrelated are probably the most important things to talk about.

Where does someone want to be in terms of their role in an organization? Founder is one role, but there is all sorts of other roles that you’re going to have to play as the business reaches its different types of scale. Not every founder wants to be a CEO. Some founders want to be a salesperson. Some founders want to be on the finance side. And so, understanding where the person wants to be and what their time horizon is. Some people say, “I want to help start a business. In three years I want to do something else.”

You need to know that now because where I’ve made mistakes, it’s when we’ve brought people together and we talked about all the things that could go right, but we didn’t have that somewhat awkward conversation about, if this blows up, what are you going to do? Are you going to go back to a big company that maybe you worked with before, in which case maybe it blowing up wouldn’t be that sort of personally wounding to you? You should know that. Some people will hang on forever because the company becomes a part of who they are and they’re going to want to hold on.

And so, that’s important to know because even if things go well and someone comes in and offers to acquire your company, are you going to agree on that? Are you going to be fighting? And so, knowing those things ahead of time, it’s almost… I did it one time and it seemed funny. We did a role-playing scenario and it was almost fun. It was like a game. But a lot of your true reality comes out when you kind of role play if this happens. Let’s all envision the day when this happens, what would we do? What would you do next? What’d we do the next month? And so, having those scenario-based conversations about the end game are really important.

Should you add a co-founder to win investors’ approval?

I think, especially coming out of a program like Harvard Business School or taking some of these business classes, we tend to get very analytical about how we select partners, right? We have this checklist in our mind, we’re thinking about who our funding sources would be and what are they going to think. And while I think all that’s important to be aware of, where I’ve seen partnerships go awry is when you let that drive it. There’s something to be said for the old gut, the old gut feel about, does this feel right? Do I want to work with this person every day for a very long time? Do I want to be with this person 24 hours in a row if things are going bad?

And if that’s not there, the other can’t fix that. I mean, you could take the most perfectly designed ownership structure, skillset mix, et cetera, which all of the top VCs would look at and say, “Oh, dream team.” And if the chemistry’s not there, it’d be like the dream team in a sport that can’t win national championship because they just don’t click. So I think you have to have the chemistry first. That can’t be replaced. Then on top of that, the knowledge of maybe how to appropriately structure things makes the chemistry supercharged, right? And a lot of the structure is, again, how do you incentivize behavior, right? So there’s a science and an art to the structure.

How do you thin about co-founder equity splits?

Are you incentivizing behavior where everyone has the skin in the game that’s appropriate for their role? Are you thinking about what happens in the event that somebody’s life takes them in a different direction? Is that neat and easy to undo or does it become a mess? Those are the types of things that outside investors want to know when they come in because they don’t want to inherit a mess and they don’t want to invest capital and know that a good bit of that capital is going to, in a way, become inefficiently used by a partnership that doesn’t work well, right? I mean, that’s what they’re most concerned about. “I’m going to give you a dollar. I need you to make that dollar into 10. Can you guys do that the way you’re structured?” That at the end of the day is the most important.

When should you start thinking about formalizing a founders’ agreement?

I think the trickiest part about a partnership is that uncomfortable teenage phase of going from the informal to the formal. I’ve done it wrong in the past, to be honest. One of the biggest mistakes I’ve ever made is when you’re a founder, if you’re a good founder, you generate, you attract energy, right? Because you are so passionate about what you’re doing. People just want to be around you. I’ve had the experience before where people get attracted to the energy. They say, “You know what? I just want to help. I don’t need a title. I don’t need to be a partner. I just want to be part of the team.” Maybe they’re not working full time and they just have part time to offer you. And so you gladly say, “Wow. Well, I’m resource-constrained. I could use the help.”

Somewhere in there the person all of a sudden starts to want to be compensated or want to be appreciated differently or want to have the title and they may not even verbalize it. But then over time, you start to get this friction and you’re like, what’s going on? Well, I’m not feeling appreciated. And as the founder you’re thinking, well, you volunteered to jump on board, right? And so, that’s always the rub. So I think even though it’s easier to stay informal longer because it’s fun and it doesn’t take a lot of time, the earlier you can formalize things even a little bit, right?

What essential items have you included in a founders’ agreement?

Could be one page that says, “Here’s my understanding of your role, here’s my understanding of what you want to get out of this. And we’ll reevaluate it in three months.” And the first three months might be, there is no compensation, they just want to be part of the team. They want to have something to do with their time. But if you revisit that every couple months, they have the chance to speak up and say, “Now I really want to be more in the game. I want to have some compensation, et cetera.” So don’t let it go too long would be my first advice.

I think the second piece though is, founders’ relationships with each other change over time, right? There’s the building years where just like a married couple you’re building a family, you’re buying a house, you’re sort of creating things and as long as your vision is aligned, that’s a fun time. But then things start to kind of hit that first plateau where now you’ve got to think about streamlining. You’ve got to think about maybe even cost-cutting and you got to think about pivoting and all of a sudden that isn’t so fun anymore, right? And a lot of times one partner wants something different.

Why is it important to time when to formalize your founders’ agreement?

And so again I think what’s important is if you too soon try to get too complex in your formality, it won’t grow with you and you’ll have to undo it. And that’s never fun. But if you stay informal too long and you do nothing, then people get their feelings hurt and then people start to get into arguments that probably should have been heard sooner. So, I almost view it more as an iterative approach. Start someone informally, get a simple agreement in place but revisit it every three months and each time you revisit it, it may become a little more complex because things become a little more formalized or you bring an outside investor and now we’ve got to really tie some other things up. We have to tie down formal roles, we have to tie down exit strategies.

I have had an interesting experience with NOWaccount in that one of the three founders, we knew when we started the business she was a local elected official. We had a great conversation about the longterm. If the business is successful and your political career is successful, where do you derive joy? Where do you really want to spend your time? She was born to be in public service. I mean, that’s where she really finds her calling. And so we knew that. We knew that as her political career evolved and assuming she was successful, which she has been, that her day-to-day time with us would get smaller, that she would step out. And so, we had to make some critical decisions early on about her role because the last thing you want is someone to have a mission-critical role and they start to fade off.

And so, there were times when we would say, “Gosh, she’s really, she would be the best person to have this role.” But we really can’t give her that role because we’d have to undo it in a year or two. And so instead, what role can we give her that’s important but maybe a little bit ancillary so that as she phases out, it doesn’t cripple the organization? And we had those conversations every year. Now she’s still a shareholder but not active in the business at all because she’s pursuing politics on a much higher level, which is great for all of us.

How do you think about  assigning value to contributions when dividing founder equity?

Well, I mean, I think the hardest conversation to have because you never know the right answer until hindsight is this whole idea of valuation and carving up a pie. Some people believe that a smaller piece of a larger pie tastes just great and some people feel like, no, I have to own the whole pie or I don’t want any. I think the biggest challenge you have is, what are you even valuing? It’s hard to say, what is the value of the idea because there isn’t a value to it. But most ideas left sitting on a table don’t ever generate true monetary value. What is the value to the actual creation and implementation and how do you value those differently?

Part of the way I deal with it is I sit down with folks and we figure out what each person’s unit of value is. Because one of the challenges I’ve had is when someone’s joining you, where they came from oftentimes dictates how they view their value. For example, if you have someone joining your team that comes out of professional services, could have been a consultant, could have been a lawyer, could have been any type of advisor, they tend to have grown up in a world where their unit of value is time. So, the fact that I worked three hours on that means I added X value.

Determining units of value

Now, as someone that comes from more of an entrepreneurial background, a unit of time is not worth a dollar to me if there’s no results, right? So I’m always looking at, well, what result, what asset has been created from which I can derive future dollars? Because that is a unit of value. The fact that you spent three hours on something may or may not have created any value for me. And so, having those conversations early on where you say, “Okay, let’s attribute some piece of value to the idea, and that’s kind of the base. But then on top of that, how are we going to attribute value in terms of who’s putting time into the business? Do we attribute value to time? Who’s creating intellectual property?” And sometimes you don’t realize that until it’s been created.

For example, with NOWaccount, we started the business and not too far into it one of our partners identified a program that we were able to leverage to really start to scale the business to access capital. When that program came up, we actually all sat down and said, “Wait a minute, this person doesn’t spend as much time day-to-day with us, but this program that they brought to the table is going to have a huge impact on the valuation of the company. So how do we think about that now? How do we attribute some value to that? Do we give them additional shares for that?” And so, anytime you see a unit of value being created, you should stop and talk about it even if you decide not to attribute value to it at that time.

But if you don’t talk about it, then what happens is that person thinks, “Well, I’ve added all this value. Nobody’s recognizing it.” And then a year later when you now know what the answer is, was it valuable or not, there’s friction, right? Because they’re saying, “Well, I brought this to the table and you didn’t give me anything for that.” “Well, at the time we didn’t know it was valuable.” But having those conversations early on and allocating value at the point that you see the potential for it I found leaves room for a lot less arguments later.

So, that’s the way we did it. We kind of started with a pie that initially really the only thing you have is an idea, right? I mean, you’ve got an idea and a lot of boxes to check. So that’s kind of your base. But then how do you layer the next layer of value on top of that? And so I almost think of it as kind of concentric circles that build on each other and that’s sort of how your pie gets bigger. But you don’t constantly re-divvy up the original core. The core was a little cupcake. It already got divvied up. On top of that we’ve created another layer of value, how do we divvy that piece up? And so, that’s the image in my mind I’ve always had.

Can you explain your iterative approach to dividing equity?

I think we’re fluid but I think we anchor, we don’t start from zero and allocate percentages. We kind of started from a equality piece and then divvied up incremental value that was added on top of that. Obviously some people’s pieces got smaller and some got bigger, but we kind of started as, the three of us are coming together to create this. And then from there, how do we attribute additional portions of value compared to someone else’s? I think that kind of helps people feel valued from the beginning.

And most people, if you’re a good partnership, are very willing to say, “You know what? He really brought that one to the table. He really brought that one across the finish line. There probably needs to be some recognition for that.” And it may be additional options. It may be additional shares. We’ve been somewhat fluid over time but we started with a base that was well-defined. And then from there it’s been fluid as people have brought more or less relative value on top of that.

I think maybe the biggest mistake people make when they think about that founding team is putting everything in stone day one and not recognizing that businesses do change. I mean, very few businesses three years after they start even look like what the founders originally thought they were doing. There may have been a gradual sort of evolution into a different market or a different offering or it may have been a hard right pivot. But I think you’ve just got to recognize that businesses are fluid and if you can take advantage of that, then you can capture more value and prevent future issues because we’ll always see issues as where we anchored on something and then reality turned out to be something different, and we never incorporated reality into our structure. So someone feels chafed, someone feels underutilized, somebody feels underappreciated.

Why it’s important to communicate regularly if you divide equity iteratively

And again, you’re usually moving so fast at that founding stage that you don’t stop to talk about it. It’s not until the next phase, that first scale phase where you’re not a startup anymore, now you’re a scale up or you’re even so far along that you’re thinking of harvesting; and now you’re having these very friction-filled conversations which could have been heard earlier on and prevented. The worst scenario is the friction happens at the point of a deal, right? Where you’re trying to get a deal done, and the friction either prevents the deal or takes the deal sideways or allows the deal to realize less value than it could have. And that’s the worst.

The biggest challenge is a lot of times we’re so caught up in the excitement of building the business that we lose patience. And believe me, patience is not my virtue. We’re so excited to sort of start doing things that we don’t take the time to have those conversations because they’re not comfortable, they’re not fun, they do take time and sometimes we’re so much in a rush to get that first mover advantage that we’re like, “We’ll just deal with that later.” It’s a great analogy to something I just dealt with as a parent. My son’s teacher emailed me the other day and said, “I’ve noticed your son is, he’s forgetting things. He’s rushing from thing to thing. Is everything okay?”

And when I sat down with him, I realized he was so focused on trying to split his time among all these different activities that he was forgetting things. And I was like, “Whoa, step back. It is not important to be the first one to basketball practice. It’s okay to be on time and not 15 minutes early if it means putting your tuba away first.” But we do that as adults, right? We’re so excited about, I got to go get that customer, I got to go get that investor. I got to go do this, that we forget maybe the most important part, which is getting things done internally with our people. And initially that’s with our founding partners, but we do it all over again with our employees. We’re so busy getting the business built that we don’t necessarily stop and take care of our employees.

We talked about that uncomfortable informal to formal period. I think a lot of it depends on how you’re growing the business and who your investors are. Obviously if you start a family business that you use all your own capital, your ability to move fast and balance patience is totally up to you. I mean, somewhat market-driven, but you can take a more evolutionary perspective. I think if you’re raising capital from angels and high net worth individuals, their requirements are going to be very different than if you’re rushing out of the gate trying to go after a big VC firm who are going to want to see a lot more structure because their fund requires it and they’re structured.

So the funny thing is your investors tend to want to see structure that’s commensurate with the world they live in. So, know that. I mean, if you’re not a person who likes or operates well in structure, you may not want to go after an investor that is known for being highly structured. You may want to go after your friends and family first who are going to be a lot more fluid. They’re going to allow you to evolve a little bit more, not necessarily slowly but they’ll give you more flexibility in evolution. After they’ve invested, then maybe it would if you went out and got a venture capital firm day one that’s going to say we need this papered. And once it’s papered, it’s in ink and we’re not changing it.

So I think that’s important to ask yourself in terms of what investors you want to get, do you operate well in structure? If you came out of West Point, you probably operate well in structure. If you came out of a creative agency, maybe not so much. But that’s also what makes business so fun is that there’s not an answer and every answer is different, every market’s different, every team is different. If it weren’t that way, I think I’d have gotten bored a long time ago. I mean, most of us are entrepreneurs because we don’t want formulas. If we wanted a formula, we’d go work in a company where they gave us a job description.

Can you share observations or tips on what to expect while your scaling your venture?

I think to me the scaling phase, and most businesses go through several of them, right? I mean, it’s almost like you grow real fast and then you kind of level off and digest your growth and then you grow again and you digest it. And each time you go through that growth phase, you become that awkward teenager again, right? I mean, you’re gangly. Your limbs don’t work. You trip over things. Nothing matches and you’re a little bit discombobulated. I think the most important thing is for a founder to, in some cases, thrive on that, to thrive on that awkwardness and be able to keep moving through it without just completely losing it.

But where I tend to feel the friction the most is with people, with your team members, right? Because you’ve hired a team that was perfect to get you from A to B. And some of those folks may not be the right person to get you from B to C. In fact, you might not be the right person to get you from B to C. And that’s the hardest one to look at. We went through a really fast growth phase and we were running and gunning and we’re serving clients and ideas are coming up and we’re incorporating them and problems come up and we solve it, and we’re just like, “We’re knocking them down left and right.” And then all of a sudden we hit a point where we can kind of breathe for a couple of days a week. And I looked at what we had built and I was like, “Oh good God, what is that?”

Actually we were on a family vacation, which is probably what made me step back and look at it. And we were at the beach and I went into the shop and I bought barnacles, like the shell barnacles. And I brought them back to the office and I put them in the middle of the conference table and everybody said, “What is that?” And I said, “That’s us. We have had all these barnacles growing on our beautiful boat. And our boat doesn’t look the same anymore.” 

Scaling strains and breaks processes

And every little thing we did, we did for the right reason. We had a problem, we solved it. We had another problem, we solved it.

The problem is, the aggregate of all those point solutions was awful. It was inefficient. People were confused. And so I do think it’s helpful, whatever the rate of your growth is, every couple months you have to, even if it’s for a couple hours, step outside of the craziness, look at what’s evolving and see if it makes any sense. Because you might be evolving into something that is not found in nature. And that’s true with your people, whether it’s sitting down with them and saying, “Are we moving in the right direction? Are you feeling overwhelmed? Are you feeling like each step is doable or have I put a cliff in front of you that you simply can’t scale?” And to look at your processes.

And you have to have no pride of authorship because half of the barnacles I created, and I had a great reason for it. I had a problem in front of me and I solved it. But when you step back and take a system’s approach, those collection of solutions did not go together and it became clunky. So every couple months we go through barnacle scraping and we sit down and we start all over as if it were day one as a founder and we say, “Here’s the problem we’re trying to solve. Here were all the assumptions we had and here are the things we changed for good reason.” So we’re not criticizing. It’s not, “Gosh, you’re an idiot. How come you came up with that one?”

It was a good solution for the problem, but now in aggregate we may need to combine some of those solutions and change them. And so, that’s what you have to do as a founder is to constantly readjust your course, but do it in a way that you’re not just zigzagging all over the place. That to me is the toughest part of scaling. It’s not finding the customers, it’s not hiring more people. It’s digesting that growth and then adjusting the overall machine, both people machine and business machine, to be efficient again.

Are there any benefits to the barnacles—the things that strain your processes as you scale?

Barnacles are a gift because in scraping them off, you find something new that you never would’ve seen if the barnacle wasn’t there. So the act of having it is good if you periodically scrape it off. Now, if you don’t and you let it go for a year, it’s unsalvageable, right? Because now the boat’s going to sink and you can’t fix it. So I think it’s sort of like scheduled maintenance, right? If you do scheduled maintenance on your car, it continues to run just great. If you don’t, something breaks. And when something breaks, it’s expensive and you no longer serve your customer and there’s downtime.

But if you periodically just tap off the fluids, make a few adjustments, then you can keep going. You can add accessories and then you can improve it. You can change. So, I think you have to do that with your company. You have to periodically step back, assess, streamline, adjust, and then go again. And each time you go again, more barnacles are going to come and you’re going to have to scrap them off later. But you can’t prevent them. And I think that’s what a lot of people try to do is get so perfect that they prevent it. You can’t prevent it.

You don’t want to prevent it because they’re great learning experiences and oftentimes they show you who on your team has skills you didn’t know they had, sort of the diamond in the rough, and they tell you what parts of your good or service the customer most appreciates. Because in times of clunkiness, they’re forgiving on that but not something else. So you almost need that to get the feedback to improve.

How can you build up your team while they’re experiencing pressure?

Preparing people for the change and the constant scraping of barnacles is really hard and not everybody’s cut out for it. When people join the team, one of the questions I ask when we’re interviewing people is I ask them about their ideal environment. Like, where were they before? What did they love about it? What did they not love about it? Because some of the smartest people are just really not comfortable in periods of ambiguity and then what they view as stepping backwards. I’m fine with stepping backwards. If stepping backwards to fix something means I can then race ahead, I’m good with that. Not everybody’s good with that.

And so, I think you have to tell people ahead of time, you have to over-communicate, “These are the expectations.” And early on they’ll probably nod and say they’re good with it and then they’re going to experience it and they’re not going to be good with it, right? Then you’ll have to remind them, “We talked about this.” 

Observe your team under  pressure

One of the things that we’ve done which is kind of interesting is periodically we do team activities or outings. Everybody does, right? It’s good bonding time. But rather than just having a party, one of the outings we did is we did the escape the room challenge. Have you ever been to one of those? They’re awesome, right?

They literally lock you in a room and you have an hour to get out. You will find out so much about your team when they are locked in a room and have to get out. Some of the people that I thought were my top performers froze. I mean, they’re like, “I can’t figure it out. I give up, I’m frustrated.” And then there were people that in terms of their level in the company were not necessarily that senior and they shined. They never gave up. They were so creative. They took approaches. I was like, “Wow, that’s a clever approach.”

And so by doing this little simulation, we kind of identified some future high performers, people that we knew were not going to be phased by change. And once we knew that, and it’s important to have those people at every level of the organization: not just your senior executives, not just your mid-level managers, not just your sort of doers. You have to have those people all throughout. Because if your senior executives are good with it and nobody else is, not going to work. And if your doers are good with it but your senior executives aren’t, it’s going to be a frenzy.

Do you have tips for identifying people who can scale with the company and grow into a position as the business scales?

And so once we identified, by doing these activities, who our more resilient people were, we made sure that they were sprinkled throughout the organization, both functionally and by level. So horizontally and vertically because we needed them in critical spots. And so, every time we see a big change coming, that’s the group we pull together.

We’re in a fast-growth stage right now. I mean, we’re going to hire 70 people this year in a company that’s not that size yet. I mean, we’re talking more than 2X growth. And so, again I think part of what’s key is in order to absorb that kind of growth and keep moving forward, you have to bring people in in the right parts of the organization. So, where we found ourself as we had anticipated the senior level needs, we’d kind of hired ahead on our senior leadership, which is important because they’re the ones that are going to be sort of the beacon for the rest of the organization on keeping the temperature right, are we doing okay, and leading the change.

I think we had a great level of doers that had been with us for a while. They were resilient. They’re ready to step up, they’re all excited. But what we realized is we were missing some resilience in that mid-layer. If we took some of our doers and elevated them to managers, they’re probably not going to be as resilient because they’re not trained and comfortable as managers yet. And that could hurt us. So our focus right now is really kind of shoring up that mid level, which are the people that are kind of working with our underground team day-to-day to make sure that those folks are coming from environments where they’re comfortable with change.

What do you do when growth outpaces an employee?

It’s interesting when you talk about someone who’s really over-performing at the level they’re at, and then do you move them to the next level. We’re kind of going through that right now and it’s been an interesting experience because people tend to see their careers as linear. And yet in hindsight, we all know that’s not true. In fact, some of the best moves you can make are horizontal. But that’s not the way people think. They think, am I always moving forward? Is someone coming in in front of me that’s going to somehow slow me down?

And I think what’s important is not whether you allow them to move up, but when you allow them to move up. Because taking a person who is really resilient in the role that they’re in and changing their role at a critical time of change is kind of unfair because you’re not only putting them in a position where they got to grow into their role, you’re doing at a time when they’re getting hit from all sides with change. And that’s almost unfair. It’s like sticking someone out on a limb and then shooting bullets at him. Like of course they’re going to fall.

And so part of it is, as the senior leadership, being able to look out and know when you’re going to be driving that change and let people adjust their roles at a time when they can get their feet wet and get comfortable before you start to shoot the bullets of change. And so, we had that experience recently. We have a woman who absolutely fantastic, like on the ground processing operations. She’s efficient. She is a level of excellence in detail, like she’s a superstar on our team. And so, we elevated her to running a small team. And what we started to realize is she would keep going back to doing the stuff she was really good at, which meant she wasn’t doing a lot of management very well. And so we tried training her, right? We sat down with her, we got her some mentoring. We had some of our more senior folks sit with her and help her with some of the management things.

Optimizing your team by finding roles for capable staff that use their strengths

And then what we realized is with this next fast growth phase we’re going to, it’s a big risk for us to refer her to be in that role. So we sat down with her a couple of weeks ago and just asked like, how are you feeling in this role? Like, you’ve got the role now, but let’s envision what we’re going to be doing over the next three months. And even she admitted she wasn’t ready for that. She’s like, “Oh my gosh, I don’t think I’m going to do a good job at that.” And nobody feels good going home from work every day not feeling like they did a good job. And she even said that, right?

I used to go home just so proud of what I’d accomplished. And now I go home anxious, I go home worried that I didn’t get my stuff done, or maybe I got my stuff done but I didn’t spend time with my people and they’re struggling. And so we basically said, “Look, we think we need to bring somebody in to kind of run this overall department because we’re going to grow it quickly in the next several months. We’d like for you to kind of shift over and oversee this one piece,” which was really the doing part that she loved. So, it was going to be less management, more doing, but more critical thinking. We did add something. So it wasn’t going backwards at all. It was, we really need you to have time to think through some of the problem-solving in this area and help us define the processes going forward.

But you can’t do that and be managing a large team at the same time. So she actually was so happy with the outcome. She felt like she was growing but not growing out of her capability. She’s actually excited about us bringing a person in because they’re going to help her grow. I think what we have to constantly remind people is, the fact that you were going from A to B and someone was brought in does not mean you won’t get to B. You’re just not going to get to B right now. That person also has a career path and it’s not necessarily on the same path as you. So they might have a short stop there and you can learn some skillsets from them and then they’re going to move on on their path, and you can continue on in yours better position than before.

Hiring as You Scale

So, everyone’s not in a swim lane moving either in front or behind each other. Some people are going sideways, some people are going forward. Some people are going diagonal. And the best part is when you can optimize those crosses, like where they cross. We are growing a sales organization right now and because we’re starting really from scratch, I wanted someone who had built an organization before. So yes, they have run a large organization before. They know what we want the organization to look like in a year. But what’s interesting is they haven’t done it multiple times. They’re still hungry. Because I think sometimes you go out and you find that person who has so much experience but they’re kind of bored with it. They don’t view it as a challenge anymore.

And so they view it as, “I’m just going to replicate what I’ve done before.” Almost never does that lead to innovation to just replicate what you did before. And so, I always want somebody who’s done it maybe once so that they’ve got confidence that they can do it, they’ve got kind of a roadmap, but they haven’t done it so many times that they’re tired of doing it. It’s not routine. And so, our head of sales, he’s built sales organizations, he’s run sales organizations, but he is so fired up about what he’s going to do with ours because he sees it as a little different. Because you want them to view like they’re growing. I mean, nobody wants to come in and your task is, can you go do what you did three times? Can you just do it again? I mean, your honor.

So, I always want somebody who’s touched the experience but hasn’t done it so many times that they’ve got a wall of trophies of having done it before. But I also think it matters where you are in the process. With sales, we don’t have any sales organization. So I need somebody with a roadmap because I can’t give them one. If you were bringing someone in to maybe take a team that’s already been operating for a while and you’re simply trying to upgrade it, that’s a little different because you kind of have your roadmap, you know where you’re going, you just need somebody who can come in and maybe put more structure, more metrics in place.

So that person can either be a little bit of a stretch, right? Maybe they have the functional skillset but they haven’t done it before. Or it can be somebody who has done it multiple times and this isn’t a growth for them. It’s, “Okay, you want me to come in and in six months I can implement that for you.” But know they’re going to move on. They’re probably not the permanent leader there. So I think when you’re hiring someone who’s going to either come in at the top of a division or a department, or maybe even a mid-level manager, they’re going to come in ahead of someone who’s been there for awhile.

You really have to think about not just the skillsets they’re bringing in, but where is that organization in its evolution and what type of person do I need? Do I need somebody who’s been there, done it, and I simply need them to execute and move on? Or do I need someone who’s going to come in, build an organization from scratch with no roadmap and then lead that permanently? I think those are two very different tasks and you might look for a very different type of person.

Many founders struggle with their boards. Can you talk a little about how you work with your board and any observations you’ve made or best practices?

I think most people get a little confused on how to use their board. They get confused about the role of the board. So I think one of the biggest challenges that people have when they’re a founder, or even running a company that’s already scaled, is this strange relationship we have with our boards. And boards take a number of flavors, right? Some boards are fiduciary. They have actual responsibility for governance. In many cases, they’re defined by the investors because they are the people that have actually put the money into the company. Other times your board might be more advisory in nature where you invite them to come in and give you advice but they really are not a fiduciary board.

I rarely see people manage their boards well. And I put myself in that bucket quite honestly. Because a lot of times I think we inherit boards or boards sort of organically happen to us. And then as the founder, we kind of feel like, well, I work for the board, right? Because I do, if it’s a fiduciary board, I do answer to the board as the CEO. But what I often fail to realize is that the board works for the company. And so, most of us do not get the most value out of our boards that we should. And so, one of the things I’m going through right now is how to better take advantage of the services my board can bring.

A standard approach to board meetings fails to leverage the most value  from your board

I’ll give you a couple of examples. One is my board, which I’m trying to do a better job of managing. The other is I’m on several boards. And so I get the chance to see boards that are run well and not run well. And recently I was at a board meeting of a privately held company that I’ve only recently joined the board and I was just so impressed with how the board was utilized. Typically what you do is leading up to a board meeting, you send a board packet out and it’s all the obviously financials and results and topics to talk about and agendas and things like that. The board comes in and the senior management sort of reports out and the board kind of nods and pats you on the back and says, “Hey, you’re doing a great job.” Or, “Hey, we need to go in this direction.” And then they kind of tell the management team, “Here’s what you need to work on.” And then the meeting ends. And so, the management team leaves with a whole bunch of tasks and the board leaves with nothing other than they’ve given advice.

Changing the dynamic in board meetings can help engage your board

This recent board meeting I was in, they almost flipped it. As a board member, I did get the board packet, which I obviously had to review and come in with some questions, et cetera. But I had an assignment, and every board member comes to these board meetings with an assignment of, you have to come in and share what you see going on in your world. Analysis of the market, analysis of trends that you see going on, whether it’s to do with finding talent, whether it’s to do with the capital markets.

So whatever world you come from, you have to show up. And after the management team kind of does their reporting, each board member goes around and has to give a report. So you have to be extremely prepared to talk about what you’re seeing, trends, how that might impact the company, things they need to think about. And so now the management team is learning from you as the board. And so, the management team who day-to-day is so heads down gets to step up and hear about what’s going on that might impact their business. And then after each of the board members kind of gives their analysis of the world sort of, then they have the board respond to what they heard from the senior management and what particularly struck them that was interesting.

Getting more value from your board

And so, it was this really rich conversation among the management team and the board about potential challenges to the business, potential threats that nobody had been thinking about. And I found myself realizing that the conversation was at such a valuable strategic level, whereas when I was running my board meetings it felt a little bit more just routine, more reporting out, and then not really walking away with that rich conversation. So, at our next board meeting we’re going to employ this tactic as well. And then when board members leave, they’re given assignments. When you leave, could you help us with this? Could you do these five things? So the board now leaves with tasks, just like the management team leaves with tasks.

And so, you get a much more balanced view of the board working for the company. You’re right, putting value into the company than just the management team reporting to the board for approval or not. And I just think we could all do so much better because when you think about the assets your company has, your board is one of your greatest assets, right? You’ve got people with extremely strong experience and wisdom, and we don’t use it. They come in and they spend half a day with us and they listen and we never get that out. Then we find ourselves emailing later saying, “Hey, can you help me with this? Or can you make this connection?” But if you could make that more a part of your normal interactions, I think businesses could benefit from getting more out of their boards because I think it’s probably the most underutilized asset we have.

Can you share some best practices for managing your board or the reverse—what are some common mistakes that you’ve observed?

Rule number one is, never go into a board meeting surprising anybody. And you shouldn’t be surprised either, right? If you’re surprised by something the board has to say, then you’ve not been keeping the lines of communication open. In terms of some of the best practices of how to communicate with the board, not just during the meeting but between, one of the things we do is we try to do quarterly management reports. And they’re narratives. It’s not diving deep into the financials. We’ll do that in the board meeting. But it is a narrative on what’s going on, things we see on the horizon, things that maybe we thought were going to happen and the timing’s changed, right? A deadline’s moved or a dynamic changed.

Just a quick heads up because we don’t want to take up too much of their time constantly because they’re busy. But just shooting out quick narratives to say, “Just wanted you to know what was going on.” Now, we do have board members that are also geographically close to us and some that are not. Those that are geographically close, we do try to every month, every other month grab lunch. Just a quick one-on-one, how’s it going? Is there anything I can do to help you? Is there anything you can do to help me? So by the time we get to a quarterly board meeting, there’s not really a surprise.

But there’s also not a surprise for us because if the board member has a concern or they’re confused about something, that comes out in the lunch, like, “Hey, are you working on this? We talked about this last board meeting, are you making progress?” So now I know that he’s sensitive to that, or that’s on his mind, or that particular board member, she’s really focused on X. So going into the meeting I can construct the agenda knowing what the potential hot buttons are and just address them upfront because the quicker you can just get that out and talk about it, then the more valuable conversation you’re going to have than trying to like slip it in or brush over it or not address it.

How should you deliver news to the board?

I think what works the best is neither extreme when you’re dealing with a board. So your board comes in and you have good news, you have bad news, you have ho-hum, we all knew that. How you deliver it is really important. And I think particularly when you’ve maybe been through either a challenge or you’ve had to make a critical decision, how you explain that decision to the board is important. Number one, you have to explain it as somewhat decisive with confidence because remember, the board has to have confidence that you are leading.

But I find what I typically do is rather than just come in and say, “Here was the challenge, here’s what I decided,” I do give them a glimpse into how I got there, not because it’s all open-ended and let’s all brainstorm together. That leaves a lot of lack of confidence because then they’re like, “Wait, are you asking me or are you telling me?” But I do think they appreciate knowing, for example, I considered three options, here’s why I chose this one. Because then they’re like, “Oh, okay. Well, she considered other things.” And then if they want to have some input, they of course can add that in. But you at least come with a decision. So you show your ability to evaluate and form a decision. But you also give them a glimpse into the fact that you weren’t so narrow-minded that you just went with A without considering B and C.

And I think that builds confidence too because they trust that you had a process for deciding, but you made a decision. You gathered information and you made the appropriate decision. I think if you come in and just say, “This is the problem, I did it,” they might see your confidence but wonder if you were thoughtful. And if you take the other extreme and you come in and say, “Well, I’ve got this problem and I haven’t really decided, so here’s the three choices, what do you think?” Then they’re like, “Well, why are you leading if you can’t make a decision?” So I think it is somewhat in the middle. You don’t go in open-ended, but you don’t go in so narrowly focused that you just throw them the answer and move on and not let them appreciate the thoughtfulness that you went through.

Final thoughts on diving co-founder equity

When we think about a company and equity inevitably, you think of it as some form of pie, right? Whether that’s a pizza or a cake or a pie, and you’re constantly thinking about how to carve it up. But at the same time, you’re thinking about how to grow it. So, it’s not just a fixed circle that you’re carving up into potentially infinitely tiny pieces, you’re trying to cut something up but grow it at the same time. And so the way I kind of think about that is, if you were to think about sort of a tiered cake, right? You started with a base and then you carved up amongst the people that were there when you started the company.

But then a new group of people came in and they helped build something else and that’s something else is a little bigger. So you’re not going to go re-carve the whole base that was already there. It’s already been cut. But on top of that, you’ve now created another layer of value and that layer of value could be carved up differently, right? I might have layer one that’s cut into three pieces, layer two might be cut into 10 pieces. It doesn’t change the three that were already there. But on top of that, there’s now eighths.

Thinking about equity dynamically as you grow

And so, at the end of the day you may end up, as your company evolves, thinking about it as a whole series of concentric layers, each one is bigger than the next and they all sort of sit atop each other, but each one is carved up differently. When you then look at someone’s aggregate ownership share, it’s really the aggregation of, I had this part of the base, but then I had a different part of the second layer and I had a different part of the third layer. And if you add all that up, that’s my aggregate ownership.

I think what that allows you to do, trying to re-carve something up is messy. I mean, picture it. If you took a cake or a pie and you cut it into parts and then you tried to cut it again, it all falls apart. All the pieces crumble. And that’s the muck, that’s the mess that nobody wants to deal with. But if you cut that up and then on top of it you layer another piece that’s cut up differently, most of us can, sort of our egos can assimilate the fact that I played this role here and now I’m playing a different role. It doesn’t take away from my first role, right? Nobody’s taking something away. It’s just what we’re adding is a different slice and the whole pie has gotten bigger.
So I think where people tend to make a mess is when they view it as, it can’t be fixed and growing at the same time. And so, if it’s growing and you’re constantly trying to re-carve, people tend to, human nature is to grab what I have so it’ll take my piece and you end up with crumbs.

Always make sure that all co-founders and partners are comfortable with the approach to dividing equity

The model we’ve employed is very iterative. And of course there’s no perfect model. If there was, we’d all learn it, pass the test and move on. So it has to fit your organization. I think my partners and I are very comfortable with iterative. If you’re not comfortable with it, you should not do it because it can go terribly wrong. I mean, let’s picture stacking a bunch of concentric circles that are all cut differently. The tower can tumble. But I think it also matters who all your stakeholders are. Not just the partners, but is your company culture one that’s comfortable with iterative evolution? I mean, we are, and we talked about it early on and we’re comfortable with that.
Some companies are not. Some companies are much more structured and if you try to constantly iterate, you break it. I think it matters who your investors are. If your investors are not flexible and okay with iterative, then it’s not going to work. So, I think of a company as when you start it, you have an idea and you have a laundry list of things that could go wrong or that haven’t been proven yet, right? It’s sort of your checklist of value creation. And each time you prove something in the model, you check it off like, “Okay, that I can replicate now.”

But the one that’s always there until the very end is the ability to mess it up. I mean, most of us as founders at some point we start to believe our own BS. That’s why having a partner is often valuable because sometimes they hold the mirror up in front of your face to say you’re believing yourself too much. And so, we all have a chance to mess it up every day. So you have to constantly revisit, does that structure, for us an iterative structure, does it work? And the answer might change over time. I mean, I am very open to the fact that iterative has worked for us this far.

Three years from now, iterative might not work for us anymore. We may have a different investor base. We might have different parties at the table. We might be at different scales and we might have to give up some of that iterative nature. And I guess as the founder, I have to be willing to acknowledge that our model might at some point be wrong for where we are and adjust it. I have to tell you how that goes later.

Do you have any additional advice for adapting to change or helping your team adapt as you’re rapidly scaling?

I think as a company grows, obviously, the roles and requirements for different roles change and some people are extremely resilient and adaptive and they adapt easily. I mean, there are some people who can come into a company day one and be with that company years later when it’s tens of thousands of employees and they’re just as happy. They’ve changed a lot but they’re somewhat chameleon-like in that they can adjust the settings. Some employees can’t. Some team members just are great at doing something, they love doing that something and they’re not going to adjust and to try to force them to adjust is counterproductive for both the company and the person.

So I think there’s a couple of things. One is figuring out what the leading indicators are when someone is outgrowing their position and not letting them stay in it too long because then they’re not happy. I mean, they’re frustrated with themselves, their self-confidence goes down. And so, I think it’s important to identify what those leading indicators are. Meet with that person as soon as you start to see them to see if perhaps they do want to try to grow with the position and is it your job to help them or to identify it early on. But the most important thing is to treat people with respect.

Can you give a concrete example of how what to do with a staff member who had always performed well but started to become outpaced by the company’s growth?

For us, if someone is not going to continue to grow with the company, we are very serious about how we offboard them. I mean, people spend a lot of time onboarding. They don’t spend near as much time off-boarding, which is understanding “what do you want to do? Can we help you find that? Can we make introductions for you?” I mean, they don’t have to leave upset. They can leave feeling great about what you did. And we actually had a senior person that I went through that with a couple of years ago.

She’s a phenomenal person, just was not in the role that we had her in. That role was going to grow in a different direction. We sat down with her and realized that being at our company had inspired her and she really wanted to pursue an interest she had but she’d never had the guts to do it. But after sitting down with her, I said, “Well, I’ll help you. I’ll help you do that.” She’s one of our biggest fans and she’s wildly successful in her company now. And so, I mean, that’s one of my proudest moments is helping somebody who’s not the right fit find the right fit, even if it’s not with you.

How can you recognize if growth is outpacing your skills as CEO and, if it is, what do you do?

But I think the hardest one is yourself. I mean, recognizing for yourself, what are my skill sets? What am I good at? Does the role I’m in require that skillset or not anymore? I have a personal board of directors. Long ago people told me I had to get mentors, and I can’t stand the concept of a mentor. I don’t know why. It’s just my image of a mentor is somebody who when I’m having a bad day is going to like prop me up and pat me on the shoulder and say, “It’s okay Lara,” and my mom does that for me. I don’t need a lot of people to do that for me. I actually need the opposite. I need people who are going to look at what I’m doing and tell me when I’m on the wrong path, when I’m not listening, when I’m being a bonehead, when I’m believing my own BS too much. Like I need people to give me the hard love. My mother is there if I’m having a bad day.

So, years ago I put together a personal board of directors and it has absolutely no overlap with my company’s directors. But they are people that I’ve met through my life who I know but not too well, not my close friends, that I respect, that are not in my industry, that are in different areas. And I periodically get together with them and just update them on what I’m doing and ask them to poke holes in it. Does it not match who I am? You know who I am, is that not the right match? Should I be doing something different? Does the role require skills that are not my skills?

The hardest part is identifying those, knowing when you’re not a match for your role anymore and then being open to moving into a different role. I mean, my goal in life is for NOWaccount to help small businesses. If the best role for me is the CEO, I’m happy to keep serving in that role. But if at any point in time my best role shifts to being head of marketing or something else, that’s fine too. Because at the end of the day, the whole company reaches the finish line together, or not.

Lara O'Connor Hodgson

Posted by Lara O'Connor Hodgson

Lara O'Connor Hodgson is Co-Founder, President, and CEO of NOW Corporation, a B2B payments company. A serial entrepreneur, she co-founded Nourish (2009) after helping launch several high-profile, early-stage startups.