5 Mistakes Founders Make with their Boards—and How to Avoid Them
Accepting funding carries a set of new expectations and, for some knowing that your success as CEO hinges on your board’s approval can provoke ongoing anxiety, insecurity, and tension. Now a seasoned entrepreneur and SVP of Communications Products for Yahoo, Jeff Bonforte recalls that “when I was a young entrepreneur, board meetings were by far the worst days of my life.”
Because the board holds responsibility for steering your company in the right direction, it is empowered to judge your performance as CEO and terminate you based on your actions. Shikhar Ghosh, founder-CEO of 8 tech-based companies including Open Market and a professor of management practice at HBS, has witnessed common mistakes that many early-stage founders make with their boards.
5 Common Board-Related Mistakes
- Surprising the board by announcing critical information in meetings.
- Asking the board to solve your problems.
- Failing to utilize your board members’ unique strengths.
- Mistaking promises for reality.
- Assuming the funding will last indefinitely.
How to Avoid Making Mistakes with Your Board
In an environment riddled with volatility and uncertainty, the main thing that binds the board and the founder together is trust. Avoid making common mistakes with your board by following the tips Ghosh shares bellow.
Note: This is part of a series about boards of directors and advisors at startups.
Don’t Surprise Your Board
A big part of your job as founder-CEO is building and maintaining trust with your board. That means being completely open with them about both positive and negative developments. You must prove to the board that they can trust that you’re going to make the right decisions, act in their interest, and not embarrass them.
Waiting until a meeting to make a major announcement is a surefire way to alienate your board.
A board meeting should not be the place to reveal important news–even good news–for the first time. Amuleek Singh Bijral, founder and CEO of Chai Point, an Indian tea company and a café chain founded in Bangalore, India, in 2010, discovered this truth the hard way.
Enthusiastic about Chai Point’s mission of manufacturing and selling tea-based beverages, Eight Roads Ventures, Saama Capital, and DSG Consumer Partners funded a $10 million Series B round. The investors, who also held board seats, set a target that Chai Point would have 100 retail store openings. Singh knew the company had missed the target by approximately 25%.
But he had other exciting news, too. Chai Point had developed a cloud-based platform, SHARK, that could manage the entire operation including supply chain through retail sales, dispensers, and delivery.
Singh knew the pioneering technology could radically increase their market opportunity and in a board meeting, he announced the new technology. Although the tech could potentially dramatically increase Chai Point’s market opportunity and growth rate, focusing on technology completely changed the company’s direction. The board felt shocked and disrespected. They hadn’t invested in this model and interpreted the action as a change in Chai Point’s growth strategy.
Losing Your Board’s Trust Can Cost the CEO’s Job
Revealing such important news within the board meeting created tension between Singh and his board. That innocent mistake had the potential to destroy the board’s trust in him.
Your board represents you and translates your actions to a larger entity of investors who can ultimately decide your fate.
In most cases, the person who sits on your board is not an independent decision-maker, but they represent a fund. They believed in you and crafted a story to compel their partners to invest in you. Once you have funding, they must report on your progress according to that narrative. If you want to change the story, they expect—and are entitled—to know in advance.
In Singh’s case, things worked out. But statistics show that over 45% of the time, things don’t work out favorably and the board opts to replace the founder with a different CEO.
Don’t Ask the Board to Solve Your Problems
Want to rapidly undermine the board’s confidence in you? Walk into your board meeting, announce a problem and ask for advice.
“One of the biggest mistakes that inexperienced CEOs makes is they think ‘my board has so much more experience than I do. Let me put all my problems on the table and have them solve everything for me.’ But things don’t work like that.”
Shikhar Ghosh
Posing questions like, “what should I do?” within the meeting can be interpreted as weakness and suggests unprofessionalism. It sends a message that you don’t know how to solve the problems that a CEO should know how to solve. Asking the board to solve your problems within a board meeting causes them to quickly question your leadership abilities.
Your board expects you to demonstrate competence as CEO by presenting a problem and its possible solutions.
A well-structured, experienced board will listen, provide comments on your proposed solutions, and may pose thoughtful questions to help you see an alternative. Part of their job is to help develop your leadership acumen.
Does that mean that they expect you to know all the answers or that you shouldn’t consult the board for advice? No! It’s important to distinguish between your behavior in a board meeting and your actions with individual board members. That leads to the third biggest blunder that inexperienced CEOs make with their boards: failing to utilize board members’ individual strengths.
Don’t Forget That Board Members Have Unique Strengths and Perspectives
While you should not use board meetings to divulge new information or ask for solutions to problems, when you need strategic advice, you can—and should—approach individual board members. Ghosh advises, “cultivating relationships with individual board members works to your benefit and can safeguard you against being ousted, if things don’t go as planned.”
Ideally, investors chose the members of your board for a reason–each has acquired industry expertise and contacts. That means you don’t have to agonize over decisions alone. Bonforte points out, “as the CEO, you feel like it’s your job to carry the ball across the line, but it’s also the board’s job too.” Individual board members have acquired years of experience and, because they are not involved in the daily activities of your business, they can offer different and broader perspectives.
Board members are uniquely positioned to identify macro trends that could influence your business. A good board can help you find the right people, get traction, and raise the next round of financing.
Paul Arnold, angel investor and startup advisor at Switch Ventures, echoes the critical importance of developing a strong mentoring relationship with key members of your board and investors. He recommends, “The key to being a good mentee is being vulnerable. . . . Don’t be afraid of your investors.”
It’s your job to seek mentorship from individual board members. Be transparent with them about your needs and questions and communicate with them regularly. Developing mentoring relationships with individual board members can give you clarity and confidence, build the board’s trust in you, and help you master board meetings.
Don’t Mistake the Promise for Reality
Imagine you pitched that your company would grow from $10 to $100 million in revenue. Many young CEOs react by immediately trying to acquire what a $100 million company needs to operate. Ghosh notes, “you think, ‘I’m going to need this big office, to hire a ton of people, and I’m going to need a CFO who’s managed a $100 million company.’ There’s this pressure to acquire all of the things a $100 million company needs, so it looks as if you’re already there.”
Many inexperienced CEOS commit the mistake of conflating the act of raising capital with validation of their business plan.
If your board approves of the expenditures, it’s tempting to interpret that as validation that your plan is on track. But the reality is: you’re still a $10 million company. You haven’t yet worked through the uncertainty to know that you have a $100 million business. And the board expects you, as CEO to demonstrate financial wisdom and responsibility. Drawing on his decades of experience as a CEO, Ghosh shares,
“It’s easy to get distracted by the money and feel so strongly about your end goal that you develop tunnel vision and become inflexible. But the fact that people have given you money doesn’t mean that what you predicted to them is the future.”
Shikhar Ghosh
So, you still need to keep experimenting, learning from the market, and continuing to adapt. It’s important to remember that while the board provides guidance, as CEO, it’s your responsibility to budget enough to meet your milestones and make it to the next round.
This leads to the fifth common blunder that CEOs make with their boards: forgetting that the money is buying them time and that the board’s assessment at the end of each round is critical.
Don’t Forget that You Will Need to Raise More
Even if you’ve raised multi-millions, for most CEOs, a series of funding is finite. While the board approves a budget, don’t expect the board to act as a parent. It’s your responsibility to calculate how long a Series will last and to understand what milestones you need to hit to raise the next round. Then put plans in place at least for the first couple of cycles.
VCs have the most leverage to make a change in leadership when a company seeks a new financing round, a CEO’s performance and attitude are critical. While VCs customarily bring in new investors into subsequent rounds, Wasserman cautions that “when a company adds new investors, there will be a higher chance that the founder-CEO will be replaced.”
If your current VC does not invest in your next round, other investors will read this as a red flag. If your board isn’t happy with you, and their partners don’t invest in the next round, it’s highly likely they will replace you. During each round, investors take the opportunity to make demands that affect leadership. They investigate the founder-CEO’s past actions in light of the market and the company’s prospects.
If a company has the potential for explosive growth but is running low on cash and needs investment to continue, investors hold the advantage. At this stage, VCs can exert pressure on founders to step aside by making funding contingent upon the founder’s replacement with a professional CEO selected by the board.
In the eyes of board members, there’s almost nothing as bad as missing your first plan and then missing it a second time.
Because they wield so much power, working with a board provokes anxiety and tension for many founder-CEOs. But rather than seeing your board as a hostile entity or adversity to bear, remember: even if you disagree, your board was created to safeguard your company and its chance of survival.
Even the best founders cannot control the market or predict, with certainty, their company’s future. You will encounter unexpected issues and situations but your relationship with your board is one of the few factors you can shape to your advantage. Maximize your relationship with your board by recognizing and avoiding the 5 common blunders. Make your board an asset by building trust, maintaining regular, transparent communication, and getting to know members as individuals. The Secret to Cultivating Good Board Relations & Why All Founders Should Care provides practical tips for building a better relationship with your board.
EXPLORE MORE
In “The Secret to Making Board Meetings Suck Less,” Jeff Bonforte, SVP of Communications Products for Yahoo shares how, as a new CEO, knowing that your success depends on your board’s approval can provoke anxiety. He shares how he transformed his approach to board relations and leveraged the board’s expertise.
In “You Aren’t Getting the Most Out of Your Investors—This is How to Start” angel investor and startup advisor Paul Arnold summarizes that, while you shouldn’t expect your board to assist you with daily decisions, “they can be transformative when it comes to solving specific, discrete problems.” He created a checklist that he encourages founders to use monthly to assess where each board member can bring the most value in each area, including, “Make deals happen. Help build my team. Help us grow the right way. Coach me and give me guidance that is relevant right now.”
In “Founder-CEO Succession and the Paradox of Entrepreneurial Success” Noam Wasserman identifies that investors place a high value on two inflection points: 1) Completing product development and 2) Raising of a new round of financing. Many VCs embrace the idea that founder-CEOs who perform best in those early metrics—and are best suited to guide through the early stages—lack the skills to lead the company through rapid growth. Their success actually increases the need to replace them.”
