Designing the Ideal Board Meeting – Before the Meeting

All good board meetings start well before the meeting itself, so let’s start there for this series on board meetings.

Timing – how frequently should you meet? Most boards plan meetings a year at a time. That makes sense given busy schedules, but leads to the question of when and how often should a board meet. As a good rule of thumb, most startup boards meet quarterly (in fact, most boards of any kind meet about this frequently). This cadence feels appropriate for the level of work that’s involved in putting together board level materials and for a board to perform the appropriate level of governance. There was a time when it was typical for venture boards to meet monthly for a full board meeting, but this frequency – at least in our experience – was too much. Overly burdensome on a company and management and not a very effective or efficient use of everyone’s time. It also reinforced the idea that I touched on in my intro post that the board was an operating body, which it is most certainly now.

Communicating between meetings. Your board meeting shouldn’t be the only way you’re communicating with your board, of course. This varies from company to company but you should certainly be sending around monthly financials (with some discussion/overview thoughts). Many CEOs we work with send out semi-regular updates as well – typically in email format – to keep the board apprised of business operations. Some companies I work with also provide me either access to their management dashboard (KPIs that drive the business) or include me on a daily or weekly automated KPI email that gets sent to the senior team. Others feel that’s too much data and prefer not to. I had one company (since sold) that put me on their automated “won sales” email distribution list so I received an email every time a deal moved into the close/won category (although tbh, this got to be a bit much over time). How much you share of the day to day operations of your business is up to you. We’ll talk later about overall transparency and about not “managing” your board but the general idea between meetings is to generally keep your board apprised of the key things that are going on at the business so they’re better prepared to absorb the more detailed information you share with them for board meetings.

It’s also worth noting that some level of direct communication is helpful here as well. The cadence of that communication varies but you should be in touch with your board regularly so they feel connected to you and connected to your business. Some CEOs like this to be scheduled (a weekly call with their main investors or a regular breakfast or lunch with their board members) but it doesn’t have to be that rigid. And if you need the board’s time between meetings, ask for it. We have many companies that schedule a regular 1 hour operational update between their quarterly board meetings (not full board meetings and where no official board governance business takes place). But always when something comes up that the board should discuss together as a group, don’t be shy about asking for everyone to get together on a call or video.

Setting and communicating the board agenda. Plenty has been written about getting board materials out early and I’ll add my voice to that later in this series, but what’s often missed in these discussions is the importance of setting a board agenda in advance and communicating that agenda ahead of the board meeting and ahead of materials being sent out. This should be done 10 days to 2 weeks in advance of the board meeting. Lay out the agenda and be specific about what topic(s) you’d like to go deeper on with the board. Ask them if there’s anything they’d like to add to the agenda or if there are specific topics they’d like to be sure are covered. Much of the agenda remains the same from meeting to meeting but the meat of your board meeting should vary from meeting to meeting(my next post will include a lof of additional information on the creation of your board materials) . Setting this up in advance and making sure your board is aligned and has input into what key topics will be discussed is important. And should happen well in advance of the meeting.

To call or not to call. Some CEOs like to call each board member ahead of every board meeting. I hate this. For starters it can feel a bit forced and disingenuous. But really I don’t like it because it ends up evolving into a mini board meeting before the board meeting. I think CEOs like to do this because they’re following the “there shouldn’t be any surprises in a board meeting” advice (see below), but if you’re regularly communicating with your board that shouldn’t be an issue. And, importantly, by having a mini board meeting before the board meeting you also lose one of the most powerful benefits of getting everyone together in the first place – talking together as a group vs. getting one-off advice. It’s also pretty inefficient for you as a CEO. If you’re regularly communicating with your board there shouldn’t be a need for 1:1 calls with everyone before each meeting.

No surprises. The benefit of clear, regular communication and setting the agenda publicly and early is that board members shouldn’t be surprised about what’s going on at your business in the board meeting. It’s a cliche not to deliver completely new news in a board setting, but in this case the cliche exists for a reason. Surprising your board in the meeting isn’t an effective way to get good advice from your board. Of course, there are occasionally some issues that require company counsel to be present for the conversation (to preserve privilege) and can’t be specifically spelled out in an agenda or don’t lend themselves to detailed pre-meeting discussion or dissemination. These need items need to be treated differently and you may only be able to communicate that existence of an item that needs to be discussed at the meeting itself. But as a general rule, avoid surprises.

Coming up we’ll stay in the time period before board meetings and talk about the preparation and dissemination of board materials.

Designing the Ideal Board Meeting

This is the first of a multi-part series on Board Meetings. The question of what the ideal board meeting looks like comes up quite a bit in my world and I’m hoping to add my voice to the debate through a few posts (with what I hope will be clear and actionable advice). We’ll cover the creation of a board agenda, the board deck, pre-board communication, how to best run a board meeting, decision topics vs. discussion topics and post meeting follow-up, among other ideas in the coming weeks.

I hope that the reasoning behind designing a good board experience is obvious, but it’s worth stating that getting your board together is expensive. It’s expensive in terms of out of pocket costs – travel, hotels, etc. It’s expensive in terms of time – you and your management team’s time to prepare materials, organize your thoughts and prep for the meeting; your board’s time to prepare for, travel to, and attend your meeting; and everyone who supports that effort’s time to coordinate it all. Given all the costs to get your board together, planning and executing an effective board strategy is critically important.

The opportunity here isn’t just a governance and reporting one – which is how too many companies approach their board work. It’s a chance to constructively and methodically gather your thoughts about your business, get feedback from people not as close to the day-to-day operations of the company as you are, and get feedback on (or in some cases make) key tactical and strategic decisions.

It’s important to remind yourself that a board doesn’t operate your business. You and your management team do that. In fact, we’ll talk in a later post in this series about the mistake many companies make in essentially running too many decisions through their board as a decision making entity and how to best leverage the expertise of your board without outsourcing the management of your business to them. It’s also important to remember that board work isn’t a discrete set of actions that happen only when a board physically gets together. It’s ongoing oversight and help for your business that’s punctuated by those meetings but that actually takes place on an ongoing, rolling basis.

So with that as the preface, let’s jump in….


When asked recently if I could describe the attribute that is most important to becoming a successful entrepreneur the word that came to mind was “resilience”. I don’t hear it talked about much in the context of entrepreneurship, but I think it perfectly captures the combination of the ability to bounce back from the adversity, challenge and failure that goes hand in hand with being an entrepreneur while at the same time recognizing and learning from your mistakes. The best entrepreneurs we work with have an uncanny ability to face challenges head on, recognize where they’ve made mistakes, learn from them and move on. That last part is critical – dwelling on your prior mistakes serves no one, slows you down and makes you less likely to trust your future decisions. Great entrepreneurs learn, bounce back and then go on to the next thing.

One parting thought: the truly outstanding entrepreneurs aren’t just resilient themselves, but instill resiliency throughout their organization. It’s one thing for you to move on, it’s entirely another for you to develop a culture in your business where everyone does.

What’s a Fair 409A Discount?

Quick note: I’m not your lawyer. I’m not giving legal advice in this post.

Back in the olden days of venture capital, company boards had wide discretion in pricing company options. As is true today, there was a requirement that options be priced at or above the “fair market value” of the underlying stock (otherwise there would be tax consequences to the optionee and sometimes to the company as well). However the board could determine what that fair market value was and, generally speaking, there wasn’t a practical way that these valuations could be challenged. Most boards did some level of work to determine the FMV of a company’s stock but generally options were priced between 10% and 15% of a company’s then preferred price (because common equity sits behind preferred equity there is typically a discount applied to the FMV of common stock to account for this “overhang”). It was and is imprecise science but – at least in the case of venture backed startups – there wasn’t much harm in an option being priced low. It was a benefit to employees and a slight value transfer from equity holders to option holders (generally speaking in M&A transactions the value of the aggregate option exercise ends up allocated across the rest of the cap table). In a funny way it also benefitted the IRS in terms of tax collections as employees were taxed on the spread between the option and the value of the stock on exit and since these shares were typically exercised at the time of an exit were subject to short term capital gains. Higher strike prices distributes proceeds away from short term gain tax to equity holders who more typically are paying long term gains on the value that was shifted (I’m skipping a huge amount of nuance and detail here but the above is a general representation of how things work).

This all changed on January 1, 2005 when the IRS proposed new rules for the treatment of deferred compensation, including employee stock options (here’s the initial announcement; the code section was finalized in April 2007 – side note, there was a ridiculous interim period when the rules had been proposed but were incomplete and subject to final comment and approval; during that time companies were still expected to comply with the new rules, however the IRS conveniently only gave us until 12/31/05 – almost 18 months before the rules were finalized – to get it all right). Code Section 409A covered a lot of ground related to deferred compensation (and was generally thought to be the result of some of Enron’s business practices, although I think the IRS had in mind a number of different ways companies were structuring deferred comp arrangements that they felt underpriced the market and therefore resulted in immediate – but untaxed – gain to employees).

For startups it meant that for all practical purposes companies would have to hire an outside valuation firm to conduct a 3rd party, arm’s length analysis of the fair market value of a company’s common stock (boards were still free to make their own determination but doing so involved risks that effectively all professional investors determined were too great to take on). Over night a cottage industry was created to conduct these valuations. At the time, the cost of each of these valuations ran between $10,000 and $15,000 annually for each company. These costs have come down a lot since then, and the rules have been tweaked a bit but the overall 409A framework still is as it was when originally adopted – companies must hire a 3rd party to value their stock each year. These reports are generally quite lengthy and not always particularly comprehensible to non-finance professionals. So the rule of thumb is still to consider the FMV of common as a % of the preferred price – at least as a sanity check to the larger valuation exercise.

So what should this discount be? I thought it would be worth taking a look at the data across the Foundry portfolio. A number of factors go into the calculation and I assumed that the FMV of common as a % of preferred would vary both by company stage and by the time between the valuation and the last financing round. Specifically I assumed that the longer period of time between a financing and the valuation, the less the gap would be between preferred and common. Similarly I assumed that later stage companies would also show a smaller gap. I was wrong. From the data we collected, there was relatively little variance between company stage or time to last financing and 409A discount to common. There’s a little noise in a few spots in the data (due to small numbers of samples in certain categories) but the numbers were pretty concentrated around the average of 36% of the last preferred round no matter how you slice it. So 30%-40% is the range. Interesting…

Different vs. More

I’ve had this conversation with a number of founders recently and thought I’d post something here about it in the hopes that others see it/resonate with it as well.

In the world of startups we often talk about “more”. More funding. More sales. More efficiency. More. More. More. And, of course, there are plenty of times when “more” is appropriate. When something is working, and working efficiently, doing more of it is often the right call.

That said, often times “more” isn’t the right answer at all. And focusing on it obscures the need for the real answer: “different”. This should be intuitive but in my experience often gets missed (either in its entirety or at least in part) as companies scale. Just ask any CEO who has scaled a business from 50 to 100 people (or from 100 to 200 people; etc, etc).

At 50 people all you’re thinking about is how can you do more of the things that are working. This myopic focus after all is likely an important part of the success that got you from 1 to 50 people in the first place. But that’s actually not how scale works at a business – especially in the growth phases. From there you need to consider a cycle of change that fluctuates between doing things differently – then doing more of it – then doing things differently again. This might mean reorganizing key functional areas of your business. It might mean bringing in more senior managers in a few key departments. It may involve shifting around where certain functions report up to. It might mean rethinking a product strategy or changing product tiering or pricing. It almost certainly means rethinking as a business leader how you function as a manager.

Successful businesses, in my experience, are continually looking for ways to rethink how they operate and aren’t afraid to make meaningful changes – even to things that appear to be working – with an eye towards how “different” can actually be of greater impact than “more”.

How to Build a Better Network

A few notes before I jump into this. First, I realized in running through several drafts of this post that it can be hard to talk about networking without coming across as a bit cold or transactional in how one approaches relationships. I hope the note below doesn’t come off that way – my aim was to talk about something that I really care deeply about and offer some ideas for how to strengthen and deepen the working relationships in your life. Secondly, I’d like to thank Patrick (who I reference below) for his review and feedback of several drafts of this post – it was very much appreciated (and needed).

While we live in a hyper-connected world, how deep do those connections really run? And how do we better cultivate those relationships? It’s easy to pay lip service to our networks, but for me and for many of the readers of this blog our networks – the relationships we maintain with our peers and our contacts – are central to our lives (and here I’m purposely blurring the lines between business and personal, as many of the relationships we maintain do the same). I’m deliberate about how I maintain these relationships and wanted to share some thoughts/ideas on how to better maintain one’s network. I’d like to give credit here to Patrick from MindMaven, who helped me hone these skills and who has been a voice in my ear for the past year keeping me honest about making sure I care and tend to my network.

Make relationship building a priority. I’m often thinking about ways to be more connected to people in ways that are both authentic and meaningful. Relationship building is important to me and rather than let it happen by accident I regularly look for ways to deepen the relationships I have with friends and colleagues. The point I’m making is that being authentic and meaningful doesn’t always have to equate to a lot of work and effort. I actually believe that many people fear the effort they avoid it completely (I’d actually say that most people do). However there are ways in which you can deliver authentic and meaningful experiences to your network that do not cost you too much time and effort.

By making relationship building a priority you will develop habits around it. For example, one important habit I’ve developed is not letting things pass me by that are clear and obvious touch-points with someone I care about. I’ve found that a simple “saw this article about your company and it made me think of you” or “saw your quote here and I found it really insightful” or “saw this on Twitter and thought I’d share it with you” is extremely powerful. Plus it’s authentic. When I see someone I know has raised money, or been featured somewhere, it makes me happy. But instead of letting that thought pass, I take a minute to write a quick email to tell them that. The key here is to not let the moment pass or try to remember to do it later – when you are in the moment, the likelihood of actually doing it is much higher. At the time you see something that reminds you of someone, take 30 seconds and tell them that. It doesn’t take much time to send that message but it shows that you genuinely care about the relationship. The reason why this is so powerful is that it creates interactions that are relevant but where you are not asking for anything. It separates you from the transactional nature of asking for a favor from someone you haven’t talked to in a while. Investing in relationships on an ongoing basis create stronger bonds and if there does come a time when you’re asking something of someone in your network it feels more natural and less transactional.

Tools to help. At the end of the day, tools help but don’t take the place of actual work. In the tech industry we often try to rely on tools as the solution to our challenges when we identify a problem. That is rarely the right answer. Better is to figure out the habits we need to establish and use tools to reinforce or take friction out of those habits. With that as an important preamble to this section, I have found many tools that help me do that…Organizing this activity is important – there’s so much information flowing at each of us, it’s easy to miss stuff. Developing a tool-set to support your networking and engagement work doesn’t have to be particularly complicated  – for me it’s Tweetdeck to manage various groups on twitter; Feedly to manage the blogs I read; Accompany to help track news mentions of people in my network; and Contactually, which I describe in more detail below, to organize my network and keep track of who I’m connecting with. They all help me stay on top of what’s going on and allow me to gather data on my network to I don’t have to search out news and updates – those updates come to me.

A personal touch matters. I have terrible handwriting so this doesn’t come easy to me, but I have nice card stock that has my name on it with envelopes with a printed return address and I regularly use this to send notes out to people I’ve met with or who have helped me out in some way. A trick I’ve found is to use a sharpie – it slows me down and forces me to write more clearly (not my strong suit, as I said). The note doesn’t have to be a long one – the point is that I’m taking the time to write something personal, address and stamp it. Emails are great, but I don’t like to miss the chance to send someone a personal note of thanks.

Know your network. Being proactive about your network doesn’t happen by accident but it also doesn’t happen if you’re not deliberate about who is in your network in the first place. Most of us manage this in our heads, which is a mistake. I’ve played around with a few different tools for this and the one I rely the most on is Contactually. This platform integrates with my email and allows me to track how often I’m interacting with my network (over email and twitter at least) and, most importantly, set reminders and goals for how often I want to connect with people in different parts of my network. I’m not a slave to Contactually – I don’t reach out to people for no reason just because Contactually tells me it’s been too long, for example – but I do use it to make sure that I know how frequently I’m interacting with people in my network and to set reminders for myself to stay on top of my contacts.

Ultimately all of this comes down to care and feeding. Your network is in some ways a living, breathing organism. Yet most of us treat it like it’s static and exists when and as we need it. But networks need work and you’ll find you get out of them what you put into them.

What’s The Optimal Portfolio Strategy for a Venture Fund?

Last year I wrote a few posts (here and here) that talked about how skewed venture returns were. The key take-away graphic from that post is below – outsized returns on venture investments are rare. Much rarer than most people realize.

A key question my post didn’t consider was what the ideal venture portfolio might look like in the face of these data. 

Steve Crossan took a stab at modeling the answer to that question using the data from my Outcomes post. It’s an interesting read – you can see his full analysis here. Interestingly, we pondered this exact question at the very start of Foundry Group. Nassim Taleb’s book, The Black Swan had just come out and we decided to read the book and discuss its implications for the venture firm we were about to start in late 2006. I imagine many of you have read the book (if not, I’d highly recommend it) – the basic premise is that humans do a poor job of understanding the likelihood of unusual or improbable events.Black swans are rare but just because you’ve personally never seen one doesn’t mean they don’t exist. Compounding this error, humans are also poor at understanding the causes of these unlikely events after they take place (we misattribute their causes and as a result continue to make poor judgements about their likelihood of reoccurrence).

The robust dinner conversation we had back in 2006 essentially asked the question: “If venture outcomes are Black Swans, what does the optimal venture portfolio construction look like?” Steve asked a similar question in his analysis, which tries to use a simulation model (actually thousands of them) to construct hypothetical portfolios to see what the resulting returns look like. We obviously didn’t have the benefit of the data that my original Outcomes post relied on, but having already been in the venture industry for a while we knew that venture outcomes were relatively rare. In the end, we came to some similar conclusions as Steve did on one end of the portfolio construction scale but our views diverge as the portfolio size gets larger – more on that below.

It’s clear from the data (and from common sense) that every venture firm needs to place enough bets to expose themselves to outsized successful companies. With a small number of investments your chance of a winner is too small and your bets are too concentrated. That’s true no matter the size fund you’re investing (I’m referring to early stage funds here but a version of this is true even for larger, later stage funds; although a higher level of  concentration in later stage funds is actually helpful). This is similar to the advice I give to angel investors as well. Diversification is clearly important in venture investing – you can see that from in the graph below from the steep slope on the left side of the graph (which shows on average very poor return multiples for funds that have a small number of portfolio companies).

But is too much diversification a bad thing? Here’s where I think math fails practical reality. Given the rarity of outsized returns (the data from my original post surprised many) a purely theoretical model such as the one Steve ran suggests that the optimal strategy to exposure yourself to outsized outcomes almost has no cap on the number of companies one should invest in (again see the 2nd graph – the slope flattens, but still rising, as the number of companies increases). I think we intuitively understood this back in 2006 and the cruz of our debate centered around just how diversified should a portfolio like ours be. On the one hand there is clearly some benefit to being exposed to a large number of companies. On the other hand it’s not practical to manage that many relationships and we believed there was benefit to knowing which businesses to continue to support and which ones not to. Additionally there is benefit to concentrating ownership in your best performing portfolio companies – something a firm can’t do if it’s spread too thin. It’s a discussion we continued to have throughout the history of Foundry, in our case settling on ~ 30 companies per fund (each of our early stage funds is $232M in size). We felt like that struck the right balance of capacity, ability to concentrate ownership, ability to continue to back “winners” and, frankly, the kind of relationships we wanted to have with our portfolio.

That said, I imagine there’s an argument to be made that 30 is still too concentrated for a fund of our size – we debated this vigorously back in 2006 and still talk about optimal portfolio construction regularly. Certainly there are examples of funds like ours that invest in more (or in some cases far more) companies than we do (FirstRound Capital comes to mind as does True Ventures). And, of course, there are many examples of similarly sized funds that have the same or even greater concentration than our model. I’d also note that the earlier stage a fund invests the less concentrated I think it should be – the earlier the investment the larger the distribution of outcomes. And similarly, the smaller a fund is the less concentrated it should be as well – lacking the ability to continue to invest across rounds (and therefore to meaningfully concentrate ownership in clear winners) the more diversified the initial investment set should be.

As a student of venture math, I love these sorts of questions. I’m sure we’ll be debating them for years and years to come.


You May Have Too Many VCs On Your Board

Those that have followed my blog for any period of time know that I love the data that my friends at Correlation Ventures gather and write about (for example the data behind my post Venture Outcomes are Even More Skewed Than You Think or IPO or M&A). Today they released some data on the correlation between the number of venture board members around the boardroom table and the success of venture funded businesses which I thought was pretty illuminating and which confirmed a long held suspicion of mine.

I haven’t counted exactly but I’ve been on dozens and dozens of venture funded boards in the almost 20 years I’ve been a venture investor. Some have been fantastic. Some have been dysfunctional. Most have been somewhere in between. I’ve had the experience of being the sole venture board member. I’ve also been on boards as large as 15 or more when you include not just the board members but also the board observers, associates and others that regularly attend board meetings. I’ve often wondered what the optimal number of venture board members is and have regularly cautioned CEOs and founders against adding too many; and especially adding too many too early in the life of a company.

Today, Correlation answered this question empirically in a fantastic analysis that plots the correlation between the number of VC board members and the ultimate success of a business. They’ve controlled for factors beyond this variable and from their analysis we can draw pretty clear conclusions about how many board members is too many.

There’s plenty to talk about here, but the shape of the graph pretty much tells the story. There’s value to having VCs on your board. In fact, there’s value (or at least a correlation with success) to having multiple VCs on your board. But this value diminishes – and does so rapidly – as you add too many. This certainly matches to my experience. It’s almost always helpful to have a few experienced investment voices around the table. But having too many becomes hard to manage and leads not just to conflicting advice, but I’d suspect to CEOs and management teams spending too much of their time on board management and not enough on the business itself. It’s important to note here that the skew on the right tail of this graph was not due to investment stage (which was my first thought when I saw the graph) – Correlation controlled for that, as well as sector, time period, etc. and found that the correlation holds – companies with more than 3 investor board members performed worse than those with 3 or fewer.

I think it’s important to point out here that, at least in my experience, that having too many VCs around the table is bad for companies even if those VCs are good, helpful, competent people. I say this not just for the benefit of my peers who are reading this and with whom I sit on a board with more than 3 venture investors. I say it because I’m trying to emphasize that different board members bring different skill sets to a company and a board. And while VCs certainly come from many different backgrounds, I think the real issue here is that their skill set and points of view are over quite overlapping. They also tend to have a very loud voice in a board room because, despite being fiduciaries of all shareholders, they also represent typically the largest owners (and funders) of a business. Better boards are more diversified. Actually I said that backwards – more diversified boards are better boards. The research clearly shows this. This is true across all types of diversity (background, experience, gender, race, etc.) and ultimately having too much of a concentration of VCs on your board is a type of lack of diversity that creates poor boardroom dynamics and negatively effects businesses.

Now you have the data. It may be time to have some hard conversations with your investors…