Startup Boards. Brad Feld
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as successful as Reid Hoffman as executive chair. Reid co-founded LinkedIn and is also a partner at the VC firm Greylock, a significant investor in LinkedIn before Microsoft acquired it. Here, Reid explains how he approaches the role of executive chair (which officially was “Executive Chairman” while he was at LinkedIn).
A few years after I co-founded LinkedIn in 2003, I decided to shift my role from CEO to executive chairman. While there are a relatively clear-cut set of roles and responsibilities attached to the CEO's job, an executive chairman at company X may play a much different role than the executive chair at company Y. It's a nebulous job title and depends on the company in question and the person filling the role.
I made the shift because LinkedIn was in a state of transition, shifting from a startup to a growth-stage company. I love articulating a product vision and other facets of early-stage entrepreneurship, but I'm less interested in organization building, international expansion, and developing scalable business processes. Becoming executive chairman allowed me to continue playing a highly active role at LinkedIn regarding strategy and several key projects while handing off the operations to the CEO.
Jeff Weiner became CEO in 2009, and, while I remained extremely involved at LinkedIn, the division of responsibilities between us was extremely clear. The buck stopped with Jeff. If Jeff made a decision, that decision was made. Period. While I tried to offer Jeff honest and candid advice and even challenged him, he had operational control over the company. Jeff worked for the company, not for the executive chairman or the board, although the board could choose to replace him.
Trust is the critical factor in an executive chairman and CEO relationship. Neither works explicitly for the other, and no one reported to me. I was careful never to override the organizational chain of command.
My most important job as executive chairman was helping Jeff do the best job possible. Sometimes this meant helping recruit and retain great people. Sometimes this meant helping launch an international expansion or a new product. It always meant being a great partner to Jeff and the entire executive team so that we could advance our vision of bringing economic opportunity to every professional in the global workforce with our thousands of LinkedIn colleagues around the world.
Reid Hoffman, Greylock Partner, LinkedIn Founder, and Executive Chairman until the sale to Microsoft
Should You Be Chair of Your Board?
Until the Enron scandal and the ensuing Sarbanes-Oxley legislation in the early 2000s, almost all US-based CEOs were board chairs of their company. Today, 75% of public companies in the United States are still set up that way, although there is a growing movement to separate CEO and chair roles. There are good reasons for that, with larger, public companies and private companies with long and checkered pasts rife with governance issues. It's also common for nonprofits and associations with different stakeholder structures to separate the CEO and board chair roles. However, in closely held private companies, it probably doesn't matter much.
If your board or a major investor insists on someone else being chair, you can always push back and suggest appointing a “lead independent director” instead. If you are a CEO at this type of company, having a lead director or not being the board's chair primarily means two things:
1 You still run the meetings and write all the materials since you run the business.
2 You have one person to consult with on the meeting agenda and the materials ahead of time.
Matt (the founder/entrepreneur) prefers combining the CEO and chair role as the overall leader of the company for a private company, but he can see both arguments. In contrast, while Brad (the VC) is fine with the combined CEO/chair role, he prefers a CEO + lead director role in private companies, especially at later stages.
Independent Board Members
Most board members in a startup represent either the investors or the founders. An independent board member represents neither group. Optimally, an independent board member will be unbiased and ultimately concerned about the company and its shareholders and stakeholders rather than the specific interests of an investor or a founder. The composition of a startup board is often specified in the company's governing documents to create a balance between investors and founders with at least one independent board member.
Data show that in venture-backed companies, board control is typically split between investors and founders more than 60% of the time, with an independent third-party director holding the tie-breaking vote.1 If the independent director is well respected and has the trust of both the investor and founder board members, they can often act as a mediator or voice of reason when conflict arises. Jocelyn Mangan, whom you met in the Foreword, says, “One of the worst things in a company or a board is groupthink. In a world where a board needs to see around corners and make tough decisions, the voices in the conversation must come from different experiences. When the board is a founder and only investors, adding independent directors offers the opportunity to round out the conversation with the unique perspective of an operator, which in many cases is even more relevant than the heavily weighted financial perspective.”
Founders and investors should invest the time and effort to identify the right independent board members and bring them in as quickly as possible. Unfortunately, this effort is frequently deferred, often to the company's detriment. While financing documents often provide for an independent director as part of the board, this seat is often left empty due to the excitement of the new investment, the pressure to get the product out, the intensity of the work of scaling the company, or the lack of appreciation of the value of an outside director.
Board Observers
Many boards have board observers who have the right to sit in, observe, and participate in portions of the board meeting but don't have formal board roles or responsibilities. Observers don't get to vote on board matters, and are often VCs or co-founders of the company.
To limit the size of a board, many companies grant observer seats to investors. In other cases, strategic investors get observer rights instead of actual board seats to limit their control. Some strategic investors prefer board observer status, as it minimizes any liabilities their corporation may face due to actions of the board and individual board members.
VC partners who want a junior member of their firm to participate in board meetings often also ask for an observer right in addition to a board seat. In the best case, these junior members of the firm don't show up without the VC board member partner and never end up being a “proxy board member” for the actual board member. Instead, they're observers. They listen to what is going on, help support their VC partner when appropriate, and only weigh into the discussion when they have something significant from their experience to add.
Early in the life of a company, more than one founder may be on the board. As the board grows, the number of founders on the board is often reduced. While there can be a founder seat and a CEO seat, the CEO may no longer be a founder or additional founders may have observer rights.
Observers don't have a right to be in the board's executive session or closed session. Observers will respect this, but it can be taken to a ridiculous level, where there are essentially two separate board meetings. With the observers in attendance, the first one ends up being a high-level reporting session. The actual board meeting follows this, attended only by board members, where the material is again reviewed, but this time with substantive discussion. If you're going to give someone an observer seat, you should expect that they'll be in all but the most sensitive conversations.
While an entrepreneur may think they are managing the size of their board through using observer rights, we've sat in boardrooms with 20 people or more, where only five of them were board members. We've experienced VC firms who use their observer rights to “bring power to the board meeting.” Instead of one board seat, the observer seat is used to effectively have two board members. And we've been in situations