The Bad Board Member

Over the last 40 years the U.S. has evolved an entrepreneurial ecosystem with two of the most unlikely partners – venture capital investors and technology entrepreneurs. This alliance has led to an explosion of technology innovation, scalable startups and job creation.

Tied at the hip, VC’s and entrepreneurs take large risks together. VC’s invest in startups with minimal tangible assets and no certainty about the product’s viability, market size or customer adoption. Entrepreneurs face all that, and add one more risk to their list: the bad board member.

The Bad Board Member
I had coffee last week with one of my ex students. 30 months ago he raised a Series A venture round from two name brand Silicon Valley VC firms. It was early in the day, but he looked tired. “I need some advice about my board. I get along great with one of the VC’s, but the other one, Bob, is making my life miserable. Nothing I do is right in his eyes.” He looked pained as he continued. “We never had any personal chemistry, and it’s gotten so bad in the last six months, our board meetings are just hell. They consist of Bob beating me up regardless of whether the results are good or bad. I can’t tell if he’s trying to get me to quit, fire me and bring on a new CEO or is just a miserable human being.”

My antenna went up when I heard that Bob was his board member because the senior partner who led the investment said he was too busy to take another board seat (and right after the closing had assigned Bob to take the seat for his firm.)

Uh oh, I thought. I lived through this one. Admittedly, my ex student was quirky, bordering on eccentric, but he had a long and successful track record in Silicon Valley delivering complex products before he went back to get his MBA. He was a great engineering manager and recruited, hired and inspired a world-class team. This was his first CEO job. He said that Bob described him to others on the board as the “crazy aunt you hide in the closet when the guests come.”

We went through the status of the company, and at least from the outside it sounded good. In fact it sounded great: three major versions of the product shipped, multiple iterations and a few pivots under their belt, revenue was growing even faster than plan.

“Well you just need to talk to your other board members and ask for their counsel,” I offered.  “I did! I’ve talked to the other VC and he told me it’s a problem that I just need to work out with Bob.“ Hmm, this wasn’t sounding good. “Why don’t you go back to the partner who led the deal and ask for his advice?”

The look on his face told me I knew what the answer would be. “Why do you think I’m having breakfast with you?  I did just that, and do you know what he said?” I sat there thinking I knew exactly what the senior VC said because I had heard it myself when I was an entrepreneur. “The senior partner at the firm said he wasn’t going to get involved in “chemistry” issues.” Sounding both sad and frustrated he said, “What do I do now? I built a great company, and I think I’m being set up to be fired.”

The VC Lemon Law
Every Venture Capitalist I’ve heard talk about founder/board member problems treats them like they only happen in other funds. “Great VC’s in brand name firms don’t have these problems” is the line I hear.

The venture capital industry is in denial.

The problem is as bad in large brand name funds as in the smaller firms. While most board problems arise from founder performance issues, naiveté or disagreements about strategy, a number are created by bad behavior on the part of a board member. Yet while a VC can remove a founder who misbehaves, there is no corresponding recourse when a VC is the source of the problem.

Astonishingly, there’s no professional standards in the venture capital industry that acknowledges this problem even exists. Not only does the industry lack a code of conduct, but individual venture firms lack avenues for founders/CEOs to bring these problems to light. There’s no ombudsman or 3rd party in a firm to hear an objective review, and no remedy to deal with a partner’s bad behavior. (And why would there be if the problems are only with the founders.)

The rationale seems to be rooted in both tradition and math. Like doctors VC’s tend to bury their mistakes. If a partner screws up a single company in a portfolio it’s not the end of the world since they have 20-30 companies in a fund.  If a single partner has a consistently terrible track record, he or she just won’t be invited into the next fund.  But in the meantime this bad board member has left a trail of broken companies. When it comes time to understand individual partner performance, information asymmetry is at play – like bad doctors, knowledge about a partner’s performance is limited—and entrepreneurs rarely have a say in the matter even if they do have some knowledge.

Finally, there’s more than a whiff of noblesse oblige at play. If firms believe that VC’s always act responsibly and the problems are always with the founders, they don’t need to worry about bad board member behavior. They can continue to pretend it never occurs.

The reality is that the VC business has expanded from the clubby group of 20 or so firms that sat on Sand Hill Road 40 years ago into an industry of ~400.  My hope is that they realize that with that expansion comes a different set of responsibilities.

Lessons Learned

  • Most Entrepreneur/VC clashes arise from founder performance issues
  • Infrequently the cause is bad behavior from a board member
  • Currently founders have no recourse
  • After 40 years of growth the VC industry still operates with “small club” rules and mindset

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29 Responses

  1. A portfolio company has to, unfortunately, take into account the internal dynamics of a VC firm. You can get an idea of what to expect in a firm from thefunded.com

  2. So in the end there’s no solution…other than stand still or leave your company

  3. You kind of left us hanging without the end of the story there. Or if it hasn’t ended yet, at least tell us: what should the CEO’s next step be?

  4. I find the conclusion “Currently founders have no recourse” rather surprising, because certainly Bob doesn’t have ALL of the power. It’s not (much of) a board if the membership is just the CEO and Bob.

    How do the other board members feel about Bob? Can they be turned against him? It’s not Bob’s bark one needs to worry about — it’s his bite.

    Also, how much longer until the VC’s exit strategy comes into play? That as much as anything may explain Bob’s behavior. It may suffice to hold down the job until the sale.

  5. Well, at least thefunded.com is there to help :-/

  6. I’m with Ken on this. Your student needs to rally support of other board members privately, and then address it head on in the next board meeting. How does this board member’s behavior serve the company?

    He has the numbers on his side–he should be confident in his performance and stand up to this guy.

  7. Fire him. Being a CEO/Leader is about doing the “right thing”. If the current Board member is causing issues that are interfering with the execution of the companies plans (by undermining the CEO) then fire him. The CEO has a fiduciary responsibility to the shareholders – the “Bad Board Member” has the same but is undermining that value therefore he needs to go.

    Your entrepreneur now needs to “grow” another level. Either he can or he’ll be gone.

    I’ve been in this exact situation and I “left” – just as they wanted. That was my mistake by not leading. It hasn’t happened again.

    • I agree 100%. The recourse is to negotiate the right terms. In my case I did the opposite. I had negotiated very very hard and all along knew I had what we called the “nuclear option. The investors were apparently too full of themselves to realize this until it hit the fan. So when it became obvious I pulled the lever. I fired a board member to regain majority control, then went on to put my co-founder on the board and the guy who cut me the 1st 20k check (also an entrepreneur). Unfortunately it was end of 2008 and the reasons the investors were going bzerk was the same all other investors went bzerk and we could not raise more funds…

      • I would be interested in understanding how the “nuclear option” was codified in the company’s official documents. Please email me at: pm24601 (at) yahoo (period ) com if you can!

        In my mind a “yesman” Board member is just as bad as “Bob” is. I would like to be able to remove a Board Member who brings no value to the meeting. A director who says nothing but spends his time checking his Blackberry is should be removed.

        So I would love to hear about how you retained this removal power.

  8. I think the real question is whether or not an entrepreneur can remove a board member from invested VC firm.

    Would the VC firm agree to that? (no board seat for my money, no way, etc..) Return the money? (if possible, you still have to look into the effect of this VC can badmouth you to others; VCs work very much as a group)

    The only other possible option, I think, is to make him quit your board voluntarily… Consult the “Art of War” book for tactics.

    • I like the idea of giving their money back because even if the VC bad mouths you after this it’s unlikely to have the desired effect. When you hear that an entrepreneur gave back money (especially money that they needed) rather than deal with that board member, it speaks more to the integrity of the entrepreneur and can overwhelm any negative comments from that VC.

  9. I wonder if this bad board member has an ulterior motive, or is just generally a verbal abuser. If it’s the latter, one of Suzette Haden Elgin’s books on dealing with verbal abusers (‘The Gentle art of verbal self defence’ series) will be of use (and will also help identify if this is the problem).

  10. Hope a successful resolution is found. Like that you point out the industry issue but a bit downer that the guy remains stuck.

    Also appretiate the link to NVCA.org. Helpful thank you.

  11. Say the 400 venture firms is more like 794 per the NVCA 2010 Yearbook I just downloaded from the link you provided from the directory of venture firms which show about 400.

  12. Call him on in front of everybody and push back. You are a man, don’t let some chump bully you.

  13. I think your founder is in trouble. The senior partner’s attitude is not surprising. As you mention, there seems to be a code that partners should dip their nose into other partner’s investments (lest their partners do the same to them).

    My creative idea to solve the problem is two-fold: VCs should do more two-in-a-box work where at least intermittently there is a shadow partner who keeps an eye on the company, watches board meetings, etc.

    In addition, if they were really gutsy, the partnerships would solicit performance feedback from the portfolio company CEOs on how their partners are doing as board members.

  14. I am a CEO who has experienced the bad board member – twice. The first time I toughed it out. Poor choice. The abusive board member was a distraction. The second time a bad board members was in the mix, I insisted he be removed. I made my case to the BoD with the bad board member present. Using specific examples, I was able to show that he was creating heat and not light. The bad guy was removed.

    All this to say, you can solve the problem. Use your power as a CEO (its greater than you think) and summon the courage to directly confront the problem.

  15. I would suggest he call out the board member, if he is meeting the boards objectives then he is fine. He should shame the board member at the board meeting and ask the board member to resign.

  16. [...] The Bad Board Member Over the last 40 years the U.S. has evolved an entrepreneurial ecosystem with two of the most unlikely partners – [...] [...]

  17. +1 for fire him. Especially when he is being a pain in a board meeting and you are sharing good news. If you have some other better board candidates it might make it even smooth. Bob might even like it since it doesn’t seem like he is enjoying his job anyways.

  18. I say go straight to the partner who did the deal, complain but with constructive examples, maybe do it twice. Then conclude after a couple rounds by saying that that Bob is representing the firm poorly, you won’t put up with it on what you’re trying to build as a high quality board, you are happy to find an outsider to represent the firm, and if they don’t agree, you’re going to keep complaining (more and more publicly) until they’re sick of hearing it. VCs need (and are entitled to) feedback and consequences as much as anyone else. And they will respond if they want to preserve their own reputation.

  19. The problem with VCs is that as their name suggests, they are indeed capitalistic minded people who only care about revenue streams inwards. Thus, once the start-up gets off the ground, their next move is to replace the founding CEO with one who takes their orders rather than the founding one who has a part in the making of the history. I think the founding board should be the one that has a set-term to oversee the startup, like, say cannot be there for longer than the period the startup has successfully repaid its dues. In fact, there has to be some mechanism of ensuring that the founding CEO is protected, may be through some piece of legislation or institutional mandate, because if he/she underperforms he/she gets fired, so if his/her performance is above par why the hell is the board in conflict with him/her.

  20. Let’s get real. He’s done. He has no recourse. Its tragic. And it happens all the time.

    The truth is that VC’s and CEO/founders do not have an alignment of interests and almost every VC backed company I know has a dysfunctional Board from the CEO’s standpoint. It’s and old an untold story. Welcome to Silicon Valley.

  21. [...] Steve Blank has a post about a problem an entrepreneur is having with a bad board member: I had coffee last week with one of my ex students. 30 months ago he raised a Series A venture round from two name brand Silicon Valley VC firms. It was early in the day, but he looked tired. “I need some advice about my board. I get along great with one of the VC’s, but the other one, Bob, is making my life miserable. Nothing I do is right in his eyes.” He looked pained as he continued. “We never had any personal chemistry, and it’s gotten so bad in the last six months, our board meetings are just hell. They consist of Bob beating me up regardless of whether the results are good or bad. I can’t tell if he’s trying to get me to quit, fire me and bring on a new CEO or is just a miserable human being.” [...]

  22. I was at an Orrick event recently on how to effectively work with the board where this issue came up.

    As I recall, the suggestion was to ask the VC to initiate a smooth transition to replace the unproductive director by asking them to start sending a second representative to meetings.

    It may also be beneficial to increase the volume of communications to the entire board. “At our next meeting, we will be discussing this matter. Please familiarize yourself with it.” Institute a layer of formality at meetings with an explicit agenda and quash off-topic discussions.

    Since the CEO’s performance is OK, then there is some other reason for this behavior. Take away the saboteur’s weapons by making everything extremely transparent. You can’t dig up dirt from a block of ice.

    The goal is to make it obvious to other members that there is no reasonable explanation for this behavior.

  23. I’ve repeatedly found problems with weak or aggressive Board members in companies I’ve built. I’ve learned to be just as careful in the terms of Board appointments as I am with investment terms which give control of founders. I now try to structure my deals so obnoxious or weak Board members can be expelled as easily as obnoxious founders. Of course many investors still resist… they don’t like to accept accountability for their behavior. But unsurprisingly, the resistance comes from the ones who tend to be obnoxious or weak!

    Unfortunately, many founders find themselves dis-empowered when the Board members don’t perform and without balanced investment terms, that’ll always be the case. Sure, founders are more often the problem, but toxic Board members can destroy the company just as easily.

  24. It seems to me that Bob is effectively ruining the investment of 1st VC (call him Sam). Is it possible that Bob and Sam play together against the founder (good cop-bad cop game)?

  25. [...] last scenario is apparently the one illustrated in the vignette in Steve’s post (full text here). There are no easy answers for this CEO, but I hope this happens in a small minority of venture [...]

  26. Why not ask for the VC organisation to designate another person as their representative?

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