Small Business Financing

Your Board Needs a 'Truth Teller'


The role of the board in public companies has rightfully gotten a lot of scrutiny in the past few years. However, because the boards of private companies are not bound by the Sarbanes-Oxley Act and are less likely to have high-priced lawyers and accountants breathing down their necks, they operate quite differently from the large company boards we hear so much about in the news.

Still, much like a public-company board, the primary mission of the private-company board is to increase the value of the equity on behalf of shareholders. In effect, they are agents of the shareholders. In this capacity, they are bound by two important factors: the duty of care (be informed, diligent, and prudent) and the duty of loyalty (serve the interests of the company and its shareholders). The board of directors does not run the company. The CEO runs the company. The best entrepreneurs recognize the important and valuable role that the board can play and provide them with the transparency they need to do their job effectively.

When a venture capital firm invests in a company, the VCs get seats on the company's board. The entrepreneurs and the VCs have to trust each other to be open about their motivations. In the case of the entrepreneurs, they may be trying to protect their position of power at the expense of shareholder value. In the case of the VCs, they may be trying to achieve gains on behalf of their limited partners at the expense of the other company shareholders. If entrepreneurs or VCs suspect that the hidden motivations of the other are dominating their behavior and their decisionmaking, they will lose trust in their advice and counsel. That's when the soap opera stories begin.

In my experience, board members, like the cast members of a soap opera, tend toward dramatic archetypes. In the case of board members, however, I liken them not to TV protagonists such as Gregory House from House or Jack Bauer from 24, but to the judges on American Idol, a show I thought I would never watch. Only after tuning in for several seasons and enduring heavy lobbying from my wife did I become a devotee of the show. What brought me around was not so much the contestants as the judges. I found that I enjoyed listening to Randy, Paula, and Simon (the original judges for many years) as much as I did to the contestants. Maybe more. One evening, as my wife and I watched the show, I began to picture the contestants as entrepreneurs and each of the judges as one of three archetypes: the Domain Expert, the Cheerleader, and the Truth Teller.

Nabbing a Hall of Famer and Senator

Although the Domain Expert may provide value in assisting with certain valuable introductions and the Cheerleader makes you feel good by telling you what you want to hear, most experienced entrepreneurs will tell you to choose the Truth Teller every time. They develop thick-enough skin to value the insight of the Truth Teller and know that they can be trusted to give good, tough advice about even the most complex problems. Board members that hold you accountable force you to elevate your game in ways that would resonate with a good high school basketball coach.

Basketball Hall of Famer and former U.S. Senator Bill Bradley taught me this lesson when he served on our board at Upromise, the college savings company I co-founded in 2000. When we met Bill through one of our investors, we had fortunately moved out of my partner's house and were in proper, professional office space. Shortly after his slim loss to Al Gore in the 2000 Democratic presidential primaries, Bill was looking to get involved in a few business ventures. We seemed like a great fit for his interests—education, taxes, the Internet, and entrepreneurship. What could be better?

Having him join our board was a huge honor and thrill for us. Negotiating the details of his compensation package, which fell on my shoulders, was a huge stress for me. How do you say "no" to a few extra tenths of a percentage point of equity to a guy who came within shouting distance of the Presidency? But I managed to work out a fair deal and he was very gracious and wonderful to have on the board.

where—and when—are these deals?

For his first few board meetings, Bill listened patiently to me as I reported on the ups and downs of our negotiations with the large consumer companies with which we were trying to partner. Finally in one board meeting, Bill decided he had heard enough.

"Jeff," he interrupted me in his commanding, senatorial voice, "you and Michael have been talking about closing these deals for a few months now. All I want to know is this: With which companies will you have signed contracts by the next board meeting?"

I gulped, feeling the heat of a Senate oversight committee.

"Well, I think we'll get Citibank, AT&T…"

"Wait a minute," he interrupted me, pulling out his fancy pen and writing on his pad, "Citibank, AT&T. Okay, who else?" he pushed. I gave him a few other names in our pipeline.

I don't think I spent a moment over the next 30 days without wondering how the heck I was going to close those contracts we had promised Bill Bradley. Fortunately, we closed them all and launched the service successfully a few months later. One of the partners at Kleiner Perkins remarked to me a few months later: "I've never seen a team so precisely execute on its business development plans so fast." That's probably because the rest of his portfolio didn't have a six-foot, nine-inch Bill Bradley breathing down their necks. That's the power of having a Truth Teller on your board.

Excerpted from Mastering the VC Game by Jeffrey Bussgang. Published by permission of Portfolio, a member of Penguin Group (USA).


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