Studies show that, within three years of receiving investment, 50% of founders no longer held the role of CEO. In four out of five cases, the startup’s board of directors ousted the Founder-CEO. Paradoxically, research demonstrates that boards replace founder-CEOs with professional CEOs—even if founders demonstrate successful leadership. Can you protect your role as CEO? Building a strong relationship with your board and understanding your board’s motivation may help your chances of staying on, in some capacity, as your company scales. Shikhar Ghosh sat down with serial entrepreneurs Lara O’Connor Hodgson and Dinesh Moorjani who share their insights into board decisions and suggest practical ways to improve your relationship with your board.
5 Ways to Improve Your Relationship with Your Board
- Understand Your Board’s Perspective & Motivation
- Cultivate the Relationship Outside of Board Meetings
- Set Expectations about Communication
- Communicate Proactively & Transparently
- Nurture Relationships with Board Members
Understand Your Board's Perspective & Motivation
What type of board do you have? For most startups, investors form the board because they put the money into the company. The board’s chief function is fiduciary. And members are obligated, Moorjani explains, to help “increase the statistical likelihood of success for that particular business to become a standalone enduring company.”
Board members hold responsibility for creating as much shareholder value as possible, and they represent you—as a founder-CEO—to a larger entity of investors. Thus, if a board begins to doubt that a founder-CEO is the best person to serve the company’s needs as it evolves, they have an obligation to recommend replacing them as CEO.
In some cases, boards remove founder-CEOs because of unsatisfactory performance issues. Other times, especially as a startup scales, boards choose to replace founder-CEOs with professional CEOs who they believe are better suited to growing the business.
Understand Your Investor’s Goals
Typically, raising venture capital carries a loftier exit goal of “becoming a growth equity business with a line of sight to becoming a public company.” In Moorjani’s experience, the skill set required to be an effective early-stage CEO differs dramatically from the skills needed to lead the company as it rapidly scales to meet VC’s expectations.
Thus, as a startup scales, he and other investors evaluate: “Is the founder’s ability to contribute to the original vision and motivation of the company still integral to the success of the business?” If the board determines yes, then they may try to move the founder away from the CEO role and into a “Chief X role—chief scientist, chief medical officer, chief architect, chief creative officer.” But in the eyes of VCs invested in a certain outcome, most often, the founder can no longer serve effectively as CEO.
The execution and operating sophistication required to manage teams and inspire people, and the discipline required at scaling a company, looks very different than the scrappy early-stage entrepreneur.
The Paradox of Entrepreneurial Success
Studies validate Moorjani’s observation and examine the rationale behind boards’ tendencies to replace Founder-CEO. Noam Wasserman, former HBS professor and current Professor of Clinical Entrepreneurship at the University of Southern California, calls it the “paradox of entrepreneurial success.”
When founder-CEOs perform really well at early-stage two inflection points, they face a dramatically higher chance of their board replacing them with a professional CEO.
After studying thousands, Wasserman observed that 50% of founders get replaced as CEO within three years. Less than 25% of founding CEOs lead their companies’ initial public offerings. Boards replace founder-CEOs in four out of five cases—even if their ventures meet inflection points and perform well.
Data leads him to conclude, “it is precisely their success that has increased the need to replace them.” Most VCs adhere to Moorjani’s observation—that founder-CEOs who can best lead through the early stages lack the skills to lead the company through rapid growth.
Can Founders Minimize the Risk of Being Replaced as CEO?
If your board harbors doubts about your suitability to serve as CEO, it’s easier to improve your relationship with your board if you start with shared expectations. Your board’s composition and your interactions with members matter. Thus whom you choose to raise money from can make a big difference. “If you’re bringing in a large fund versus an individual investor,” Lara O’Connor Hodgson, serial entrepreneur and co-founder and CEO of NOW Corporation, learned, their “expectations will differ.” That could ultimately affect whether you remain CEO.
Moorjani concurs, that most VC-backed boards show a predisposition to replace a founder-CEO as the venture scales. Sitting on several boards, Moorjani observed that most founder-CEOs make common mistakes when dealing with their boards. Most revolve around communication and trust. Miscommunication can quickly diminish your board’s confidence in your abilities. For starters, he suggests, don’t rely on quarterly meetings to build a relationship with your board.
Cultivate the Relationship Outside of Board Meetings
“The secret of good board governance,” Moorjani explains, lies in the time between board meetings. “You should use meetings to recap the quarter, review important updates, and take votes” but the “the real hard work, the real analysis, the real understanding, the human condition, both for the employees, the customers, what’s happening inside the company, what’s working, what’s not is happening in between board meetings.”
The secret of good board governance lies in the time between board meetings.
Maintain open and frequent communication in addition to quarterly meetings. In Moorjani’s experience, founders who spend time outside of board meetings “laying out the detail and fact-finding” and communicating any challenges well in advance of a quarterly meeting have a better chance of gaining their boards’ trust and long-term support.
Additionally, he observes, “the best founder-CEOs are not managing the board on their own” but involve others. “They expose a particular function team leaders to the board to show insight a few layers deeper about what’s happening inside the company.”
Set Expectations for Communications
Open and proactive communication is the key to improving your relationship with your board. Hodgson and Moorjani each emphasize that as CEO, you should set expectations for how the board communicates. That includes agreeing on how information comes out and the cadence of the information.
Setting expectations for communication, and establishing a way to engage, becomes especially important as you scale and may need to communicate more frequently. Hodgson learned that setting clear expectations with the board at the outset gives everyone “a level of comfort.” It provides a solid foundation of trust and helps investors build confidence in the founder-CEO’s leadership.
I tell investors, “This is what you should expect. We welcome any input and suggestions that you have. But expect to get this from us.” It gives me a level of comfort that I’m delivering on my promise. And it gives them a level of comfort.
Communicate in Advance Anything that Will Affect Expectations
Sometimes, you may need to change a deadline or the level of reporting. Hodgson shares that when Now Corp did its first securitization, it placed a level of burden on the accounting and financial reporting teams. They reached out to shareholders and explained, that for the coming year “we may not get four reports out because this small team now has an additional burden of public reporting to our bondholders.”
If such a scenario occurs, she emphasizes, it’s essential to inform the board when they can expect regular reporting to resume. Explain, for instance, that once the team adapts to X situation or internalizes a new process—in X weeks or months—we will resume the normal cadence or reporting.
Share Mistakes Quickly and Matter of Factly
If something goes wrong, “the faster you can tell someone about it, the less impact it has negatively on the Board or the business.” Hodgson admits, “The minute we know we’re off on a quarter we let everybody know.” And they discuss potential causes.
Communicate Proactively & Transparently
As you scale and you “hire people rapidly and processes evolve quickly,” she notes, “it can be very unsettling to your board, depending on the expectations you set with them.” Thus, “You have to tell people ahead of time. You have to over-communicate.”
Build Trust with Transparency
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. Shikhar Ghosh recommends, “The more transparent you are, the more willing they are to help you to grow into your leadership role as the company grows.”
How you deliver news matters, especially when you’ve been through a challenge or made a critical decision. “How you explain decisions to the board,” Hodgson stresses, “is important.” Often, boards decide to replace you (as founder-CEO) with a “professional” CEO not because you’re not confident, but because they don’t trust you.
You have to explain your decisions with confidence because the board has to have confidence that you are leading.
Build the Board’s Confidence in You by Explaining Your Rationale
Often, Hodgson notices, founders follow one of two extremes. Some don’t share enough information about challenges which leads to distrust from the board. Others lean too heavily on the board to solve problems, which can convey a lack of decisiveness and capability.
The board has to believe in your leadership ability. Don’t present the problem, provide three possible options, then ask for their opinion, she cautions. Asking for open-ended input or a chance to brainstorm together will undermine their confidence in your ability to lead.
On the other hand, don’t just reveal a decision. If you simply state the problem and your decision, Hodgson remarks, “they might see your confidence but wonder if you were thoughtful.” That, too, can undermine their faith in you as a leader. She recommends a middle path. “Share a glimpse into the thought process of getting to the conclusion gives them confidence in your problem-solving.”
For instance, Hodgson succinctly informs her board, “‘Here was the challenge and here’s what I decided.” But she elaborates on how she arrived at the decision. “I considered three options. Here’s why I chose this one.”
Nurture Relationships with Board Members
If your board members live nearby, both Moorjani and Hodgson recommend meeting informally with individual members. Every month or every other month Hodgson has lunch with board members. It’s “just a quick one-on-one,” she shares, “How’s it going? Is there anything I can do to help you? Is there anything you can do to help me?”
Meeting individually with members between meetings, allows you to strengthen your relationship and learn what matters most to that member. It minimizes the chance of an unpleasant surprise announcement at a meeting. Hodgson elaborates, “If a member has a concern or they’re confused about something, that comes out in the lunch. Like, ‘Hey, are you working on this? We talked about this last board meeting. Are you making progress?'”
Then, as you prepare for the board meeting, you can construct the agenda “knowing what the potential hot buttons are and address them upfront.”
The CEO-Board Chairperson relationship is especially important. Your board Chairperson translates the board’s expectations to you and also represents you to the larger entity. If needed, the board’s Chair can provide a buffer between you and the rest of the board. Hodgson works closely with NOW Corp’s board Chair and explains one way she enlists his support.
For instance, if a new board member requests a potentially substantial change in reporting—like creating a different type of dashboard—Hodgson can leverage the Chair’s support in buying time to understand the burden on her team. “Are our systems set-up to do that in a way that’s not, overly time-consuming but accurate before we promise it?”
Make sure you understand your board’s requests then determine “what can my team realistically deliver?” Make sure you don’t over-promise and under-deliver.
Create a Small Network of Advisors
In addition to your board, Hodgson recommends, having a small group of advisors whom you trust. “You really need people to talk to figure out what’s going on inside your own head.” Having a trusted sounding board becomes especially important in situations where you and your board may disagree.
Want to learn more about managing your board? Our series on boards of directors and advisors at startups includes tips on how to get the most value from your board and how to avoid common mistakes founders make with their boards.
“Founder-CEO Succession and the Paradox of Entrepreneurial Success,” a pioneering study by 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. He notes, “it is precisely their success that has increased the need to replace them.”
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.”