Unfortunately, there are times when things just don’t work out with a board member. This could range from board members being benign but useless (e.g., spouting generic advice that does not matter) to being actively destructive. I have heard of board members leaking information to the press, fomenting political factions among the staff under the CEO, derailing a company’s financings, or pushing for strategic directions that make no sense. I have seen cofounders leave more than one company due to poor advice from board members, as well as board members who poach executives from one startup to join another of their portfolio companies.
While it is typically straightforward to remove a misbehaving employee, a poorly behaved board member may be harder to “divorce.” In general, investor board members are harder to remove than independents.
Once they join your board as part of a financing, investor board members are notoriously hard to get rid of, as they usually have contractual rights to the board seat written in their financing documents (i.e., your series A, or series B, C, etc., paperwork). 1
Removing a VC board member can generally only happen at a time of transition or leverage (a financing event, major change in company direction, IPO, etc). Additionally, the VC may have extra economics in the investment for taking the board seat, or view the seat as something that builds her stature in the broader world. So how do you get rid of a misbehaving board member? There are a few tactics you can try, depending on the stage of your company, the leverage you have as an entrepreneur, and your relationship to the VC and her firm.
1. Change the overall composition of the board to reflect the maturation of the company (and boot the VC off as part of this shift). The makeup of your board should change as the company scales from a young organization seeking to develop a meaningful product to a more mature startup in high-growth mode. At the early stages, board members may be valuable in your quest for product/market fit or your next round of funding. For example, board members may know of new distribution tactics or other strategies that are working in their portfolios, which they can share with you (e.g., “Facebook is suddenly working well for mobile app distribution”). However, if they lack operating experience, a network of potential later-stage executive hires, or broader strategic insights, it might make sense to replace them and other board members as your company starts to scale rapidly.
Once a company finds product/market fit and focuses on scaling, the skill set, network, and advice needed from a board member shifts as well. Similarly, as a company starts to plan to go public it will need to add more independent directors and more operators, as well as more specialized board members (e.g., a former CFO for the finance/audit committee).
“Once a company finds product/market fit and focuses on scaling, the skill set, network and advice needed from a board members shifts as well.”
– Elad Gil
When shifting into high-growth mode, you can ask multiple early board members to step off the board to help enable the transition to a successful later-stage or public company. This approach prevents any one request from being viewed as a personal criticism of any one board member—rather, you are changing the slate as the company matures. If an early board member can be especially helpful in your later stages, you can retain this board member or alternatively convert her to an independent seat.
While the request to step down as the company matures may be a logical one that should increase the value of the company overall, some may refuse—because they benefit from the stature of being on your board, for example, or want to protect their investment in your company until the company has a liquidity event. But if one or more of the other board members step down as part of an overall reshuffle, it puts pressure on the holdouts to comply as well.
Alternatively, as a later-stage funding round occurs you can ask an early investor to step down so that you can create a seat for a later-stage investor. Many early-stage investors may refuse. However, you can point out that the investor coming in brings new and necessary skills, networks, or advice to the table. Remind existing members that there is a need to keep the board to a constrained size and also to start planning toward an IPO (assuming one is in sight in 18 months or less).
In general, simply asking an investor board member to step down is unlikely to work.
2. Buy them out. It takes 5–10 years for most companies to have a liquidity event. Many investors will be raising additional funds from their own limited partners (LPs) along the way, and they’ll want to show a return to get the LPs to invest more in those future funds. This means you can offer VC board members an opportunity to sell a subset of their stake in your company in exchange for stepping off the board. This stock sale could happen either via a secondary event (see the chapter on late-stage financings) or as part of a later-stage primary funding round. If the investor does want to sell stock prior to a full liquidity event such as an IPO, you can make the following arguments for why a stock sale should be tied to her stepping off the board:
- If the VC is selling part of her stake, she is signaling about the upside of the company to the market and should step down.
- Board composition is reflective of ownership stake—i.e., the board is supposed to reflect share ownership. If the VC sells a subset of her position in the company, she will own less of it and therefore should no longer have a board seat.
- The company has now returned the VC’s investment. The requirement for ongoing governance of her investment (which they have diversified out by selling) has decreased and she should step off the board.
3. Ask the VC firm to swap out your board member for another partner from their firm. This tends to work only if your company is working really well and the firm wants to maintain a positive relationship with you over time as the founder of a breakout company. Unless the VC partner you are trying to remove controls the whole firm, the firm may agree to swap out your board member for another one to maintain warm ties with you. (Thanks to Reid Hoffman for this insight.)
These conversations, by the way, can be very tough and very emotional. VC board members are humans too, and they may have a lot of ego or emotion wrapped up in a successful company. Even if they have done nothing to help the company beyond capital (and capital is indeed helpful), your VCs may still feel that they fundamentally contributed to the company’s success. When making your case that they should step down, be firm, calm, and consistent.
Independent directors are generally easier to remove than investor board members. In some cases, you control the independent board seat and can simply ask the board member to step down (see below on “Independent board seat structures”). The simplest way is to explain why you want them to do so. Obviously, though, there are lots of reasons (ego, a difference of opinion, VC investor influence, etc.) that board members may not be willing to step down.
There are two types of independent board members: those whose primary relationship is to you, and those whose primary relationship (and sense of loyalty) is to the VC who invested in your company and helped bring them on board. The VC Crony probably owes a lot more to the VC than they do to you. Additionally, they will have a tendency to vote the way the VC wants or push for things the VC asks them to push for.
These VC Crony independents may be harder to remove, as your investor board members will have a disincentive to support their replacement on the board. In some cases you may need to negotiate with the VC directly for the removal of the independent. Alternatively, if you have a larger board with many members, they can help push for the removal of a non-performing independent.
There are a few ways an independent board seat may be modified (depending on your financing documents). The most common are:
- A board vote. Each board member can vote for or against the removal of a board member, and each vote is counted with the same weight.
- Stock votes for the seat on an as-converted basis. In this type of vote, each share of common and preferred stock counts as one vote. Everyone votes and you add it all up.
- Mutual agreement by common shareholders voting as a class (i.e., the founders) and preferred shareholders voting as a class. Each class of stock needs to agree to the change. In other words, a majority of common stock (usually just founder votes matter, since founders tend to control most common stock) AND a majority of preferred stock (e.g., investors) both need to agree to the change.
- Common nominates, preferred approves. VentureHacks has some of the best content out there on the board of directors and how to construct it. 2
Depending on the structure above and your percent ownership as founders, you may or may not be able to remove an independent board member on your own. Sometimes you can just get one additional board member or a major holder of preferred shares to vote with you to change or remove a board member, but sometimes you need all the preferred board members to vote your way. If this is the case, removing a VC Crony may be impossible without trading something of value with the VC.
Once you have agreed to remove the board member, work with your lawyer to generate the proper legal documentation and board resolutions to make it all official.