Naval Ravikant (@naval) is the chairman and a cofounder of AngelList. He previously cofounded Epinions (which went public as part of Shopping.com) and Vast.com. He is an active angel investor, and has invested in dozens of companies, including Twitter, Uber, Yammer, Stack Overflow, and others.
As one of Silicon Valley’s most respected angel investors and entrepreneurs, a veteran of some of the Valley’s biggest startup success stories, and an investor in many others, Naval has a uniquely broad perspective on startups.
In this part of my two-part interview with Naval, we spoke about the intricacies and delicate issues involved with managing boards.
Elad Gil:On the board side, is the idea to only raise from people who won’t take a board seat? And how do you think about also getting rid of earlier board members as part of late-stage financing?
Companies are this weird thing. The whole point of a company is to try to be efficient and get stuff done. And when you go through human history, you find that when you want to prevent an entity from having too much power, you defuse that power by having committees or groups. Go back to the Romans; they had the Senate, and all the senators had to agree. But when the Romans went to war, when they wanted to be efficient, they elected a dictator. And that dictator then took charge of everything and went off and fought the war—and usually ended taking over all of Rome afterward, so it kind of backfired. But the Romans were aware of that model, and the trade-offs.
In companies, you have a dictator at the top, a CEO, or the founders. Then all of a sudden it turns back into a butterfly network, and now you report to a board, a bunch of people. And inherently, the founder-dictators tend to be very risk-prone. They have a lot of vision, they have a lot of drive, they know where they want to take the thing. They like to make risky moves and bets and pivots and turns.
But boards don’t like that. Boards don’t like to be dragged along. It’s a group of people. It’s groupthink, it’s committee-think. No committee ever built anything great. So related to that, no board ever built anything great. Boards can be helpful; they can be sounding boards. But you do not want the board to be running the company. And the larger the board, the more you’re going to find yourself spending time just keeping them up-to-date and in sync.
I know there’s this belief that venture capitalists can add a lot of value on the board. And they can—under very specific circumstances and situations. They’re experts at financing, they’re experts at knowing the external market, they might have deep domain expertise in one particular thing that you might encounter.
But by and large, your average VC board member is on ten boards, so they’re taking ten different board meetings every month or two. On top of that, they’re spending half their time looking at new companies. They’re also managing their investors and LPs. And, let’s face it, anyone who’s been in the venture business knows it’s not really a full-time job. Maybe for the best VCs it is, but your average VC does not work the hours that your average entrepreneur does. Your average VC is a retired entrepreneur; your average entrepreneur is not a retired VC. So they just don’t have that much time. You’re spending most of your time keeping them up to speed, and then you’re hoping to get some value and wisdom out of their expertise and years and years of learning.
You don’t want your board to be too large. The larger your board, the less it is going to get done. Every experienced board member will tell you that they favor private company boards of five or six people or less.
“Every experience board member will tell you that they favor private company boards of five or six people or less.”
– Naval Ravikant
You can keep the board small in multiple ways: one is, don’t give up more than one board seat per round. The most common mistake I see entrepreneurs make is this: they want to get two investors involved, they do a two- VC round, and they’ve got two board seats from one round. That adds up really fast. Because then when you get to series C, series D, series E, you’ve suddenly got a six-, seven-, eight-person board.
Second, you can actually put it in the early term sheets that the investor will leave that board seat when another board seat comes in later. First Round Capital, I think, is famous for doing this. They’ll usually step out of the board when the next round takes place.
Elad: Yes, but they tend to do that since they’re a seed-focused firm. How do you do that for people who are traditional series A, B, C investors?
Naval: Well, the smart ones—I’ve seen Fred Wilson do it—will actually step out when the company is getting closer and closer to going public. You can also try to just negotiate it early on. And you can do it in the new rounds. Let’s say that you’re raising $50 million in a hot growth round. You could go to your series A person and say, “Hey, this is your opportunity to get off the board and recover your time. We’ll leave you with the protective provisions that you negotiated, so you’re not going to lose anything. And I’ll keep you on the mailing list and I’ll send you the board decks, so you get the updates remotely. But you don’t have to sit on that conference call every month. You don’t have to do the board meetings.
Elad: The primary thing I’ve seen people be willing to do in circumstances like that is effectively get partially bought out. Then it’s an excuse to get them off. Because I feel that a lot of early-stage investors, if the company is doing really well, they want to maintain association with the company, both for their personal brand and as a vehicle to buy other things in their portfolio that aren’t working as well.
Naval: That’s right. It’s a credit thing, so that always does make it tough. It’s sad, but I see too many late-stage entrepreneurs spending literally half their time just doing board management.
“I see too many late-stage entrepreneurs spending literally half their time just doing board management.
– Neil Ravikant
The other thing you can do is space the board meetings out further. So maybe have a board meeting every three months, and then do an update call every month. And keep that call short. I’m a bit of a jerk with my companies, when I’m the entrepreneur, in that I set the expectation very, very early on that I’m not going to do a fancy PowerPoint deck. I’m going to have a sheet of paper with the big points on it and the big numbers on it, and then we’re going to get together and have a conversation.
It’s very important as a founder-CEO that you manage your board. Because if you don’t, then whoever the next most aggressive board member is will step in and fill that vacuum. You don’t want to be in that position where you’re always responding to them or answering their questions. You want to guide the board and guide the company.
Elad: Have you seen any circumstances where people have used a chair for that function of coordinating with the rest of the board members? Or does that happen more with public companies?
Naval: Yeah, that’s more of a public thing. Generally—I’m thinking of the founder-CEO model, which is the most successful model in Silicon Valley—if there’s going to be a chair it may be the other founder or a departed founder or a retired founder. But it’s sort of odd to have a chair who’s not also a founder.
Elad: How do you get rid of somebody who is starting to be destructive at the board level? The nightmare scenario, to your point, is that it’s your first company and you do a shotgun process. You end up with somebody awful for your series A, and then your company is really working well and you’re stuck with this person. What should you do?
Naval: Terrible situation. It’s very, very hard to navigate. Usually you end up buying them out for more than they’re worth, which sucks. And usually your other board members really help you on this; this is where the other board members earn their keep. Generally the most senior person on your board, someone who is good to work with, will hopefully help you with that.
Elad: Is there anything you can do with the VC firm itself? Can you go to the firm and complain? Can you ask for a different partner?
Naval: That’s a last resort. That’s going nuclear. It only works if the person who is being difficult is a very junior person and you’re willing to take the gamble that they’ve been exposed internally. But that can backfire on you just as much as not. It’s almost like going to a husband and saying you don’t like his wife or going to a wife and saying you don’t like her husband. VC partners are married to each other in these very complex, decade-long or multi-decade-long arrangements. So I would not attempt that maneuver unless there’s someone on your board who’s willing to do it on your behalf, who says, “Oh yeah, I know so-and-so who runs the firm and I have a good relationship and I can give him that feedback.”
Elad: And at that point, you have to go to the person running the firm. You can’t go to another junior partner. You have to go to the very top.
Naval: That’s right.
Elad: I guess it also depends a bit on firm structure. Because if there are multiple senior partners, then power is fragmented. And then it really becomes a weird situation.
Naval: Yeah, I’ve seen that situation actually kill companies. My solution to most board problems is going to be highly unacceptable to the venture community, but we don’t give out permanent board seats. We would never ever give out a board seat that we could not remove. And in AngelList and my company, that’s what I’ve done. The only board seats I’ve given out are ones that can be removed; there’s no such thing as a permanent board seat.
Elad: It sounds like that’s something you should start negotiating from your very first round.
Naval: Experienced entrepreneurs will. Otherwise it’s marriage with no possibility of divorce.
The way my company is structured is that everyone can be removed, including me. Then it is actually a very consistent moral argument that I can make, which is saying, “Hey guys, you can remove me as well if I’m out of line.” Nobody is safe, and that forces everybody to behave.