Boards

Rajinder Balaraman:

Hi, and welcome to matrix moments. i'm really excited to do this discussion today with you Vikram on boards. i want to start off by thanking you, i owe you a great deal of gratitude, because i've learned a ton from you on this topic. i've been in as an observer on boards where you're the director, and you have supported me in situations where i've been asked to step up and lead in certain situations.

Vikram Vaidyanathan:

You're really excited. i'm not this -  has been like a hot potato topic, which no one wants to do and still i’ve stepped up. You have to thank me for that. Yeah, first.

Rajinder Balaraman:

Okay. Thank you for that, because this has been floating around and passing around once the group for a while, yeah. But know, it's an important topic. And, you know, honestly, every time there's a term sheet negotiation,  i don't know why it ends up being one of those topics that gets blown out of proportion and discussed a lot more than perhaps it should be at a very early stage. But irrespective, let's start with the basics. When should this board discussion happen?  when does it become relevant? How many people should be on a board, who should be on a board, you know just the basics?

Vikram Vaidyanathan:

So first, you know, like you said, it's heavily negotiated at term sheets stage and docs and so on and it occupies a big mindshare, in a founders mind because as soon as you say the term board it suddenly feels very heavy, that your company is going to move slowly, you have to talk to a lot of people.

So yes, it does define the cadence of your company, how nimble it is on decision making, how many people do have to consult and all of those things. So there, it is an important topic, and rightfully so has mindspace enough in a founders mind. i think, finally, a harmonious board, leads to less dissonance in a founders mind and top management  is already tough to make decisions in an ambiguous environment. if you have a less harmonious board, it does create this. So i want to put it all out there that the reason founders think about this is justified, right? As is the reason, the investors think about it.  

So first is when should you be thinking of the board, that i would take in more extreme position and say very early, almost at inception, regulatory in india, you're supposed to have two board members, or in the US, you're supposed to have one. So you need a board anywhere to function.

Second, it is going to be part of you building a company long term. And we just did another podcast on it already ,you will have managed it, and so on. So you might as well learn early. And as with everything else, which you have to learn it. This especially takes time. So you're better off starting early, and then building on it.

So i would argue start thinking about it as early as possible. From our perspective, often, we do get board seats, when you're investing a meaningful amount, have meaningful shareholding and we'll come to some of those thresholds. But we do ask for and get board seats. At the early stages of companies, we often don't exercise our right to get on the board. Because you actually don't want to make the processes very heavy. A lot of corporate actions and simple actions in the early stages require, you know, minutes for circulation, approvals, and so on. And you don't want to make that process very heavy.

And we are actually more involved than the quarterly cadence at that point in time. And you're on a monthly weekly cadence. And some of those informal calls give you enough access. So we don't usually get on boards very early at seed and seed stages and so on.

Rajinder Balaraman:

Yeah. So then who should get the board seats initially in their mind?

Vikram Vaidyanathan:

So i was thinking about this, and i think there are two parameters that i thought were important. The first, who deserves to be part of the conversation at the board level. And second is who adds value? So the question is, what are the things that are discussed at the board level? So strategy, very good capital, which direction you want to go, how you hire performance, on how you've done, versus plan, and which is performance review. And the third is governance and compliance. So those are the things that you discuss at a board level. Question is who deserves to be part of that conversation?

And who can add value to those conversations? So first is who deserves to be part of those conversations? i think it's anybody who has a meaningful role in every discussion that is being had on these topics. Now, the reason i'm stressing the word every because there might be a technology, strategy discussion, where some people can come in as special invitees, but they may not be relevant to a capital allocation discussion. So people that you think are relevant to every part of the discussion that the board is having, they deserve to be there.

And second is that they can add value in which ways can you add value, you can add value as the personal mentor to the founder, you can add value as somebody , who has given a lot of money back in early stage investor or late stage investor to adding value to the company. And in other cases, they are adding value to common stock shareholders as an independent. So they deserve to be there and add value.

Now, we prefer in the initial days to have smaller groups. So, call it two three member groups initially, because you don't have to carry a lot of people along, and you have to make a lot of decisions very quickly. So we prefer smaller discussions, or smaller groups that can make faster decisions. As you grow and i think from an investor nominee perspective, which investor gets to go on the board and so on. i think two things are important. One is threshold ownership and capital allocation, which is in the- who deserves to be in this conversation. And if you think of investors, they care about two things.

One is you've invested a lot of capital or the most meaningful chunk of capital, as an early investor in the company. And as a late stage investor, maybe you invested hundreds of millions of dollars in the company. So you want to know where that capital is going, how it's being allocated, which is one of the most important functions the board does at that point in time. So if you either invested a lot of money, or your stake is a lot in the company, i think you deserve to be in that conversation.

Okay, now, the thresholds and all of this, you know, i'll give you some thumb rules. But that's the way i would think about it. Now, thresholds, i think, are in the 5 to 10% range. For companies where you can get two board seats, i would argue, in the initial stages of company fit could be 15, 20% is only when you get a board seat, but let's call it a i'm giving advice more for companies in the middle stages. So i would say 5 to 10%. if the board is getting very large and unwieldy out take that threshold up to the higher end of the range 8 to 10%. Otherwise, it could be 5 to 10%. i think the board starts getting unwieldy at 8, and definitely at 10. And if you're at 10, and haven't gone public yet, i think you should start thinking about rejigging the board and thresholds and so on.

Rajinder Balaraman:

And should all the co founders be on the board?

Vikram Vaidyanathan:

i knew this is why i should not get into this topic. But you know, as with all of these questions, it depends. Value the pros and cons, i think co-founders who A again, have an important stake in the company, and are driving very important functions deserve to be part of the conversation and will add value to the conversation.

So they need to be part of these discussions. So depending on the co-founder relationship, and so on, i think they should be on the board. But at max two to three, if you have like seven co founders, everybody can't be on the board, we'll have to pick two or three, who fit the criteria of the threshold of ownership where they deserve to be part of the conversation and the functions that they're driving. And therefore they will add value to every discussion. At the board level. i'll give you the flip side of everyone having board seats is because some co-founders leave, some co-founders exit, sometimes there's a split.

And in india, to actually get someone to step off the board. And to take someone off of a board seat at some point in time, is a harder conversation and can at times create a lot of friction. So you need to think through some of these as the main co-founder or main co-founders. One way of allowing more people to be part of the conversation is to have observer seats. And observers get to be part of the conversation. it's also a great way for you to try on somebody, as they are adding value in this discussion? And so that's a good way to start?

Rajinder Balaraman:

You know, i've always found this discussion, that there is a formal board meeting where there are no formal board members, but then there are also management team members who attend perhaps there are observers from the investor side that also attend. So what's the role of those observers? in any board meeting? How do you think about it ?

Vikram Vaidyanathan:

So i guess there are two questions embedded in this block. One is i think there are management views and then there are board meetings. So what gets discussed at an executive level is usually a very deep operating review and very deep operating planning of the company. Sometimes investors and board members are part of it, or sometimes they are not. So that's an executive review. Right? Which sometimes actually board members are invited to, because executives are doing that, then there is what you're saying, which is observers as part of boards, and sometimes management team members or product board, sometimes investors are part of boards as observers.

i'm going to talk about the second part, which is the observers, by definition, observers observe. And they don't vote. So that sounds pretty innocuous. it is and it isn’t. So yes, they don't get votes. But it isn't, because they do get to participate in those discussions, they get information about the company. So as an observer, you will be privy to information about the potentially public company or late stage company, which has very different connotations associated with the information. But also an observer can influence the discussion that is happening in the room. And often there are times when i trust somebody's opinion, and that person is an observer. But because they are, a very seasoned observer, they might add something to the discussion that might change my mind.

Now, that might be desirable for me, because i'm seeking diverse opinions. But that might not be desirable for a founder to give too many observers seats, who can influence the discussion in the room. So that's the downside of having an observer. i'll also tell you why we sometimes ask for observer seats put it out there. So we do ask for observer seats, in addition to having board members, and that's usually for slightly younger investment team members, who sometimes have actually done the real work on the investment.

And so they've done the real work, they've actually led the investment. But because it's still younger, we sometimes let the older guys take the board seat, and they are actually grooming the younger guys to take on that board seat in the future.

And to be part of these discussions is a great way of grooming. Now, i think they need to do enough work, to deserve that observer seat, and we take it as a big responsibility. Or if you have an observer seat, then this person actually deserves to be part of the conversation. And they have to do, continue to do real work along the way to deserve that. Now, it can set precedence, right, one person gets an observer seat, the other investor should also get it and so on.

So we understand why it might be onerous. We make sure that we have enough of a relationship and our younger team members have enough of a relationship with the founder, that they will get a permanent, special invite to board meetings. And that's the other way to solve it that they are always a special invitee to board meetings.

Rajinder Balaraman:

You mentioned earlier on, you know, the number of board members, and you said 8 and 10. And i was just thinking both of those are even numbers. And then in early stage companies, sometimes there’s 2 and 2. What’s the right no? is it odd even? i know you said smaller is better than bigger in the early stage.

Vikram Vaidyanathan:

But as you're right, and so we do prefer all board members of 3, 5, 7. And when you're expanding body usually try to expand it to a larger number, which is odd. But there are times when you don't want to add a board seat just for the sake of adding a board seat. Or you might have expanded the board to five, but you actually have only four members or seven, and you actually have only six.

So the question is what happens when it comes down to a tie? That's, i guess, the embedded question. And honestly, it hardly ever goes there. But if it does, we think the casting vote should be with the founder. And so we might be in the minority here. But we think founders deserve to make these huge decisions, which affect the company type and they have a huge opportunity cost. And this therefore they deserve to make the decision.

So we are happy to give the casting vote to the founder, or at times when you know the company has scaled and so on. And you want different governance for these decisions. You give it to an independent, who's quote unquote, like the chairman of the board, somebody who's a person of repute, will take how they make these casting vote very seriously. Act in the balance interest of founders, Company, investors. So in that the casting vote could go to them.

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Rajinder Balaraman:

Just continuing on the same train of thought – should founders really focus on board control?

Vikram Vaidyanathan:

Yes, and yes or no, this is the another thing that founders really obsess about, which is do i have control of the board, how many votes will be for me, against me and so on. Because we've heard some nightmare stories, they've read some books, or hostile takeovers, how the board acts in those hostile takeovers, and so on.

One, i will just tell you, i've actually i've never been in horribly contentious situation, maybe, like one off edge case events, in all of those, that even this even comes up that some matter goes to vote, and people are thinking about where people are going to vote and so on. in most cases, boards are constructive, and especially if it's early stage investor the board, because we’re on so many, and we’re on so many boards together and with founders, we want to get to constructive ways of making a decision.

But you still have to think about possibility. And i know we talked a lot about possibility in term sheets, and in these kind of situations versus probability. So founders should think about it. The other thing that i will talk about is in india, overall company laws are reasonably friendly to founders and so on. And beyond a point, the board control is overrated. And especially for early stage investors and so their reputation and how they function on board is super important.

So they will always do the right thing. Because their reputation actually is more important than this one decision that one company & one board is making. Now that said, you will lose control of the board at some point as a founder, so it's better to plan. And the best way to plan - and what i recommend to founders is to add independents, independents that you trust, independence, who will actually add value to you. And in some way, either as mentors to you, or mentors to your team or on subcommittee or through the network. And those independence actually balance the interest and balance the board. So the more early you add those independence, i think the more quote unquote, board control you have, but i actually think it's just a fair board.

Rajinder Balaraman:

Yeah, you know, you're talking about how the board changes over time. Actually, let's finish that, you know, this board evolution topic, and also maybe talk a little bit about management and its role on the board. So over time.

Vikram Vaidyanathan:

So, one, the board expands over time. it's just because this bigger company expands over time, your team expands over time, more and more people, stakeholders join you, so board expands over time.

The question is, how do you handle that expansion? One of the things that i've seen people do very effectively, is to create roles for board members, because then each board member has a role both on the board, as well as in your life as a founder and talk, to you – i’ll give you two or three examples of board member roles.

The first is in recruting. So you can effectively use a board panel as your recruiting panel for top team, there might be a big CTO on your board, who's great at actually building the tech team. And great founders use their board members as resources for recruiting, and as a recruiting panel. But i've seen one founder convert his entire board into each of them as a recruiter for them.

And so that's one way of creating a role. The second role is as mentors for yourself, because you do need personal mentorship, taking some of the big calls, but also as mentors for your team. And in some of our best companies, all of us actually play a mentor role to the next in line, as minus one and minus two, and so on. And one way of doing those mentorships is one on ones.

But there's also reviews, which are a great way of doing some of that mentorship, and the third, as a company scale, then you have committees, the nomination committee, the audit committee, the risk committee, and so on, you will need people to chair those committees. And that’sthe third role to create for the new board members and so on.

i'll give you a few do's and don'ts on these new board members how you expand all of that. i think one big do for me is diversity and diversity, of course , in terms of the kind of people, who have been board members, different ethnicities, and so on that you're adding, but also diversity of thought, that people are bringing a view into the boardroom, from a different industry, from a different capabilities set , froma different function, for example, and i think those that diversity of views is very important in order to make a discussion richer and for you to make better more well informed decisions as a board as well as founder and CEO, and, and so on.

And second, who would you like in the trenches with you, when things don't go according to plan who do you want to be huddled with in a room for a day to try and figure stuff out. So those would be the two things, which are the do's, the don'ts for me on expansion and so on is- don't look for passive people. And i think founders often want passive people where they will not get in the way. And  i think passive people, detract from the discussion that has been happening.

So if you might ever have a smaller board, rather than have passive people on the board. The other thing you don't want is only cheerleaders, because they're not going to be helpful when you really need them, which is actually when things are not going well. And on the other side, you don't want people who disagree. We want people to disagree, but you don't want people to disagree, but don't commit, because you want a voice. But once you've come to a collective decision, you want people now to say, okay, you know, what,  i've been heard, and this is a collective decision of the board.

And then we're gonna move forward, once you're moving forward and moving forward, you can't keep second guessing decisions here. i disagree. i disagree. So you don't want that one naysayer? i'll tell you how we make sure that we're adding the right people to the board, we ref check them as founders who have checked them out, or they act in those situations. So i think that's super important for you to do, as you're adding more board members, and so on. i'll give you our view on how we function.

As part of this, especially on this disagree piece. We are definitely not cheerleaders, we do disagree. Our approach in the early stages, and maybe even actually, mostly later stages also, is that we disagree privately, with data, with respect and humility. And at times, he will just want to slow the process down and make sure that we have enough information provided, sometimes it's experts, sometimes it's data from other markets, that slows down the founders and the board members enough. But after that, our approach is actually founders first -  the founders get to make that decision. But as long as we feel heard, and we slow them down enough, to make sure that they've considered this alternate thought, as part of the decision. So most of the time, what happens when we slow them down, they will either change their mind, which is fine, or they will move forward with their approach, but having factored in the risks that we have highlighted. So it's led to a better decision. But in our world, i think the founders get to make these big decisions.

Rajinder Balaraman:

i think the importance of seeking the truth is a super important, especially in early stage when product market fit is still a work in progress.

Vikram Vaidyanathan:

On this train of thought that you had on inducting management into the team.  And we actually encourage getting management into the team, especially at later stages and so on. Because sometimes the CEO is joined, your CTO joined, your CEOs joined you. And they are adding tremendous value to the company.

And it's a no brainer for them to be part of the board in our mind, because they-  both deserve to be there. Because these decisions, they actually have the most to add, and it impacts in the most. And they can add value to the discussion.

So it's a very simple no brainer, there's a fee that adds value. And it does become a big discussion. And i think the observers is a great way of inducting them, and then over a period of time for them to become long term board members, but then they are part of your next five year journey. They should be on it.

Rajinder Balaraman:

Yeah i'm just going to do a little bit of a recap on something touched upon earlier, which is early on, what should the board meeting ideally look like? And what should get discussed? You know you mentioned a lot about it should be a forum for decisions that you know, go ahead i think so. Clearly, there is one part of it, which is more of a performance review, which was more around what's happened in the last month. What do we think what happened? What are the decisions we took, how did they play out, plan versus actual, you know essentially, a discussion around metrics and more backward looking?

i think there's a reasonable chunk of time, which needs to be more forward looking, which is more around what have we done and how does that inform our strategy going forward? And too often i've seen like, you know, we just get stuck on the metrics discussion of the review, discussion and frankly we haven’t  necessarily learned enough to actually have the forward looking discussion, which is the most important discussion. Once we’ve kind of aligned around what the forward looking, you know, thought process looks like there's obviously an implication on org., because there are people there are org gaps and may be someone's firing on, you know, certain agenda but may not be able to fireon another agenda.

So i think there's a natural conversation that flows from strategy to org. And then finally, i think there's a, you know, just hygiene conversation around compliance regulation, basic things that, you know, every board meeting should have like a certain agenda and checklist, which you're just getting through.

Vikram Vaidyanathan:

So four topics, you said review, strategy. Org, including compensation. And fourth is compliance . Yeah, that sounds about right, i think we should put down in our notes for this podcast, maybe a little bit more detail on how you would do this. The only thing i would add is that it's important for board members coming into a discussion to know what the focus is going to be correct, for example, company's done

well, you actually have, you can send out a review a week in advance, and say, i'm going to focus on this part of the strategy.

And we're going to discuss product strategy and these choices. So for board members to know that this is a more strategy centric board meeting, or this is a more Org centric board meeting,  then it helps you also control what you want to discuss in that board meeting. And if it's a two hour board meeting, or a three hour board meeting, you're spending the biggest chunk on the topic that you want to, and you don't get mired  like you said, only on reviews

Rajinder Balaraman:

Yeah. And ideally, i think another tip for founders is, ideally you want to do your board meeting in the third week of the month, get all your metrics, and your you know, data out, call it around the 10th of the month, generally, most companies are able to do that. And then the board deck of what needs to get discussed ideally should be sent, call it 2, 3 ,4 days after that, and you know, everyone has at least three to five days to review share questions in advance.

And actually, you know, the board meeting then becomes a discussion around key decisions that need to be taken. The good companies i've seen are always able to stick to this like clockwork, right around 10th, 11th of the month, by like clockwork, you end up getting, you know, the MiS and 2, 3, 4 days later, you kind of have the deck that needs to get discussed as well, the companies, at least personally, where i feel like i've not been a great board member is i’ve not able to get companies to always be able to, you know, stick to the discipline of getting the board deck sent well in advance, because then what ends up happening is you literally have maybe 12 to 24 hours to read and reflect on what the company is trying to go through and try to figure out, and then the discussion actually becomes more of an information exchange, rather than actually something reflective analysis of you know, what has happened in the past?

And what should we be thinking about going forward? Any advice to, you know, people who are just starting out in their career, or founders who are just beginning to formalize these, you know, reviews and boards, etc? How should they actually just, you know, get into the virtuous loop versus…?

Vikram Vaidyanathan:

i think a board member, you know, what we tell our young guys, one is to prep hard before every board meeting, because you need to deserve to be in that board meeting, which means if the company has sent you review documents, make sure that you review, sometimes we do a lot of upfront work before a board meeting, especially if it's strategy and so on, so that we can bring something new to bear in the board meeting.

And then third, figure out in those discussions, how you can be constructive. And where you're following the flow of the conversation versus suddenly jA Matrix Momenting the conversation and interrupting the conversation. i think those are the sort of few tips as sort of early board members and, and so on.

And oftentimes, i actually shoot out an email or a text to the founder saying that we should be discussing this. And therefore, they factor in a this is on this board members mind. And i want to make sure that i address that question. So that's also helpful to do upfront and in advance, as founders i’ll tell you the extreme situation that  founders and top management do which i don't agree with is to do a pre board meeting, which is to align everyone before the board meeting and do like a half an hour one hour meeting with them prior to the board meeting. One it doesn't scale and i think it's really an overkill and it destroys the purpose of having a board which is a collective decision to, you actually made a process which is supposed to be efficient, but it is heavy, into very inefficient, very heavy process. So i just don't recommend that at all. But there are parts of that you can learn from, which is to send out the note in advance.

Get questions early, that what are the questions that you have and you want to discuss,and if somebody has a very strong point of view on let's say one thing or Hiring or maybe it's a big fundraise discussion that you're gonna have, then get on the phone on that one particular topic. So that you know, what that person is thinking. So he could do that, but selective, this pre board meeting is, you know, it's an overkill.

Rajinder Balaraman:

Standing in the actual board meeting, i'm guessing that there will be conflicting views, and there will be divergent points of view at some point. How do you then drive consensus? is it the founders responsibility?is it collective responsibility?

Vikram Vaidyanathan :

So firstly, you want conflicting views, you want divergent views, both i would argue as the founder, CEO, as well as a board member, because if all views are in consensus, then you don't have a very good board, because everybody is agreeing on everything, or actually don't care enough, that's what is happening, if everybody’s agreeing on everything, you don't have a diverse enough board, and we don't get enough, then you're in a bad situation.

So you want divergent views. But you want all those views to be discussed with respect. And everybody gets time as well as the respect for their views. And i think in different board dynamics, it's different things. By and large, we want founders to actually control how they drive that board meeting. And we don't care that much about consensus, but respect for all views, they have gotten factored in, and then a decision has been reached.

So we care more about respect and harmony, but not as much about consensus. i don't even think in the early stages, you can drive consensus, because we have such ambiguous information. And you have to make so many decisions. Some the decisions will have consensus will not some of them will be right. Will not be right. For as long as you have harmony you keep moving forward? That's the right answer on a board. Sometimes as a board member, you have to jump in to try some of that harmony. But by and large, I think founders should be doing it.

Rajinder Balaraman:

Yeah. And I guess like we started out, you know, talking about how this board is, you know, heavy institution and feeling area. So at the end of this, like, you know, just get to summarize there, you know, as a founder, what's the value of this board? And essentially, how do you maximize what you get out it.

Vikram Vaidyanathan :

I would say learn to have and manage a board. It's a part of the company that you're building. It's an important part of the company that you're building. And so learn how to have one and manage one, create roles for your board.

Therefore, they have a role to play in your work, in your life, in your growth, in your company's journey. And that and you will get the most out of that. That whole. For us. We treat it as a responsibility to be on the board, to be as constructive as possible, at the least, and hopefully add value.

And I think we do have to work very hard to actually retain that position. And we treat that as a responsibility to make sure that you're learning alongside the founder, so that you deserve to be part of the conversations. Finally on choosing your board members, to founders, I would say trust your instincts, you know who deserves to be there and who adds value, trust your instincts, choose your board members.

Rajinder Balaraman:

Thanks.