Reid Hoffman | Building A Great Startup Board Pt. I

Hi, I'm Chris Yeh, the co author of Blitzscaling and I'm here with my co author and old friend Reid Hoffman, the co founder of LinkedIn and investor at Greylock Partners. Reid had so many things to say about this topic that we decided to release this content as a two part episode. You're about to hear part one of our conversation about building great startup boards. Part two will follow soon. We hope you enjoy the discussion. Today I thought we might discuss an important topic for many entrepreneurs which is how to build a great board of directors for their startup. This topic isn't something I saw a lot of courses for in business school. Mostly it seems like people learn this by apprenticeship or worse by trial and error. For example, I learned most of what I know about startup boards from my old mentor Han Wong, and I suspect I'm pretty typical. So let's start with the basics. Reid, what is the role of a board?

So the structural role of a board is to essentially the governance of the overall company. It means it's managed in accordance with the interest of equity, which obviously, hopefully in most major companies has a combination of investors and employees and so forth. But it's overall, the equity side is managed in a coordination with the law and kind of making sure the board of directors is responsible that, that the company is, is managed in a way that it fits with kind of legal operations and expectations. They have the, the ultimate responsibility for how to make that happen. And the way that that is manifest itself is the board of directors is responsible for the management is running well. They are not the management themselves. And that's actually, that's an important point that we'll come back to in several different angles on this. And it's a common mistake the boards make which is slipping into management and not recognizing that they are slipping into management. Now the most central way to state this, and I learned this simple formulation from Reed Hastings, he says the fundamental, I think it's one of the fundamental responsibilities of the board is to hire, fire and compensate the CEO. Because essentially when you say what is the role of the board? In thinking about gunrunning, the management was like, well, it's the CEO. Now here's the first light mod to that is actually in fact in many boards the CEO and the CFO both have their own direct channels at the board. And there's a reason why the CEO and the CFO are in kind of different roles for this because part of the different role is to say the CEO is like, here's what we're Building to here's our aspiration, here's what we're trying to target. And the CFO is almost like the not pessimistic voice, but more cautionary voice. Like, okay, here I've been analyzing downsides I've looked at every month. I've kind of cross checked the plans. They look pretty reliable, you know, et cetera. And there's a good yin and yang and a CEO and CFO who obviously should be tight and well coordinated and all the rest. But like, what roles are they doing as they playing that out for the company and also playing that out with the direction of the board. Because just like, for example, usually there are very, very few human beings who can both play writer and editor of writing at the same time. They might be both very capable writers, but they might be both very capable editors. But on this project, this one's the writer, that one's the editor. In the same kind of thing, there's this kind of diversion between CEO and cfo. That's an important part of the thing. And so part of again, the reason why I'd say that when you say, well, why is it that you diverge somewhat from, you know, this first principles, genius thinker, genius entrepreneur, Reed Hastings. The answer is because actually, in fact, it's not just the CEO. There's also the thinking about how the CFO mixes in and how the two work together and what the two roles are and how they're playing. I've actually seen boards, been on boards that have said, oh, look, we're doing great with the CEO, but actually, in fact, we need to fire the cfo. The CFO needs to go now. They do fire the CEO. They don't fire the CFO themselves. They go to the CEO and they go, well, here's why. This is why we think this is what should happen and why it needs change. By the way, part of our worry that you don't fully understand your job, that you don't understand that the CFO should be fired. Now, that being said, the CEO coming to a board saying, hey, we should fire the CFO also means the okay, like the CFO is partially the board's cross check on what kinds of things the cautionary note within it raises a cue, questions and flags. So that's part of the reason why this is a nuanced position about the board making sure management is doing the right thing. And by the way, while generally speaking a lot of cos prefer that the board is completely disintermediated from the management team by the CEO because the CEO wants to control. And by the way, so sometimes and by the way both the CEO and the board misunderstand the relationship between the board and the management team. Generally speaking, the much more healthy boards have actually in fact exposure to the management team for a number of reasons of governance, but do so in a way that does not undercut the co. Because the classic reason why a CO would go ooh, I don't want the board talking to the management team except in these structured ways is I don't want the these people thinking they're running the company so they're undercutting my ability to run the company. By the way they're talking to the management team which is the board doing damage. And so anyway, so the very high line is the board is saying we are making sure the management team is exercising the best possible results for the company. Is the management team the right team? Is the management team doing the right things? Are they not off roading in bad ways? We what is the risk structures of what they're doing? And then this kind of leads to the other kinds of things that usually boards do, which is the boards say look on the very big financial and structural commitments that you're going to make as a company, those large structural commitments you have to run by us, you know, like say for example a startup, a lease has a higher financial liability than all the money I currently have in the bank. Is that okay to do? Right. You, you know, and so like you know, leases, business development deals, other kinds of things. Also of course with if you're going to dispose of a company like oh we're going to sell it and the equity is going to be worth X. Another part of the board of directors question, like one of the most fundamental ones that most people don't understand until they're close to and being experts at being board members is like well is the company being governed in the interest of equity or in the interest of debt? Right, because by the way part of the whole thing is once your liabilities exceed your assets, it flips you in certain circumstances, not universally because you're like oh we'll have revenue and this three year lease or five year lease, you know, we got many years to develop a product that we think we're going to get be making revenue off of. And so we're not in that place. It flips your governance responsibility because your governance responsibility is now to repay your debt holders versus realize the best possible equity thing. And that's part of where you begin to say well who Are the people who are actually knowledgeable board members. They understand that that's actually part of shifting responsibilities. Now, this is a long answer, but let's touch on two more issues before we get to, you know, whatever the next question is, which is one, let's even just look very clearly at this topic where you go, well, okay, higher firing and compensating the CEO's responsibility of the board. And people will say that. And then you go, okay, well, let's evaluate board members based on how good their skills, where is their experience and targeting of evaluating or hiring CEOs. Do they understand how difficult actually CEO management is hiring CEOs? You know, like one of the things I frequently tell people is hiring CEOs usually has at best a.500 batting average. That's when you do it super competently in terms of how you operate. And do they understand that, how that works and what the batting averages are? When you go through your board members and you ask them, even on this basic question of hiring, firing CEOs is like, well, when have you done this? What principles have you learned? What do you know that most other competent professionals who haven't done this job yet don't know? And what do you know? And do you really know this? What mistakes do most competent professionals going into a board role? What mistakes is the most common mistakes that they make that you avoid as a competent board member? These are all kind of basic tests of competence. And one of the really stunning things about board of directors, everything from startups to public companies, is how few people actually have answers to these questions. Which shows you that they're approaching it in more of an amateur fashion than a professional fashion in terms of how they do it now. And this gets to the last point that I think is super important. I, along with a number of people, including people who are venture capitalists like myself, usually kind of say all these mocking and ironic statement about venture capitalists. And there is a bunch of things that are legitimate criticisms of, call it more than 50% of venture capitalists in various ways. Here is actually one of the things that's super interesting if you say, where do the best board members come from everywhere for public companies, for startup companies, they generally come from the venture capital profession. And it's a very, very simple set of reasons, which is VCs are one of the few people who get lots of repeat practice being board members. Like, I've been on so many different boards now that I need to go back and count to remember the number of different boards I've been on and I don't have 10,000 hours of practice. I have 100,000 hours of practice, I have 200,000 hours of practice. It just tons and tons and tons of time doing this because I've encountered all the different issues about how boards interact, how they differ, different circumstances, different things with executives, different weird behavior from executives or CEOs that, you know, issues around financing. And, and what does it mean? Because on startup boards, like one of the real central thing is how do you raise your next round of financing as one of the pieces of competency you're looking at in a board member and helping you with it? That's actually one of the central things you want a board member to help you with in terms of doing. And all of that leads to that 10,000 hours. But despite the misfunctions, the place to best hunt from is people who have had a lot of experience doing it and doing it well. Namely VCs. Not only VCs, but VCs are a bulk of it. And then of course you want a reference check to make sure you're getting the ones who are doing it well to call other cos who this person has been a board member with and say, hey, ask the good reference questions. Not hey, were they a good board member? Okay, but like were they your best board member? What were their strengths and weaknesses as a board member? What were the thing that you, you most got from them that was. And what was the strongest weakness that you encountered with them as a board member that you were navigating? And these kinds of things, because these are part of the important things about realizing this as a, an important area of competence.

You described a couple of things that startup boards do that go beyond what just traditional boards do. One of the most important of which is helping the startup raise that next round of financing. And so what I take away from this is that you think that building a great startup board is important. As an entrepreneur, why is it so important? Is it just the raising of the money or are there other things that are involved?

Well, the boards can make or break the company. They usually tend to be higher risk of breaking the company because the making of the company tends to be the entrepreneurs, the CEO, the executives, the team members, the founders, they're the people putting in 80 hours a week, 100 hours a week, et cetera. And this is actually one of the misfunctions that you get from arrogance of VCs. It's like, oh, well, it's really important because I made the company, you're like right in the two hours a week that you averaged into the company, if you were making the company, you made a really bad investment. You like you chose the wrong entrepreneurs, your wrong executives. Like your thing is to help these people be successful and be the right catalyst for them is kind of like the one of the really central things and so you can help make it. And I will get to that in a moment. But the very first thing is almost like they hit a startup Hippocratic oath, a startup board Hippocratic oath which is and VCs need to understand this and investor arrogance. Like oh, I've seen a lot of these. Like one of the things that I most often see from board members that I Unfortunately internalize or VCs as a sign of weakness is they go, well we're pattern matchers and so we know how to pattern match to the go to market strategy, to hiring the right executive to da da da da. And usually when I hear this it's the oh, you don't know enough about this area to be able to articulate explicit learnings or areas and you're trying to assert expertise and authority that you probably don't have the backup for. And you're actually in fact shooting from the hip. And this is part of where you suddenly could be doing a lot of damage to the company. And this is one of the issues with this kind of most classic problem. So a very first thing that all board members should do is say look, I should be super clear about what, where I might add negative value and I should withhold myself from doing that. The Hippocratic oath make sure you do no harm because it's very easy to do a bunch of harm on a board. So let's take a board member I won't name an early board member at LinkedIn asserted to me with strong vigor the business model of LinkedIn, you know, will be advertising all of the other of this other things that you're doing. That's a waste of time and we should focus on this as an advertising business and that's what you should be doing. And to this board member's demerit, they've never come back to me and said, oh yeah, you are right, it's actually in fact, you know, corporations and subscriptions or like there's a great advertising business here too. But this was a really fundamental part of the business. Now what that board member did is it caused distraction. It forced me to spend time defending myself against this point of view which was different than the one that I had and not to the point of saying like, for example, a good way saying like a good board member doing this, as opposed to saying, I am an expert and I believe that the following thing is true. A good board member says, hey, we should evaluate the question about whether or not advertising might be the most central thing. Here's some of the arguments about why advertising might be a really central business model, the one we should focus on first for LinkedIn. And you as a management team should have a coherent and developed point of view based on these sets of arguments. And if you have an alternative set of arguments, then those should be helping drive and inform your strategy about what you're doing. And I should make sure that I understand them. That would be a functional board member. Because, by the way, part of what you do is you go, what's my level of certainty now? If I have a ego that has gotta be I am the man at the table, which unfortunately too many board members and VCs and so forth have, then they assert it that way as opposed to saying, hey, I've got this question, this idea, this thought that I'm refining in a way that the work that you're going to do as a CEO and a management team and a CFO and everyone else is going to make you better. It's going to make you stronger as a way of doing this. You're going to refine your strategy, you're going to have an informed theory about what your business model case is and so forth. And then, great. And then we're going to back you on what you're doing and we're going to enable you and we're going to support you and help you make that happen. That's a good board member. So that's kind of in the question of do not break the company. Because there's lots of ways you can break the company with your own ego, your own misbelief and what you're expert on, your own misbelief that you're running the company like the, oh, CEO, you should do X or you should do Y. It's like, well, really, if you have a CEO that you should be issuing commands to, and I saw this in my very first startup, SocialNet, there was just literally terrible board members who were going, well, I'm much more expert than you, so you should be doing what I'm telling you to do. You should be doing television advertising and you should be doing that. And you're like, okay, you're breaking the company. That that's what you're doing, you're actually reducing value in the company. Now, I was a baby entrepreneur and I recognized that the mistakes they were making, but they thought, of course I was a baby entrepreneur and I was an idiot. So I didn't know what the fuck I was talking about. They were on the board and so they had the control of this stuff. And that's part of the thing that kind of screwed up here. And by the way, baby entrepreneur, a lot of mistakes I made, especially at SocialNet, but the question is, is the board is not like, oh, I'm evaluating whether or not I've made the bet on you. I'm trying to make you as successful as possible. And you know, we'll probably get back to this whole question about like, when do you change CEOs? And so. Because that's a very different question in a startup than it is in a larger company. But that's all the thing of not breaking things, not doing. There's lots and lots of ways away. As a startup board member, you can add negative value. Don't do that. Right? And so that's one now question is making value action back. There's a lot of ways you can add value. Now part of it, by the way, and this is what makes the thing is like being a catalyst or a challenger for the entrepreneurs is extremely important because the headline for it is, look, if you've made a seed investment or series A investment and you turn around, say, oh, it's time to fire the CEO, you've almost certainly made a disastrous investment. And actually, in fact, if you think it really is time to fire the CEO, you should really be thinking it's time to sell the company or shut down the company. Because the kind of person that you need as a CEO of a startup is, is a founder. As someone who believes this, who's, I'm making this successful. Usually you can't get a hired gun, another person to come in and really do this. And it's one of the reasons most incubators fail too. Because the hiring someone to be the early stage founder is super hard because they go, oh, I don't really like, oh, it's a problem with the idea. It's not really a problem with me. It's like, no, no, this idea, like my ability to make this successful, that is where my value is. So that way, that's the high line. So what that means is that frequently what you're doing as a board member in a startup is you're going, how do I help make this successful? I'm not really evaluating firing the CEO, like, because firing the CEO is like, well, we're fucking dead anyway. Like, like, if you get to a point, you're really doing that. And by the way, a lot of classically experienced board members come in and make this mistake because they go, well, we hire and fire the CEO, so, oh, we should talk about firing the CEO right now. Like, our whole bet is on the CEO and the founders and making them successful. Like, if you really, really think that that's what we should be doing, then at that point we should be reevaluating the whole investment. Like, that isn't like, oh, we just need to get a new CEO in here. It's like the. No, no, no. This is like, it's time to dispose of the investment. It's time to try to sell it if we can. It's time to try to like, you know, like, shut it down. Maybe like you shut it down, hand remaining money back to vestors. That's the decision. You like the early stage startup thing, you're not really firing the CEO. Now, there's nuances and asterisks to this. The CEO comes to you and says, hey, I, I think it's like, my co founder should be CEO. Like, like on the master's scale, Toby Lutka, you know, kind of thing where his, his CEO quit because he didn't. He wanted to be snowboarding, not all commerce. And, and Toby stepped up. That's great. Because all of a sudden they're like, oh, co founder, founder, like, who could be CEO? Okay, great, we'll do that. You know, like, there are asterisks to this and as a way of playing. But the way that you kind of play that asterisk is by exception, not by rule. Now, my very last thing I will say on this, because this is one of the reasons why, like I. Of all the different venture firms, I joined Greylock. Is that Greylock of the venture firms. You know, then and now that I was looking around, had exactly the right philosophy on VCs and entrepreneurs, which is one is the success of the company is the heroism of the entrepreneurs, heroism of the executives. It isn't one of the firms that kind of tries to say, oh, we made that successful, like that huge success, whatever that was because of us. It's like, no, no, it was because of them. Number two is you're not passive. You're not like, oh, I'm just asleep in the back seat as you're driving. I'm an active partner. An active partner includes by the way saying, hey, I think you had a big risk here, or hey, you may not be doing that right. Or, hey, you may do that a lot better. And by the way, can even get to a point in some point where you're like, well, actually, in fact, you're really not hitting it. And the bright thing for the company is to hire a new CEO. There is a point in the startup journey where that can be the case. Now, obviously, everyone prefers it not to be the case. And you know, a lot of VCs say, well, I never invest in entrepreneur. They can't be the CEO the whole way. Well, you can't know, right? And you're trying to do as a board member, you're trying to do the right thing for the company. So if you say, I never replace the CEO, then, then you're also undercutting your fiduciary responsibility. Now, by the way, at early stages, the answer is that's not replacing the founder unless there's another founder or kind of equivalent that goes in. But like Greylock has that right balance of I'm kind of roughly in the metaphor is I'm in the front seat next to you, helping, including helping by sometimes asking the hard questions or pushing you in a way that makes you uncomfortable or, or kind of challenging you on some decisions that you're making and doing that. But I am not under the illusion that I'm in the driver's seat. And I'm also not under the illusion that the heroism of this journey is yours, that I am the invited partner in the room. I am the person coming in to help do that. And whatever becomes of this becomes from the people who are CEO, who are founders, who are executives making it, and the board members at best are the helpers and facilitators. And sometimes that help is amazing. Sometimes the next round of financing, a key strategic insight, a key risk avoided, a key thing that helps the CEO or the founders unlock some new potential or new market. All of those things are things that board members have and can add in and should aspire to be. They should aspire that the founders and the cogos, oh my God, this journey would have been so different without you. You have so much increased the impact and the value of the company, what we've done and so much decreased risk and so much helped us get to certain decisions faster and better than we did before. That's what you aspire to as a board member. And that should be your personal okrs, your personal goals for how you do this. And you should have that Kind of that's what I should be doing, you know, as part of doing this. Now, there's some weirdness around. You know, sometimes people say, hey, we should have 360 reviews who are board members, you know, and it is good to have that viewpoint, but sometimes you'll get a negative 360 review. That's because you're doing the job you should be doing in this particular circumstance. And so, you know, there's a. There's even asterisks and nuances to that. So anyway, that's a, you know, a long. But that's the basic statement about why building a great startup board is as important in many ways as building your executive team. Even though the people doing this are not like they're two hours a week. Right. Or, sorry, you know, like, you know, versus the 80 hours a week or 100 hours a week, you know, roughly in time. And sometimes it's a little up, sometimes down. Executive chairman might be a day or two a week. Like, there's. There's variants and nuances about how you compose these things together, but that's why it's. It's a super important thing.

It seems like the core fundamental thing is as a board member, you have to understand you're in the passenger seat. You may get to choose whether to change drivers at some point, but no matter what, you're in that passenger seat. And your job is to figure out how to help the car or bus or whatever it is you happen to be driving get to its destination. And so being in the passenger seat and yelling, turn left, turn right, Stop. Go. Is not something that is helpful except in very rare circumstances.

Exactly.

Having been the person mostly in the passenger seat when my wife drives, I clearly recognize my role.

Indeed.

So when we think about boards and startups, clearly the term startup encompasses a lot of different kinds of companies. In Blitzscaling, we describe there being five different stages of an organization. From the family stage, where it's a very small organization, less than 10 people, basically all in one room, to the tribe and village stages, which are still relatively more informal, ultimately to city and nation, with city being 1,000 or more people, nation being 10,000 or more people. So it seems to me that as your company grows and goes between these five different stages, the nature of the board will probably change as well. And you sort of referenced that a little bit in talking about startup boards versus traditional public company boards. But help us understand, how does the role of the board change as the company grows?

So it definitely does. It's part of the reason why you and I as co authors architected blitzscaling the way we did and saying look what got you here won't get you there and why the rules change and evolve as you're going to these stages. And that one of the things that's super challenging of course about blitzscaling is that the size of the org is changing so quickly that you have to really quickly readjust even though all the rules internally about like how do you operate, how do you go to market, how do you, you know, what dashboards, what managerial responsibilities look like, what communication looks like, how do you keep culture, all that stuff is all part of the reason we did blitzscaling. And that's because the underlying thing is, is how much organizations change roughly correlated to the size of the organization it is in terms of are they multi threaded and you know, all the rest of the stuff. And that's the reason why it does broadly correlate to, to what you should be trying to do with board. So I'll go through the five and talk a little bit about kind of structural changes to get some sense of it. But at the outset, let me say it's not the only variable because the real variable is what are the circumstances of the company. The thing that you're looking at is what board members you should be hiring for. At least kind of like a 3ish year tour of duty. I actually think that classical one, the one that I tend to think of it as 10 years, there's arguments about why it shouldn't be longer than 10 years with exception. And there's I think very good arguments why it generally shouldn't be shorter than three years except by exception. So something along those kinds of lines. And so you're looking for something that's, that's with you for a while is, is collaborating and generating a knowledge store and helping the management team shift the right way and have enough knowledge of the company to provide the governance the right way when that's relevant and all the rest of it. So part of it is to think about the circumstance of the company. Like one of the metaphors, you know, Chris, that I use sometimes is, you know, Marines take the beach, army takes the country, police governs the country, where the country is kind of like market, like market share and so forth as a way of thinking about it. Well, where you are in this three part journey will have different circumstances of play because that's part of the role of the board too is to make sure that both of those things are in the combination of how to compose your board and what the board function is. So now going to the specific answer to the challenges and size of company are partially correlated. All why we did this in blitzscaling. So when you're in a family stage, generally speaking, you have very little in the way of board members. Because the short answer is it's kind of an idea. You've assembled some very basic resources. You put it together, you might have a, an angel investor or you might have someone who is, call it part time, an executive chairman, co founder. So with generally speaking, that person probably has like, like a tell would be that they're vesting common equity along with it in terms of what they're doing as work and this is part of their work. In which case, by the way, this isn't the two hour a week board member. Usually this is more intense than that, at least for some period of time. Then when you get to the tribe stage, you're beginning to look at now you're really lucky. You've got product market fit that even goes product market fit to scale. Because part of our whole blitzscaling thing is the first to scale is what really matters. Not first mover, it's first to scale movement. And the tribe is you're generally speaking looking for product market fit. You're usually refining it. You're usually doing the Brian Chesky handcrafted things. All of the first episode of Masters of Scale and you're setting up for scaling. So a lot of what you're looking for board member help here is, is in taking the right risks, the concentrated bets. You may not actually have anything that's worthwhile yet. That's part of the reason, of course, I say starting a company is usually jumping off a cliff and assembling an airplane on the way down is because usually your asset value is usually zero. No one's going to buy this from you. No one will buy anything in it from you. There's nothing here. You're still trying to get to being something of value. And so usually you're playing for that upside down, you're containing some downside risks and so forth. But it's entirely a can we get to. We've built the plane. It is valuable. This is something that someone else would pay something for, you know, because we're going somewhere now that then bleeds into the village size. And usually somewhere between tribe and village is usually where suddenly the blitzscaling question really occurs. You know, as we note in the book now at the village, you're beginning to have executives at least managers of managers, you know, executives may sometimes come into cities. There's different levels of executive in there. So what is executive management? Is your management team set up for hiring them? Does the founders understand that, you know, what are your first executives look like? How do you maintaining cultures doing? Are you doing blitzscaling? Do you now have some kind of asset value that you're trying to make sure you preserve and so you're not no longer just like doubling down, putting it all on the table to try to get to the next level and being very focused? Or are you like. No, no, actually, in fact, some value preservation is part of how we're managing the company now. This is by the way, part of how understanding board members for startups like, look, we're not trying to preserve value. There is no value right now. But now, oh, we're getting the point. We're beginning to preserve value. That becomes and by the way, strategically, it's a choice. Sometimes you go, no, look, there's assets, but we should still be pushing them all in the center of the table and go all in the next thing because we're still playing for that amplification. So there's a choice about whether or not you start managing for downside and governance or sort. But that's a collective choice about what's right for the company, what's. What's right for the shareholders, what's right for the employees, what's right for the customers. You know, all this is part of doing that as you move from the village to the city, almost for sure now you're beginning to say, okay, we're managing downside risk as well as upside opportunity doesn't mean we might not be prioritizing managing downside risk, but we're actually in fact like there's enough substantial value here importance in the ecosystem, asset value employees, employees who are motivated by the asset value, customers who are depending on your product that now part of the function of a board is saying we're doing the management of make sure that this asset is potentially infinite. Like is investing in the future, is rejuvenating itself, is not taking risk where the whole asset might go away unless super important by exception or by need, by crisis Covid, you know, et cetera. And then by the time you get to a nation state, you're much more like a public company if you're not even already public. Most of those companies are public in some ways, not all, but most. And you're beginning to operate as a public company. Now there's a nuance which is most public companies tend to have switched all the way into governance for like, oh, we're trying to manage all the downside. The things our shareholders, most managers like don't put the assets at risk. And there's some structural things where the way that public board members are hired and compensated and who they're hired from and all the rest that all tend to be the don't take risk, don't take risk, don't take risk. And this is actually one of the structural challenges, I think, in the modern world, in essentially the modern technology world, all companies are on the process of becoming technology companies. And all technology companies have these kinds of cycles of invention and reinvention that involve taking risk. And that's of course one of the reasons why, you know, Mark Pincus and I went and started the SPACs with re invent. Because actually, in fact this, this matters in the public company market as well. But you know, that's obviously SPACs you and I talked on your podcast about, it is a different conversation. And so that's a very quick illustration of each of these different levels of some of the vectors, not all of them, but some of the vectors that change as your size changes and as you think about the phase, phase of what you're in, in your startup, changes to what the OKRs, the governance functions, the team sport of the board should look like and then what the people on the board should be doing.

And this should come as no surprise because it's one of the core themes of blitzscaling. It's really about the management of risk, the balancing of upside and downside and figuring out which is the more important thing to do at that particular phase. As a board.

Yes, but boards are very much a team sport, right? Like the chairman of the board, for example, is in charge of certain aspects of the board, the legal powers. Frequently a good way you can look at stuff is setting the meeting schedules and setting the agendas of which are the things that the chairman is important for. But part of the weirdness of the governance piece of this is like what is the bringing on of new board members? Well, it's a collective board responsibility that the board is really a team sport. It isn't like that there's a coach, that there's a captain, etc. Now, one of the weirdnesses again, where people misunderstand public boards a lot, as you look at which are the best run public company boards, they tend to be run by the CEOs, but yet that's the inversion of what people's usual model is, which is the CEO reports to the board and the board hire fires and compensates the CEOs. Like actually in fact the best run boards, the CEO tends to be actively running them even if the chairman is fairly active too. Because there's a whole bunch of things that go into that. Now sometimes you have a very active chairman that really is running the board. But most often, and that's part of the reason why you sometimes have the CEO and chairman of the same position. And some people say that should never be the case. But actually in fact when you look at where the CEO and the chairman is the same position, it is both the worst run boards and the best run boards. Right. Because of the activity of so doing so the team sport part of it is another of the interesting nuances when it comes to this unusual thing that is a board of directors.

Now it's obvious you have a lot of thoughts on building these boards of directors. The question is how did you learn all this? Who did you learn from? Where did this all come from?

Most of it's trial and error, most of it's exposure to the stuff myself and you know, frankly I didn't really have any real idea what boards did. Couldn't find any good writings and descriptions of this. Most of the stuff was kind of like oh, you got a responsibility for making sure the business doesn't go out of business. So you have a responsibility for hiring and firing and compensating the CEO. And you're like okay, how many people have expertise at that? How do you do that? What does that really come down to? Because by the way, people frequently of course tend to put people on boards who are former CEOs and you go okay, they at least have some exposure to that. But by the way, how many CEOs have hired and fired and compensated CEOs right? You know, because obviously you're self exception reference the earlier comment I made about why VCs are generally the 10,000 plus hours and repeat practice in board members. So most of it was from experience. Now I'll share a little bit of the kind of the personal story on that which was, you know, so my first experience on board obviously was doing my very first startup social baby entrepreneur watched all the dysfunctions of what I thought was a classically dysfunctional startup board which had CEOs who thought, you know, because they'd been executives and startups, that they knew much better than we knew what was going on. We were making mistakes, don't get me wrong. And they were right. About the mistakes we were making. Also true. But their thing was, oh, we should just start running it. We should just start issuing commands. We should just start telling you what to do. And you're like, okay, that's a total fail. You know, epic, you know, caps lock fail on the direction. I was watching all this and going, oh, okay, now I get a sense of what the dynamics work like and what the legal powers look like and all the mistakes. And so then part of this is I was relaying both my startup experience and my board experience to my friend Peter Thiel, who then said, okay, PayPal, let's have. When we set up this board, before we bring in VCs, let's bring in my most experienced, you know, most knowledgeable person to be helpful. That was me for Peter and then for Max Levchino, Scott Bannister, and we set up that board. It was one of the very first unusual boards where you had two independents, you know, who were there before you got your first vc, because usually it's the VC or the investor and then later as independents as part of it. And I think that's partially what led to a really excellent board member, John Malloy, who was at Blue Run vc. And John was, you know, excellent as a board member at PayPal, because I'd had some experience but again was learning from it. And then later, as I started joining other venture boards, I even then refined my theory about, like. Cause you should have a theory about why you would be particularly helpful, A, as a board member and B, as a board member at this specific company with this specific CEO and this specific founders. And like, why it is like, you're a valuable talent there versus the oh, I just want it or something, because, you know, like, part of professional competence and delivering against the responsibilities.

And.

And so I went in thinking, oh, I'm an expert at consumer Internet. I'm an expert at Virality. I'm one of the people who invented a whole bunch of the Virality thing that's now common within Silicon Valley. I'm one of the people who helped bring Web 2.0 into existence and was, you know, I was calling it Internet 2.0, but like. And I said, oh, it's my experience there that makes me a board member. And by the way, all of those things are helpful. It's good active theory and so forth. But what I quickly learned when I joined my first board that had other VCs who were there, not selected by me, but as board members, I realized actually, in fact. And this is part of the reason, the thing I think is highly valuable as an independent board member is your role as a board member, especially as an independent board member, is to make sure the board runs well. Right. It isn't just the responsibility of the chairman. And part of the reason for that is because most classically there's always some division of interest between management and investors. Like for example, roughly speaking, how much do you compensate all of the employees and stock and the management and do you re up and all the rest? This is is partially a collective gain because we're trying to grow the stock such that everyone's really happy. But it's also the zero sum, just like investment, it's a zero sum. Part of it and so part of what. And there's a whole stack of these things between management and investors. And part of the role is to select. Now, if you're lucky, you've selected investors who are objective and broadly thinking are not intrinsically investor partisan. That's one of the ways, by the way, by just being an investor partisan, you can destroy value and limit the overall value in the company because it needs to be collaborative. But one of the primary functions of independent board members that it's not commented on that much, this is what I learned by being one of these people is like, oh, I came in thinking it's my experts in virality, it's my expertise t sin consumer Internet this. It's like, no, no, actually it's fact making a useful collaboration and game between the founders and the investing board members and making sure the dynamic worked. I'll give you an example which was this is early days in the web, 2.0 days because this is what I was starting my experience as a board member, the investor turned to the CEO and said, oh, I would like you to go and generate the comparisons of metrics and valuations of where you are now relative to these other consumer Internet companies that had done this a couple years earlier. I'd like you to go generate and do that work. Right. And I looked at that and went, oh God. Well, that would of course be really valuable to the venture capitalist and would be valuable for helping the venture capitalists set benchmarks to try to help manage the board member and so forth the team. But by the way, the benchmark is do the best possible job you can. You're not really, we're not in a stage you could fire these people and you're asking them to do a whole bunch of work for you, for you doing your job, which is not the work they should be doing. Building the company. So I spoke up and I said no, actually, in fact, don't do that. Belay that order. Right? That's a mistake. Board member. I'll tell you afterwards why. Like, because I'll give you the theory about why you're doing this for your own convenience and you're actually helping the company. And by the way, if there was work you would like to do to collaborate, to help the company, you should go do the work. You should set an associate in your venture firm to do that work and you should bring that as value add to the company versus a distracting the company with a mistake of focus to make you feel important in your function. Right. And that's again part of things. By the way, I'm an avid learner because like I have yet to find and you know, it's one of the reasons Chris, you and I have been talking about writing a book here about like, what is the actual in depth, how do boards work? How should they work? I've looked a lot and maybe I've just missed it. But like at MBA schools, like they don't serve on a large number of N boards. They don't have the 10,000 hours of practice. And so there hasn't actually been a good generation thing of that. And most of the content's generated is on public boards, which is interesting and valuable in some ways. There's things I've learned from that, but also huge blind spots in other areas, even on public boards. That's actually an important part of that. So that's part of it.

That's it for part one of this two part conversation about building great startup boards. Reid and I look forward to having you back for part two. That concludes this episode of Gray Matter. You can subscribe to gray matter on soundcloud.com greylock partners. You can also find new episodes and blog posts on greylock. Com. You can follow Greylock on Twitter at greylockvc. I'm Chris Ye and thanks for listening.