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Boards are dangerous to founder/CEOs

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Re: Boards are dangerous to founder/CEOs

#211

Post by Topgamer7 »

system16 wrote: post #103

Reading things like this and how common it is for investors to take over, I just wonder how it is possible that a young - and presumably naive - Mark Zuckerberg avoided the typical VC pitfalls and board guillotine / "CEO replaces themselves to help transition company to the next level" path? Was it just because Facebook's growth was so unprecedented they had no need to replace him? Or did he have a very good mentor o…

I think people don't credit Zuck with intelligence. Sure he created something simple, but he saw the value he could create, grew it, avoided giving away large chunks of it. He did go to an Ivy school, presumably knew how to learn on his own. And also there are people that you could probably trust to give you good advice: 1. business owners not invested in making money off you. 2. your lawyer is effectively a extremely expensive professional advisor, and generally required to be a fiduciary to you.

Re: Boards are dangerous to founder/CEOs

#212

Post by sulam »

repomies69 wrote: post #180
robocat wrote: post #172

Earlier quoted context omitted.

The VC cares about their portfolio, so if removing the CEO gives gains elsewhere in their portfolio, then their financial incentive can be against the startup. Edit: also the financial incentives of the most influential board member might not be aligned with the company valuation. Or the “nobody gets fired for buying IBM” theory where it is better to put in a known respected CEO (John Sculley), because fault can be b…

That is true, but I don't see how firing the CEO typically would give gains somewhere else in the portfolio. For example VC's very rarely invest in competing companies. However what affects the situation is that VC's want a lot of risk, and the risk preferences of the CEO could be considerably lower - eg. the CEO would be fine with moderately profitable company, while the VC wants all or nothing. I don't think it is…

VCs invest in competing companies all the time. There’s even a saying about it “no conflict, no interest” (as a counter-play to “conflict of interest”). They might not invest in a direct competitor, but startups rarely have direct competitors that are each both looking for VC funding and are fundable. Conflicts happen all the time, though, and VCs don’t worry about them as such. They may worry about a fund company that is doing well, because no intelligent VC is going to potentially hurt a successful investment to fund something that has a 90% chance of failure. But when all else is equal (and especially if it isn’t and they can help their successful investments) they will never worry about conflicts of interest.

The more interesting point here is: word gets around. You can see it in another part of this conversation (top comment right now). VCs are worried about their portfolio, it’s true, but they’re MORE worried about their next fund. The success of this portfolio is simply a good way to advertise to LPs that they should participate in the next fund. They are also worried about deal flow — they can’t get into the hot deals if they have a reputation for turning on founders. If the situation is noisily public (Uber was a good example of this) VCs will think very carefully about what to do. If you’re a small company that is struggling to stay afloat, they will ask themselves one question: is the founder the reason the company isn’t successful? If their answer is yes, then good luck. If not, they will simply chalk it up to it being one of the many investments they make that didn’t work out like they hoped.

Re: Boards are dangerous to founder/CEOs

#213

Post by hinkley »

antoniuschan99 wrote: post #160
hinkley wrote: post #111

Earlier quoted context omitted.

They don't have to value the company at $0 to fuck you over once you're gone. The current board can depreciate all of the shares by 50% and then issue themselves twice their original shares so they break even. Then do the same thing a couple of rounds later. I haven't seen $0 but I knew a few people who got diluted to a joke. It doesn't take but a factor of 2-4 dilution of your outlook to drastically change your opin…

How does one go about learning about these things. HN crowd definitely leans towards the technical side myself including. Btw. The blog is very informative and have subscribed.

> How does one go about learning about these things.

A very good question that I don't have a good answer to. Management likes that there's a steady stream of new people who don't know that there's a bunch of tricks that get used and so everyone learns them the hard way.

Re: Boards are dangerous to founder/CEOs

#214

Post by marcosdumay »

rsweeney21 wrote: post #48

I always thought stuff like this happened to OTHER founders, but would never happen to me. But my board fired me six months after closing our series A. The advice in this article is 100% spot on. I didn't know any of this. I was totally focused on building my company. But if you raise money you can't do that anymore. 50% of your time will always be occupied with working on your next round of funding or managing your…

> but what am I going to do about it? They have billions of dollars and I had no money.

There are still many options. You just have to search harder...

> On the bright side, the new CEO ran the company into the ground.

And this is the real risk. There are plenty of legal ways to make stock worthless.

Re: Boards are dangerous to founder/CEOs

#215

Post by ajkjk »

secondaryacct wrote: post #209
javajosh wrote: post #148

Earlier quoted context omitted.

If firing the CEO is a (the?) major degree of freedom for investors/boards, why are these events not recorded on crunchbase? That would seem to be a natural addition. I'd also like to see events related to dilution using valuation and any other major DoF that a board might have.

But firing the CEO, even a founder, is the right of investors who paid for it... I mean what else do you sell them? If they like the business but not the guy, why should they forever be forced to have him as a parasite in their mind ? Dilution seems wrong though, because they were supposed to buy something, not steal it.

You sell them.. returns on their money. That's the whole point, right?

Re: Boards are dangerous to founder/CEOs

#216

Post by hinkley »

redshirtrob wrote: post #206
jiveturkey wrote: post #185

Earlier quoted context omitted.

well to be fair, you should never exercise if it isn't early exercise. the odds are very much against you. I mean, by the odds you shouldn't early exercise either but at least you don't get hit by the AMT bullet.

That's certainly not true. You should evaluate the investment just like any other investment and decide if you can afford to lose the money and stomach the risk. Part of your evaluation should be consulting a tax professional to determine if there are any immediate, negative tax consequences. You're not guaranteed to get hit by AMT just because you exercise some stock options.

> You should evaluate the investment just like any other investment

Except it's not like any other investment. It's an investment that you are too close to. You can't think 100% objectively about an investment that you're too close to. For many people the solution is unambiguous: If I can't be objective about a decision then the answer is automatically 'no'.

Re: Boards are dangerous to founder/CEOs

#217

Post by sulam »

Waterluvian wrote: post #134

“ They will each feel like your special confidant. They will also see the other board members reacting calmly to the news and start to think that perhaps you actually have it under control. This will calm them down in the future.” This seems like obviously good advice. But also begins bordering on what feels like manipulation. And that makes me uncomfortable. In fact, this whole thing feels like manipulation. If noth…

I’m not sure why you’d feel bad for knowingly manipulating a bunch of people who, if you don’t, could decide to replace you in your job. These aren’t your parents, or your priest.

Put it another way: replacing “manipulating” with “managing” — this is just about managing up as the CEO, and it’s pretty basic advice at that.

Re: Boards are dangerous to founder/CEOs

#218

Post by ptudan »

engineeringwoke wrote: post #188
mritchie712 wrote: post #107

Earlier quoted context omitted.

Many of the debt players are realizing their advantage over VC is lack of control over your company. For example, check out https://timiacapital.com/ . A lot of their marketing is around "Retaining control" and "No warrants and no harsh covenants".

What kind of competent investor does a debt deal that doesn't place them higher in the cap structure?

The best part about debt deals is that if the company collapses, you can take over all IP as it's the only asset worth anything.

Re: Boards are dangerous to founder/CEOs

#219

Post by hinkley »

low_common wrote: post #165
hinkley wrote: post #111

Earlier quoted context omitted.

They don't have to value the company at $0 to fuck you over once you're gone. The current board can depreciate all of the shares by 50% and then issue themselves twice their original shares so they break even. Then do the same thing a couple of rounds later. I haven't seen $0 but I knew a few people who got diluted to a joke. It doesn't take but a factor of 2-4 dilution of your outlook to drastically change your opin…

How does share dilution work? Does that mean issuing more shares? How does depreciating shares happen?

It's not a publicly traded company so the paper is worth exactly as much as the people who hold most of the paper decide it's worth. They need some sort of majority to vote to change the rules, and since the employees with unexercised shares control exactly 0.0 repeating percent of the company, you're going to lose that vote.

It's a democracy where the wolves vote that the sheep will be dinner.

Re: Boards are dangerous to founder/CEOs

#220

Post by codingdave »

rsweeney21 wrote: post #48

I always thought stuff like this happened to OTHER founders, but would never happen to me. But my board fired me six months after closing our series A. The advice in this article is 100% spot on. I didn't know any of this. I was totally focused on building my company. But if you raise money you can't do that anymore. 50% of your time will always be occupied with working on your next round of funding or managing your…

That was a disappointing and strange day - I was in the last group of devs hired before all that went down, but I understand if we are just vague memories at this point.

I choose to focus a bit differently on how that all went. There is enough negativity from it all to go around, but I find it better for my own well-being to focus on the positive. (To be fair, you had more skin in the game, so I understand our difference in approach.)

Specifically, you and the other folks who hired me gave me a great opportunity to come join a modern team, learn a more modern stack than I had been on before that time, and it was a good growth experience for me, so you deserve thanks for giving us that chance. Thanks!

I consider that experience to be pivotal to converting me from being just another old legacy coder, and instead empowering me to modernize my skill set. I look back on that experience not as a failed startup, but as a valuable learning curve that has helped me succeed in the work I've done since that time.

Even events with poor endings can bring positive results to who we are, and where we go next.

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