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How to Get the Most from Your Board
- The entrepreneurial-investor relationship is projected to span 8, 10, or 12 years, a duration described as longer than the average marriage, during which both parties aim to build a longstanding, potentially independent, publicly traded company.
- Venture capitalists are expected to provide operational value beyond board oversight, including making customer introductions, advising on executive hiring (such as CFOs or heads of sales), and navigating PR and marketing to accelerate growth.
- Although boards technically hold the power to remove a CEO, the risk of unilateral termination by a venture capitalist is expected to be significantly reduced because many boards are now controlled by the CEO and common shareholders rather than solely by investors.
- Investors are anticipated to act rationally, preferring to address CEO mistakes with support rather than immediate termination, though conflicts may arise when series A, B, or C investors face pressure to show returns to their LPs.
- Economic divergences between investor series may necessitate a "waterfall analysis" to calculate payout distributions and determine if interests conflict during a sale, with courts potentially intervening if directors fail their duty of care to common shareholders.
- In cases of high liquidation preferences (e.g., $30 million), venture capitalists may become indifferent to sale prices slightly above that threshold (e.g., $35 million or $40 million) if they cannot convert to equity ownership.
- If a market fails to materialize, companies may face wind-downs conducted in a "reasonable fashion" or undergo recapitalization to reset prices and clean up liquidation preferences to attract new investors.
- Successful recapitalization requires re-incentivizing the team to prevent employees from losing jobs due to underwater stock options.
- In the event of acquisition, entrepreneurs must evaluate whether economic consideration is paid in cash or stock and assess the acquirer's prospects, while the post-acquisition plan may involve retaining specific roles (e.g., engineers) and laying off others (e.g., sales staff).
- Acquisition incentives for key employees may include retention bonuses for the first two or three years and additional incentive pools established for the first, second, and third anniversaries of the deal.
- A "management carve-out" may be utilized to reallocate funds from liquidation preferences into a bonus pool for executives responsible for facilitating an acquisition.
- Investment bankers face a conflict of interest where the need to maintain repeat business with institutional investors may lead them to favor those firms over the company.
- IPO pricing dynamics create conflicting incentives where entrepreneurs seek high prices to minimize dilution while institutional investors aim to buy shares cheaply for maximum upside.
- The pricing of an IPO is expected to be "more art than science," relying on qualitative demand signals rather than purely mathematical formulas.
- As a company approaches an IPO, the board's function is expected to transition from active business guidance to a governance and legal structure focused on compliance and audit committees.
- The venture capital firm A16Z expects to collaborate with entrepreneurs who are a good fit for their investment types, working side by side to create change despite inevitable disagreements.