Recently, I had the pleasure of attending my first board meetings ever. Thanks to Bilal Zuberi, Partner at Lux Capital, for having me along and answering all of my questions about board dynamics and effective leadership – your continued advice and support are really appreciated and invaluable.

The following are my takeaways from observing multiple meetings between investors and entrepreneurs. The Interpersonal dynamics between CEO/board members and between individual board members can be very telling – they provide an indication of how much thought has gone into the strategic leadership of the firm, and whether the group can work well as a team. Note that board dynamics will look very different between startup, private equity, and public companies. This post will focus on startup boards, which are typically made up of investors and some advisers.

A healthy level of tension helps a board and management team think critically about a startup’s direction

Startups are in a constant fight for survival. Startups that are not facing any tension are not thinking critically about the problems that they need to resolve in order to survive. At the other extreme, if there is too much tension the leadership and company becomes dysfunctional resulting in the death of the company.

Thus, it is the leaders’ job to maintain a healthy level of tension. Boards must be able to have honest, objective discussions about the strategic direction and decisions a company will make, and the leader of the board (the CEO and/or the Chairman) is responsible for facilitating this discussion. This is accomplished in a few ways:

1. Agenda Setting: Leadership teams have many important things to worry about day-to-day to execute on a strategy, and a limited amount of time should be spent in high-level strategic meetings. Prioritization of important topics of discussion is key. Deciding what to discuss and what not to discuss should be the result of careful deliberation, and not left to open-ended discussion.

1. Socialization: Board meetings should not be the only time that a leadership team communicates with its board members. Important news should be spread ahead of time such that an appropriate discussion can be had. If you wait until a meeting to drop a bomb, board members will not have had the opportunity to do their homework. The resulting discussion will be much lower level and informative rather than deliberative.

1. Selecting the Right Team: Because a variety of skills are needed to build a company, leadership teams and boards should be made up of people who bring different perspectives to the table. However, it’s going to be difficult to get mileage out of a board if they don’t understand the business and industry dynamics. Entrepreneurs should do substantial diligence on a potential investor by asking other entrepreneurs that they’ve invested in about the investor’s knowledge of the industry, accessibility, and overall ability to add value.From a people perspective, boards should have members that provide dissenting opinions. This doesn’t mean that every board meeting needs to be a bitter argument, but a board filled with “yes-men” provides no value either. A good investor on a board acts as both a coach that provides critical feedback and as a support team to provide the leadership team with resources it needs to succeed.

At the end of the day, a board’s purpose is to serve the company – they have a fiduciary responsibility to the shareholders of the firm including common shareholders and employees. If you are the CEO, it’s up to you to design your board and board meetings to maximize the value you get from it.

The relationship between the investor and entrepreneur is what you make of it

There are two extremes that an investor-entrepreneur relationship can look like:

• Investor disengagement: Investor might not even show up for board meetings, or shows up to meetings and gives weak advice. The investor is not invested emotionally in the success of the entrepreneur or the business.
• Investor partnership: Investor is deeply engaged in the business, and is at the company multiple times a month. The investor and entrepreneur can both see that the other party wants what is best for the business, and a partnership is built based on trust.

A good investor is plugged into the business and actively engaged in coaching the management team and offering advice. This investor engagement can be extremely valuable if the relationship develops into a true partnership and can help align the incentives of the investor and entrepreneur. On the other hand, the development of personal relationships between investor and entrepreneur can complicate the relationship dramatically, making it more difficult to give honest, objective feedback. It is up to both the investor and entrepreneur to optimize for what is best for the business, and to build their relationship thoughtfully. If an entrepreneur doesn’t put effort into choosing an investor who they can partner with and doesn’t work to build that partnership, the default is to have a useless investor relationship.

Entrepreneurs must manage a fine line between confidence and arrogance

Aaron Harris of YC recently published a great blog post on I and we. While the discussion is focused on the relationship between an entrepreneur and their employees, but this discussion of ego is also applicable to the investor-entrepreneur relationship. Generally speaking, the investor is not in the trenches in the portfolio company’s industry. As a result, the entrepreneur has more detail and information from the day-to-day operations than the investor, and thus has a higher knowledge base for making decisions. On the other hand, it’s harder for the entrepreneur to evaluate firm strategy objectively due to their involvement in the day-to-day running of the firm, and because of human factors that cloud the passing of information.

Assuming the entrepreneur and investor have a good relationship (which is not always the case), an entrepreneur must manage their ego to effectively leverage their investor. This does not mean that the entrepreneur should blindly follow every single piece of advice given by the investor. Rather, they should remain objective by communicating the rationale of their decisions based on data. The entrepreneur should remain open to reevaluating their decisions based on new pieces of data that investors may bring to the table.

While the entrepreneur-investor relationship can be very complex due to the boards’ role in deciding to support or replace the management team of a firm, I believe that investors can add value to portfolio companies. Much of this value can be captured only through thoughtful building and maintenance of the board. Although many leaders strive to make decisions based on thoughtful data analysis, the reality is that effective decision making and leadership require effective management of people. Investors and entrepreneurs alike would be wise to think just as carefully about personal dynamics as they think about the business situation itself.