Sunday, January 01, 2006

Control Roulette: A Bet on Red or Black

Dining last night on the best tuna tartare around, an entrepreneur asked me my thoughts on board structure. My answer surprised him, prompting his suggestion that I share it in a blog post. So here goes: Crafting the right board of directors has nothing to do with legal structure, and everything to do with getting the right people in the room.

I find that the ideal board of directors has 5 members--a nice, small odd number that allows for multiple skill sets without losing anyone's attention or complicating communications. The CEO is the only employee on the board, so that open, apolitical conversation can ensue regarding the team. VC's occupy no more than two of the seats--more than that yields rapidly diminshing returns (and fuels the conspiracy nuts who blame all setbacks on evil VC control). The remaining seats are held by outside experts recruited opportunistically--the board should regularly consider skill sets and credentials that would add value to the board (contacts, reputation, domain knowledge, customer perspective, CEO coaching experience...) and keep all eyes open for the right individuals who inevitably pop up.

For the record, my "ideal configuration" is a guideline, not a rule. Historical constraints commonly require deviation, which I have often seen work just fine.

Here's the surprising part... I don't care who elects whom, how many seats the common shareholders elect, or whether I even hold a formal board seat. Ask any entrepreneur I work with--Bart, Chini, Scott, Messiana, Risley--and they will confirm that I'm 100% easy on control terms, because I have learned from experience on 40+ boards that they don't matter. Real control has nothing to do with the documents, and everything to do with the color of the ink at the bottom of the cash flow statement. Simply put, when a private company is losing money, the investors control it, and when it's profitable, control rests in the CEO's hands--unresolvable differences between the CEO and investor group inevitably pan out this way. It's simply a matter of which is more dispensible at the time--the financial support of the venture firms, or the knowledge and momentum that the executive team brings to operations.

So as you can imagine, I'm always quite happy the day I truly cede control of the board!


  1. I should like to date your dog.

  2. Anonymous6:22 AM

    Hi David,

    If you want *the best* (aka the best greatest ever ever) tuna tartare (actually spicy tuna tartare), try Aqua Grill in NYC (downtown Manhattan). They actually cut up their own tuna fish each week, and it's simply the best quality (in terms of freshness and taste) tuna i've ever had. Try it on your next trip over....

    Please, excuse the superlatives.


  3. Woow... ur posts are a little too long... but then very very full of stuff...
    i think you could pls contribute ur ideas for this paper i am working on..
    pls visit:

  4. Your post's last paragraph is really thought provoking. Control as you say doesn't require documents you know it when you have it.

  5. Interesting topic.
    Happy New Year !

  6. Hi David,

    I came across your blog when I was reading your post on a different blog, I am deeply impressed is to say the least,although I dont have the necessary qualifications to comment,I have learnt a lot here! as a failed entrepreneur once, I am trying to start off on a new venture(very early days yet...), and your advice that you put up here has given me lots of insights to go forward!

  7. Hi David,
    Definitely had/ve time for your blog.Thoroughly food for thought and action too.

    Please do share your thoughts on mine,when time permits

  8. I hope you don't mind my saying that I think it is roulette, not roullete.

    Would you ever want a thoughtful but (to the point of significantly underachieving) not ambitious board member?

  9. Maurice,

    Ugh, you are right. My spelling isn't nearly as good as my grammar! Now I have to correct it, and break any links to the old blogspot URL...

    I think I understand your question, and the answer is that a thoughtful but unambitious underachiever sometimes turns out to contribute more than any other board member. However, you can't know that until it happens, and so I still try to recruit only directors with proven success and skill sets.


  10. David - some good advice as well as an interesting perspective regarding boards. Smaller, privately-owned firms that implement a board are faced with unique challenges, particularly when there are multiple family members involved. How does such a board remain objective? One of the techniques I've witnessed, as well as been subject to, is the mis-use of a board to railroad other shareholders into selling and leaving the business. That's something to consider before placing a close friend on your board if you are involved in a family owned business and you're one of the senior family members.

  11. Congratulations on being a blog of note. I've enjoyed reading through your posts. I like how you've listed your most popular posts, as well.

  12. hi... very intresting great advice too
    could you link my blog... i haven't got one comment's
    i'll add yours :) with a note in my bog saying to visit :)........happy new year thanks!!!......simi

  13. someone6:16 AM

    yes u are a blog of note.
    yes they are too long.
    no i didn't read them.
    no i dont have time for this.

  14. David,

    Very thought provoking.

    I wish the company I work for would follow a better "Board" direction.

    I enjoy the blog.

    Thank you,

    Mark Harvey

  15. Love your posts - keep up the good writing!

    -Mr. Non-Juan

  16. David,
    I am looking for 5-10K in venture capital. Do you know where the best place is that I can find it?

    Ron Wilson

  17. Chris Neumann9:41 PM

    Being an entrepreneur, the conflict I see that arises is the pace in which the company grows. VCs want to go for the home run - they have a portfolio of companies, and if one of them gives a 1000x return then the whole portfolio does well. Entrepreneurs don't have a portfolio of companies, and in fact, they generally have ALL their eggs in the basket of the company's success, and if they give a 5x return, that's fine with them, they generally make good money that way. When faced with a management decision that could either sink the company or give it a 10% chance of getting that 1000x return versus a decision which might cost some but not all of the company's cash but would give a higher chance of getting a 5x return, the entrepreneur would generally rather have that deal. Therein lies the conflict that I see arising when it comes to board and ultimately company control. It's not really about profitability, as the VCs LPs want liquidity events, not dividend checks.

  18. Nice blog,

    I am new to blogging (still trying to sort it all out, especially pictures) and working on my business, building playhouses for children (limited luck so far had to keep the "day job").
    Perhaps I am going about this all wrong..... :)

    Ed R-
    KidSafe Playhouses
    my blog
    some playhouses at a friend's site

  19. David,

    I have very strong feelings about food! While Tamarine does have an excellent Tuna Tartar (I visit the place at least once a week for this particular dish), the real best place in the world to get tartar is Tartare in SF (550 Washington St.). They have a mix of Ostrich and Tuna Tartar that is simply amazing :). The head chef is the guy who used to run Aqua (also in SF), if that tells you anything!

  20. We don't go dine-in there regularly since it is not close to our place. I make it a point to come every time I'm in the neighborhood. We get filled up and usually have leftovers to take home.