Sterling Lanier (2:28)

That's a good question. When you first start out and a lot of people who haven't sat on boards will think this way is, oh, a board is there to provide detailed oversight of the company. It just doesn't happen. Board members are busy people. When you think about most board members, either financial investors and they've got a wide portfolio. So they're not in your shorts all day long looking over everything. Nor should they be, by the way. But the board really has two roles. One is to provide accountability for measuring and tracking the management team. Are they doing a good job? And this is like everything in your life. Right. Is someone holding me accountable to do this? That's number one. And number two is just to be around for the big stuff. And the big stuff here being a financing, this is an M and A. This is broad based equity option planning and large strategic issues. Should we do a big pivot? Should we do a big partnership? That's what you're there for. And even on the big stuff, you're really there as a sounding board and provide strategic advice rather than saying, yeah, I make the final call here. So the board's really there just for two things. And some board members take that responsibility very seriously and some don't. That's another dynamic that's important on boards.

Mike Lyon (3:29)

Absolutely. So not asking for a weekly update on the financials, that's not a good board member.

Sterling Lanier (3:34)

Yeah, I've had board members in the past will ask me that all the time. And it depends on your industry. Right. Like healthcare is very different than banking. So knowing the industry and knowing when things are relevant is important to being a good board member.

Mike Lyon (3:45)

Yeah, you mentioned board members not paying attention. And this was a public company story, but I remember I was at Citigroup, we were in the middle of this really contentious M and A deal. It was a conference call, CEO was talking a lot. And at some point one of the board members fell asleep so close to his conference phone that we could no longer hear the CEO talk. So the CEO just ground through that for 20 or 30 minutes. Example of not a great board member. Maybe say a little bit about what does a good board member look like? Obviously you've probably worked with some bad board members, some role model board members. What does that look like in Terms of how they behave and what they.

Sterling Lanier (4:15)

Do, I'd say, sadly, I think I have worked more with bad board members than I have with good board members and bad. Not that these are nefarious people, right? They're either sitting on too many boards and their time is diffuse and who knows what's going on, but they're not present. They're not present. Or I have also been on boards with what I would call professional board members who are there to collect a paycheck. Now, if you're on the board of a startup, you're probably just getting equity, but still you might be there to collect any potential outcome. A good board member is someone. And by the way, it's very low bar, which is a sad commentary on boards, but a great board member is there to actually be helpful. And everyone will claim, oh, I'm going to be super helpful. I'm going to make all these introductions. Nobody does. I have found that on most boards that I sit on, more than 50% of the board has not read the deck, let alone read the deck, thought about it for a second, maybe even had a pre call with the CEO to say, hey, I don't want to waste our time in a board meeting. What's going on right here and if it's a big enough issue, we'll talk about at the board level. So that's the type of stuff that I would expect to be basic blocking and tackling. Again, I'm not calling people out for bad behavior because maybe they got other things going on in their life that's causing that bad behavior. But in my opinion, if you take a role as a board member, this is what you're signing up for. So just do the job. So anyway, so that's what I would describe as a good board member, but sadly is a little bit of a low bar.

Mike Lyon (5:30)

Low bar. So, yeah, be prepared, ask good questions and care and follow through on the things you say.

Sterling Lanier (5:36)

That's one of the reasons why if you talk about independent board members, having a former operator, a former CEO is the way to go. Because they've been in your shoes. They know how hard it is starting and running a business. Brutal. Anyone who does it needs to have their psyche checked. It's just, it's, it's running your head against the wall over and over without a helmet. And I think an independent board member appreciates the nuance in there. Whereas a financial investor who are very good at other parts of the business may not have that same type of appreciation in the same way that I May not appreciate just because I haven't done it. It's funny.

Mike Lyon (6:07)

I think you answered my second question, which is, what does a bad board member look like? I think you got both of those in the same question. Talk a little bit about what do you feel like is a good board size and makeup? You talked a little bit about having operators. Is a good size and makeup. You feel like for earlier stage companies.

Sterling Lanier (6:21)

The problem with software and SaaS startups is I gotta build the product first before I can sell it. That's like, how am I gonna do that? I gotta go, I gotta raise money. Right. Unless you're lucky enough to be independently wealthy and wanna fund your own startup, if you have to raise capital, board composition is not entirely in your control. Right. Cause particularly on that first Series A, you're just hoping someone says yes, so you might get one yes out of a hundred. And that person says, well, I need three board seats. You may just have to eat it. Hopefully that's not the case. And hopefully you've been able to manage it appropriately and have some leverage in that transaction. But at the same time, if you are lucky enough to have some control, I personally think 5 is about the way to go. You always need an odd number, right. Because you need a tiebreaker. But five seems about right. I have been on a board with 12 and it was like a convention. Nothing ever really got done. And the board meetings were five hours long and everyone felt the need to opine, add value, add value or pretend add value.

Mike Lyon (7:10)

And it was even.

Sterling Lanier (7:11)

Yeah, and it was even too. So that one was problematic. But that startup needed to raise a lot of capital, a lot of people, and they all wanted board seats. But five would be my ideal because you have enough range of opinions to provide value. But at the same time, you can build meaningful relationships with your board members and the board members can get to know the company.

Mike Lyon (7:28)

Absolutely. I think that's important. And one of the things that comes up is independent board members. So a lot of times you'll see, particularly in a private equity recap deal, maybe they're doing a minority deal. So in theory they should have a minority of the board seats. Let's say we go with this five example. Say the investor gets two, the founder or management team gets two, and then there's this independent board member, which can mean a lot of different things. Sometimes the board member turns out not to be so independent. Like maybe it's tied to the private equity firm. How do you think about an independent board member and how do founders protect themselves? Around that person actually being independent and not really being maybe in the pocket of one of the investors.

Sterling Lanier (8:04)

For sure. I think the independent board member is probably the most important role. I'm speaking from a founder perspective and I am also on a few boards right now where I am the independent board director, so I'm being held to that same level. But it's almost like a designated hitter that you're being brought in to theoretically provide the objective voice in the room. Having started several venture backed startups and having financial investors on the board, all of them are great people overall. The challenge with that is they're often making decisions based on fund dynamics. They're also evaluating decisions making on the board within the overall context of their portfolio and where you might fit on the portfolio. And by the way, I don't blame them from doing this. I would do the same exact thing if I was in their shoes. Everyone needs to be focused on what is driving their specific business. But the problem when you have financial investors on your board, they may be not particularly interested in the fiduciary responsibility to all shareholders that securities law says that they're supposed to be, whereas that independent board member is theoretically supposed to be removed from that. So in my opinion, the CEO needs to be the one that is bringing the independent board director to the fold and getting approval from the other board members, rather than the financial investor suggesting an independent board member and getting approval from the CEO. I just think it works better now. The financial investors on the board may say, well, you're stacking the deck in your favor. Theoretically, the fact that they need to approve it is some type of moderator on that. But I think that's the only way it works because you need that objective advice and you need someone, again in my opinion, who's been in the trenches and it can build that authentic relationship. And on the boards that I sit on now, I would say my advice may be terrible, but it's at least I try to be objective, but it's a little bit more sympathetic to kind of what these folks are going through. And if I have any criticism, it might be a little bit more diplomatic in the way that I present it. Not that the other folks aren't diplomatic, it's just I know how much that knife hurts when it gets stuck in your gut and how they might interpret it. Because I've been there and I've gone through a lot of bad times as a founder and not that it's always necessarily bad times that we're talking about these things, but again, maybe the independent board member might phrase things in a way that is perhaps less off putting.

Mike Lyon (10:10)

No, I think you're spot on with that. And with founders generally, the advice we give them is if you're doing a minority deal, you should still control the board economically. That's what's going on. But I think one of the issues founders will get themselves into is the deal just closes. You're kind of in a honeymoon period as you're selecting this independent board member. And objectively, the investor probably has a better Rolodex of executives. Maybe in the industry you could have knowledge. And so sometimes founders end up taking that independent board member and then that ends up being really decisive later on, not necessarily in a good way. So I agree with you. The management team should pick the board member and then obviously the investor has a right to approve it or not. If you're just stacking the deck with your cousin who has no capability to be a board member. But I think that's super important.

Sterling Lanier (10:52)

And to be fair, I mean, listen, if it's a majority deal and let's say PE bought, somebody like PE should make the call. They own the company.

Mike Lyon (10:58)

Yeah, they'll be in control.

Sterling Lanier (10:59)

And they're in control. They deserve it. And I remember when I sold my first company and they changed the name of the company and people said, are you really upset about that? I go, why would I be upset about that? He goes, oh, it's your baby. I go, they own the company. They could do anything they want. They own the company. And if I was going to be upset about this, I shouldn't have sold the company, or I shouldn't have sold majority interest of the company. I have no qualms. If someone has a majority ownership and puts their own independent board member on there, they have the right to do that.

Mike Lyon (11:21)

And I think that's generally the expectation. If you're majority owner, you should roughly have majority control of the business. So I absolutely agree with you there. What are some things you've seen, maybe mistakes founders have made with board members to make that relationship tougher? Just things you wish they had done differently. Maybe even you had done differently in terms of managing a board.

Sterling Lanier (11:37)

That's a really good question. I think the first one is understanding if you bring on a financial, like my first company where I raised venture, I'd never done it before. I was a complete idiot neophyte. And I think some of the incredibly fair questions they were asking me really ruffled my feathers. Don't ask me for a deal. Detailed pipeline. You think I don't know. That took it personally. It took it personally where it was probably the most fair question, but you're just not used to that. And then also, I think really understanding those investors have jobs and they have bosses too, and they may do things that you also take personally, because as a founder, the whole world's against you, and emotionally, it feels like everyone's out to get you. Everyone's out to get you. You just take everything personally because your personal life and your professional life are wrapped into one. So you have a very hard time.

Mike Lyon (12:24)

And your ego is tied to this business.

Sterling Lanier (12:26)

Oh, your ego's tied to the business. And you have very hard time barf, bifurcating, or barfing. That was a Freudian slip about what it's like to be an entrepreneur. Very true. You have a hard time separating in your life what is a real slight and what is a perceived slight. And there are a couple people I just railed on probably 20 years ago that I see at a cocktail party. I'm just so embarrassed. I've even apologized to a few people, and every single time, they were super cool. Like, no worries. I knew that was going on.

Mike Lyon (12:53)

They've seen it, too.

Sterling Lanier (12:54)

They've seen it a hundred times. Yeah, yeah.

Mike Lyon (12:56)

One of the things I wanted to circle back to that you mentioned was this idea of board members being fiduciaries. So if you've ever, like, in school or business school, you know, everyone talks about the fiduciary role, and you're exactly right. I've almost never seen an investor act as a true fiduciary. They have their own interests and pressures, and they generally pursue their own interests. And a lot of times I feel like founders still have this idealistic view of the fiduciary role, and they definitely put themselves in that role. So a lot of times our advice is around, hey, sometimes you have to take care of yourself. Right? Now, that doesn't mean disadvantage the shareholders or doing anything that goes against them, but a lot of times it just comes down to really different interests. And one I wanted to ask you about, because I see it all the time, is founder raises money from an angel. And this angel, almost by definition, is fairly wealthy. Right. Maybe they're worth a hundred million dollars. The business is doing pretty well, and maybe there's an exit that's like a 50 to $100 million exit that might be awesome for the founder. Avoid raising all this capital, get a big bunch of liquidity, and maybe roll it over. But that angel investor, who only owns a small Percentage doesn't really matter that much to them because of the situation they're in. And so they're putting a lot of pressure on the company to keep going. Or I think some investors think the minute the founder gets liquidity, they take their foot off the gas, which in my experience is not true. Sometimes they get even more aggressive because now they're diversified. Have you seen that come up and maybe talk about how a founder should see through that? Because I find that the angel investor is really effective at getting the founder to suppress their interest. How do you think about being a founder and a fiduciary and doing all the right things for your shareholders, but also making sure you're doing what you want to do at the company? Company.

Sterling Lanier (14:29)

So this is a tale as old as time. And it comes down to one very simple idea. That my, my first boss ever was this guy named Scott Galloway, who's now gone on to be a famous business pundit. He's all over everywhere. He said it best, which is the only one who tells you to keep going is already rich. And that is totally true. That just summarizes exactly what it is. As a society, we've normalized around Facebook and Google and we think that is the playbook you should be doing where like you hung on and you just kept going. You turned into this billion company double down every year. That's the outlier to the outlier.

Mike Lyon (15:05)

Yeah.

Sterling Lanier (15:05)

So you're lucky if you build a business that doesn't go out of business. Okay. You're lucky there. That's really hard. Then you're going to get a 2x outcome. Wow, that's really hard. So now you're going to keep narrowing the funnel. Now I'm going to try to get a 5x outcome. Are you nuts? Let alone a 10x, a 15. Right. So this is why it's important to have an independent board member, because the independent board members know there are short windows of time where the stars aligned and it's time to sell and it's good for everybody. So that angel investor telling you to keep going. And I know the founder feels emotional because he or she completely backed me when I had nothing. And there's this emotional pull to feel like you've done right by them. But again, the only ones telling you to keep going, per Scott Galloway, are already rich. And that couldn't be more true. And I was on one board where I remember it very distinctly. There was an offer for about an 8x return on invested capital, which most people would say that's A great deal. And there was a financial investor on the board who very clearly stated that the fund's expected return. I'm choosing my words carefully. Expected return is 12 to 15x and this does not meet their expectations.

Mike Lyon (16:17)

12 to 15x.

Sterling Lanier (16:18)

And you know how hard it is to sell a company for 8x investing. That's just really hard. But everyone has this idea that you start a company, it needs to be the next Google, when it's just almost impossible, right? The numbers just are against you. So as an independent board member, I'm always telling folks, hey, there may be a point in time where you get a 3x offer. You should very seriously consider it because let's look at the opportunity cost as a head, blah, blah, and we're still returning capital. It may not be a home run for everybody, but guess what? Everyone's big boys and girls. They invest in companies, they know what happens. Now, there may be very good reasons to double down because you're about to sign this massive contract and don't take it. Okay, fine. But for your average company, getting a good return, where everyone's happy and making sure that the founding team is taken care of is. I would consider that a huge.

Mike Lyon (17:05)

Yeah, I think with founders, sometimes they just get pressured from some of those board members. Sometimes angel investors don't think about how many X did they get. We've worked on two deals in the last year where it was a 10X return to the angel investor, which is a great return for them. And they're still cranky about the deal. Not because of the 10x, because of the dollar value return. And that's just more of a function of how much they put in in terms of how much they're making. And you just see other issues around liquidity and interest not being aligned. And again, it just comes back to what you said before. If someone's very wealthy and they're an angel, they just think about that return very differently. And for the founder, if you don't take that liquidity, and let's say you do have to raise more capital now, you've just almost made that problem worse, right? Because now you have a new capital provider and they're going to want a minimum of 3 to 4x. So you get on this wheel, this hamster wheel, that it's really hard to get off. And a lot of times founders who raise too much, what are called balance sheet capital or primary capital, they don't end up with very much in the end because they've given away so much of the company. But if you can get some of these exits in the 50 to $200 million range and you haven't raised a lot of capital, those can be really good for founder and on a risk adjusted basis or even better because you didn't have to go through step two, three and four to try and eke.

Sterling Lanier (18:13)

Out that extra return a hundred percent. And again, it goes back to this idea of, you know, how hard it is to build a company and sell it for 50 million.

Mike Lyon (18:19)

Really hard.

Sterling Lanier (18:20)

Now try to do that at 200 and above and it's the hamster wheel effect you talked about, which is the more capital you raise, the more that he or she now needs to sell this for 100 to make a meaningful amount based on the blood, sweat and tears I put in. And now I raise more capital. Oh crap, I got to sell this thing for 200 million. I remember I was talking to a founder one time and this person said I gotta sell this thing for like a billion for anyone on this team to make money because the waterfall was so bad with the pref stacks and all this other stuff. Right. So that is not the way to do it. Right.

Mike Lyon (18:50)

That means you should leave that company.

Sterling Lanier (18:51)

And go do something a hundred percent. The only thing I'd go back to this angel and you'd mentioned that the angels who are still been out of shape, I've made people a lot of money and I've lost people a lot of meaning. I've lost people to zero. And I noticed that there's just a range of angels, right. The angel, I'd say, who have been very successful in angel investing. Every single one of them, whether I made them money or lost a money, they're super cool. And it was always the least successful angels that were the ones who really been out of shape. Through that process, I kind of learned if someone's been out of shape, they're probably not a real investor anyway. I'm not really going to worry about it.

Mike Lyon (19:24)

Yeah, I think a good point. Well, anything else you would add?

Sterling Lanier (19:27)

Again, I think I feel for founders, right. Even though I've sat on a bunch of boards and had my own boards, I don't have a board now in my current company. And that's. What does that tell you? Everything you need do to know. But again, what has occurred. So in this business, we've thankfully never had to raise capital. So my co founder and I are able to manage this ourselves and I don't have to take any outside capital, which again is hard. Right. Raising money is hard. You do feel very emotionally connected to the people that helped you out. It does color your opinion as well. So I'm glad that I don't have that stress now. What are the downsides when I having a board? This is what comes in my head. What are the hard truths someone's not giving me right now? We try to be very humble in our approach about the way that we build our business and what are we doing wrong and how do we do better and the whole thing. But is there an outside perspective that would be helpful to us that we're not able to leverage? That's actually what keeps me up at night a little bit about not having a board. But it's trade offs. What are the things that I'm missing versus what are the things that perhaps might stop our ability? I know another friend who has a board that you know he's spending 10 to 15 hours a week on board management and not creating any value for his shareholders or his company.

Mike Lyon (20:34)

Yeah, or the products.

Sterling Lanier (20:35)

Or the product.

Mike Lyon (20:36)

Is that a good use of time?

Sterling Lanier (20:37)

Is that a good use of time? I'd say no. It's like everything in life, it's just trade offs and priorities.

Mike Lyon (20:42)

I think you put that well because a lot of times people put these as if you don't have this, then you lose all this or you're not getting this. But it's, as you said, it's always trade offs. You get some positive things, you get some negative things out of it. And what are those trade offs? Sterling, thanks so much for joining us on the podcast. We talked a lot about how to think about constructing a board, the importance of that independent board member, and maybe just some of the priorities that are different between founders and other people who are on their board board. But really appreciate you joining us. Thanks for your expertise.

Sterling Lanier (21:08)

I appreciate having me.

Podcast Host (21:10)

VistaPoint Advisors is a founder focused investment bank that advises software and Internet founders through M and A and capital raised transactions. We are a fully unconflicted investment bank who only works for founders on the sell side. So you know that we're always representing your best interests. Security is offered through VistaPoint Advisors member Finra Sipic. This has been provided for informational purposes only. It is not intended to address all circumstances that might arise. Testimonials from past clients may not be representative of the experience of other clients and there is no guarantee of future performance or success. Clients are not compensated for their comments. If you have any questions about the process of selling your business or raising capital, reach out to a member of our team or check out the Four Founders section of our site by visiting four Founders Guide.