From my experience working in venture capital, I would add a few more points to choosing your board of directors and VC investors (point #1).
1. I think another key factor to look at when picking a board member or investor is their network within the field. This is critical to be able to both recruit talent and to get meetings with key partners and customers. If this is their first deal in your industry or they have not worked in this industry before, they will not be helpful recruiting talent because they will just not know the right people. Deep connections in the field is an extremely helpful attribute for a board member or investor (unless you need an independent viewpoint outside the field – see next point).
2. Another key question to ask when adding board members is, “do you have a blindspot in your thinking?” This is critical because if you are building a company trying to disrupt a market but only have board members from that exact market, you might be missing learnings from other markets or just be thinking too conventionally about it. While, it is extremely important to have board members with experience and knowledge to understand your business it is also important that your board continues to challenge you and your thinking. It will force you to think more critically.
3. Another key factor for choosing a VC is how much time and money is left in the VC’s current fund. This is incredibly important if you are expecting to raise more rounds of financing. It is much better to fundraise through your existing investors base because it usually saves time and those investors already have skin in the game. Also, managing investors takes a lot of time. It is helpful to have a smaller number of them to manage. This is also important because it will influence when the investor needs to have a liquidation event in order to close the fund. This could impact when your company is acquired.
I really liked how your post touched on the human side to scaling a startup. Unfortunately, firing people is a necessary part of running a startup but it should always be approached thoughtfully and with kindness. I liked that your post was about preserving the dignity of the person. I would add one final guideline to your list though. I would argue that this is not the time to penny wise but pound foolish (aka cheap). Being generous with someone during this time period can go a long way to smoothing over bad feelings and make the former employee feel that they were treated fairly by you. Your reputation is extremely critical in the startup field and it pays in the long run to preserve it.
One idea for a follow-up post could be to explore why this is so critical (beyond the fact that it is the right thing to do). I would argue that there are numerous business reasons for firing well:
1) Industries are small – even if you are angry at this person, do not burn the bridge. Just because you are in the position of authority now, it doesn’t mean that this person might not be a potential customer, partner, or employer down the road. It is critical to maintain good relationships with people in your field.
2) People talk and a horrible firing experience is a piece of gossip that is discussed. Don’t let a moment of unpreparedness or impulse prevent you from recruiting new employees in the future. Good employees do their research about how you have dealt with people in the past. This can actually hinder growth in the future.
3) You alluded to this but discussing the lawsuits that a former employee can file is an important consideration into how you fire someone. Unfortunately, we live in a litigious society and this is a fact that needs to be evaluated.
David – I really liked your post because people often talk about becoming a founder/CEO and the excitement around raising money. People rarely discuss how to prevent actually being removed as the CEO by those investors. A founder being removed as the CEO is a harsh reality of VC-backed companies because the venture capitalist’s responsibility is to create a return for their limited partners (investors), not to maintain loyalty to the founders of their investments.
The point I would echo is the importance of board and investor management. It is not an area that is commonly discussed in the start-up scene but is often the downfall of founder/CEOs. You mention that you should share documents with investors quarterly but I would argue that this should be more often. I believe financials should be shared monthly because the worst thing to do to your board is surprise them. I like to heed Cathie Black’s advice of thinking of “your boss as a small woodland animal – make no startling moves or strange gestures.” Investors are a CEO’s boss and making them feel in the loop and comfortable is of the upmost importance.
I would also add a sixth step to your list – keep the lines of communication open constantly. For early stage startups, I think it is a good habit to have a call with your chairman/chairwoman of the board weekly. This way, they have insight into what you are doing to manage the company and you have better insight into when he/she disagrees with your decisions. For later stage startups, it is not necessary to have weekly calls but I would have at a minimum monthly calls with key investors. Communicating often also helps to create a deeper relationship with investors. This is critical to helping prevent being fired. It is just harder to fire a friend. I would bet that an investor with a close relationship with a founder would give them more time to turn it around or at a minimum, be more likely to give a favorable exit package.