S2-E2 | Aligning Founders, Board Members, and Management

Transcript

SPEAKER_00 0:02

Hi everyone, I'm Joshua Johani, your host in The Technical Founder. Thank you for joining us today. We're joined by our co-host, Ricardo Oberlander, and we are in the second episode of our Power Alignment and Communication series. Ricardo, today we're talking about alignment of founders, board members, and management. Are you excited to talk about this today? Totally. I'm very, very, very excited. I think we've got some episodes coming up that talk about shareholders and investors more explicitly, which can often be the same audience as the board members. Founders, they become successful people who ultimately go through an MA transaction by being a little stubborn and by, you know, not listening to people around them and naysayers and just kind of like plowing through and getting stuff done. And so the concept of alignment in an MA transaction, I think, is something very valuable for them to think about because it doesn't always have the same kind of kinetic energy that building a business has, where it's just like forward at all costs, boom. And you have to really make sure people are aligned and coming with you so that when it ultimately comes to sign on the dotted line with all of the relevant shareholders, you can do that successfully.

SPEAKER_02 1:24

True. All that. And with the risk of sounding controversial, I would say that in many transactions, the real challenge is not the buyer, it's the seller. And most deals don't break externally first, they fracture internally. And the reason is simple alignment is usually assumed, it is rarely fully established.

SPEAKER_00 1:49

Do you think that founders can force alignment? Like how much of alignment do you think is within the engineering control of a founder or the majority shareholder? And how much of it do you think is really just based on things outside the founder's control, such as where the management or shareholders or board members are in their own personal journey with the business?

SPEAKER_02 2:14

A lot will depend on the personality of the founder, because they shape the culture of the company, its management style, but some companies they start actually, I mean, modifying their own original DNA and they become, I mean, sometimes alien to the founder's original objectives. And stakeholders are not starting from the same place. Because even inside a single organization, people can carry very different perspectives. The founder may be thinking about legacy, for instance, not necessarily only financial reward. The board may be focused on return, management may be thinking about continuity, investors may be optimizing timing for sure for their returns. Executives may be concerned about their roles, their lives. And these perspectives are all rational, but they are not naturally aligned. And unless they explicitly reconcile, they will surface later, often under pressure.

SPEAKER_00 3:24

We advise our clients that are mostly sellers to think about the day after the transaction. Because transactions take so much time and so much resources that you can become very fixated on either the process itself, which is a strategic mistake, or become very fixated on just getting the transaction done, which is largely our job as the investment banker. What you want to think about as a founder is what am I working towards that's going to be different the day after we close versus the way it is right now? Because when you think about founders, board members, and management, one area where they are already completely aligned is that their day-to-day is very wrapped up in the operations of the business. And in the context of MA and a change of control transaction, that will change the day after you close. You're no longer in control. You may be a redundant CFO. Uh board members have received liquidity and they've moved on. And so everyone really does have that same kind of shared experience, kind of like uh, you know, like a big event or an IPO, or if you think about it in more family terms, like a like a marriage, right? The day after marriage is different than the day before based on your, you know, your family uh structure system. Ricardo, when you look at board members specifically, because you have a lot of experience dealing with all profiles, but board members is is an area where you probably have more experience than most of our audience. You know, they probably, I imagine they don't respond very well to sort of command and control terminology, and that they need to be given information so that they can reach their own independent conclusions. Do you have any advice for our listeners on how to communicate and align board members specifically with a transaction that a founder might be driving?

SPEAKER_02 5:13

I do have a thing or two to talk about that. First of all, one has to understand that a board member has fiduciary responsibilities, has to carry independence, I mean, ideally, sometimes they don't, but they have to think about what's best for the company, not themselves, not the founder, not the CEO, but the company. And the company could involve the impact on shareholders as well. And they are in those circumstances under pressure, under pressure because they have to take a decision which will affect the destiny of the company, lives of employees, uh, the lives of the executive management, the impact on customers, and so on and so forth. So one has to understand the psychological uh dynamic that one is going through uh occupying the role of uh board member, because this is critical, because it and that revolves at the end of the day, on the concept of alignments. Uh, and if people think that agreement in conversation is synonymous with alignments in decision making, it it's it's wrong. Usually very wrong. Because people may agree on selling the company, maximizing value, running a competitive process, but they disagree on acceptable evaluation, timing of exits, level of risk, willingness to accept earnouts, roll after closing. And these differences are often unspoken, and unspoken differences become structural problems later.

SPEAKER_00 7:02

That reminds me of where you've you've talked about in our conversations in the past about silence doesn't mean agreement, particularly when you know that an audience has a different point of view within a transaction. I think that to your point of how founders should interact with board members, silence, perhaps, Ricardo, you can correct me if you see it differently, but silence is seen more as a negative with a board member because they usually can be pretty opinionated people. Do you think that's fair?

SPEAKER_02 7:40

Completely fair. Silence is one of the worst signals one can get on the board in a process like that.

SPEAKER_00 7:50

Yeah, I can imagine the the board meeting already where the the founder has presented this MA transaction and there's just complete silence on the other end. That would be bad.

SPEAKER_01 7:59

Yeah, it's yeah, it's a it's a bad feeling. I mean, that's a poker silence in the room. It's not definitely something one would not on management.

SPEAKER_00 8:10

You know, there's a reality that, you know, post-min a the day after, right? We're thinking about how this day after the transaction is for all parties. And we've talked a little bit about board members. Founders are usually getting the liquidity, but management, they're often very concerned about redundancy and getting laid off, right? Most of the time, these are employees, and you know, particularly in like financial divisions, um, that's where you find the most redundancies, financial parts of back office operations, human resources, etc. I get a question from founders all the time about when do I tell this to my employees? When when should I bring this up to the controller? And depending on the relationship that the founder has with the controller, they may bring it up earlier or later. I always tell them that you should wait as long as possible. You should really just assume that the deal is not gonna happen until you essentially have the money in your bank account because these deals are very sensitive and there are levers, which we'll talk about in like the customer conversation for this series that can swing a deal totally from positive into negative or vice versa. Um, and then it's also distracting. It's very distracting to be inside these transactions with your employees, particularly if there's liquidity coming to, you know, maybe someone's gonna get a few hundred thousand or a few million dollars if they're kind of a lower level, mid-level employee. Um, it can be very hard to focus on your day job. How do you think about timing and alignment with management teams, Ricardo?

SPEAKER_02 9:40

That's uh a very delicate situation because some deals they proceed through a phase where the conversations and negotiations are undisclosed uh beyond a very closed and earnest un inner circle. And sometimes you have to you move to uh uh a phase which is more sensitive when you disclose to the public in general and for sure stakeholders, like customers, suppliers, and employees. And and that could create, if properly not managed, disruptions in the way people operate, concerns about their livelihoods, and so on and so forth. And it's very difficult to really align different expectations on this one here because the founder may want recognition, legacy, control narrative, the board may want return, certainty, time and discipline, and all the rigor that comes with it. Management may want stability, clarity, continuity because they have a role to play, but the transaction introduced uncertainty, evaluation, potential disruption. So even when management supports the deal, it communicates effective with the different stakeholders, behavior may slow it down.

SPEAKER_00 11:08

When I think about takeaways and what a technical founder would benefit, having a crisper understanding of at the end of this episode than what they walked into the episode with is expectation setting and really that that visibility into what the day after the transaction looks like. That's where alignment is ultimately going to be driven. You know, your management team is not going to get excited about your incentives if as a founder, right? If you're like, holy cow, I'm going to make $80 million the day after we close and I'll never have to work again. You know, that's not going to motivate your VP of finance who may have, you know, 2% fully diluted ownership based on stock options. And so you need to be able to look at things from their point of view and set their expectations with the benefits of what they're going to experience the day after closing. And, you know, I wouldn't focus on how certain groups might be redundant, but even if you are redundant and you're getting liquidity or you're part of a successful MA deal, that's good for your resume. It's good for your career. And so that's what I would advise the technical founder to take away. Ricardo, when you think about takeaways, how would you articulate them?

SPEAKER_02 12:13

Joshua, at the end of the day, what we are aiming to share with professionals here is how they can learn about alignment being an active responsibility, not something that happens within inverted commands. So effective professionals surface disagreement early, create clarity around expectations, facilitate difficult conversations, and make implicit assumptions explicit. And these applies, I mean these learnings apply far beyond MA. In my takeaways specifically for this session are alignment is not agreement, first of all, it must be tested, not assumed. Misalignment, on the other hand, is usually silent before it becomes visible and noisy. Delay, hesitation, friction are often signals that one should observe right at the beginning. And being effective means addressing difficult conversations early. That's how you protect outcomes.

SPEAKER_00 13:22

Thank you everyone for listening to our podcast, The Technical Founder, in our Power Alignment and Communication series. This is the end of episode two aligning founders, board members, and management. On our next episode, we will dive deeper into understanding board dynamics. Have a great day.