Cindy Padnos on The Orbit Shift Podcast

S02E30

The founder’s guide to building an effective startup board with Cindy Padnos

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Cindy Padnos, Founder and Managing Partner of Illuminate Ventures talks about the importance of independent board members, how to compensate them and how to manage conflict in a board room.

Founders are often in the trenches building the product, hiring, raising funds, and driving growth. What often goes under the radar however is how founders can navigate their way through a board room. Managing the board and building consensus can be very tricky, especially if you are a first-time founder. We talk to top investor and mentor Cindy Padnos, who sits on the board of six companies about how founders can navigate their way through a boardroom. 

Cindy is the Founder and Managing Partner of Illuminate Ventures. She focuses mainly on enterprise, B2B, cloud, and mobile computing sectors, with an emphasis on SaaS applications and platforms, solutions leveraging data for business impact, and business models that accelerate customer acquisition. Cindy serves as the Board of Director of Bid Ops, BrightEdge, CafeX, Hoopla Software, nFlux, and Pex. 

Edited Excerpts

Q. What’s the role of the chairperson of the board? 

Cindy: In many of our portfolio companies and even in my own company when I was a founder. It’s usually the founder themselves that is the chair of the board. 

In an early-stage company, the chairperson is not as critical a role as an independent board member. Many companies fail to bring an independent board member early although there’s one often designated in the documents of a startup. 

The chair of the board becomes critical much later in the life of a company. When you’re about to take the company public. Then the role of a board chair is typically filled by an independent person, or at least not a full-time member of the business. 

Q. What value do independent board members bring? And when should you bring one in?  

Cindy: Even before you take outside capital. As a founder who’s running, a business, either bootstrapped or with some angel capital. There’s always value in bringing an outside board member. They bring a level of experience and integrity. They help to ensure a certain level of rigor. And at later stages, when you do have an outside investor, they help to keep those individuals honest. 

Every board member has the fiduciary responsibility to represent all shareholders, i.e. common and preferred. Just because you’re a founder holding common shares, doesn’t mean you don’t have a fiduciary responsibility to your preferred investors and vice versa. 

Apart from the rigor and integrity, it’s also important to have them as an intermediary between investor directors and founder directors. They help address a contentious issue, convey important messages, or just be another voice as a part of the process. 

The other reason that many people bring in an independent board member is for their contacts and connections. Sometimes they’re successful entrepreneurs themselves, who can be a coach to the emerging executive or new CEO and help advise them. 

Q. What’s a good way to think about compensating the independent board member?

Cindy: It depends on the stage of the business. If it’s a raw startup, you typically might see something that’s structured as a two-year grant, not a four-year grant. 

That’s important to think about because the person who might be the perfect fit to be your independent board member right now may not be the perfect fit two years from now. There’s a real catch-22 here because if you give that person a four-year grant, and they’ve been helpful to you for the first 18 months, and then becoming less so, you’re stuck. 

You certainly don’t want to abuse that individual. They’re probably a prominent person. You ask them to do this. They were willing to. And so, typically, we see two-year grants being given so that there is an opportunity to make a change if need be.

Q. What are some of the key ingredients that go into a great relationship between a founder and a board member?

Cindy: It’s about trust and integrity. When I was raising capital for my own startup, I spoke with every CEO that my investor had invested in previously.

I reached out to every one of them, including companies that had failed, and asked these founders, what was this individual like to work with? When things weren’t going right, did he roll up his sleeves and offer to pitch in? Or did he point fingers and tell you something’s wrong. You better fix it. 

It’s crucial for a founder to do their own reference checks. And any investor who doesn’t want to introduce you to the people whose boards they’ve sat on, that’s a pretty big red flag.

Q. What are some of the expectations in terms of communication and managing the board that the board has from a CEO?

Cindy: One of the things I would say upfront is that a CEO works for the board. A CEO serves at the pleasure of the board. In terms of the responsibilities of a founder, managing their board, one of the lessons that I learned that that has served me well is that surprises in a board meeting are not your friend. 

It’s important to be proactive about sharing good news and bad news with your board members in advance of a meeting. It’s hard as an entrepreneur to find the time to do that. But there’s so much advantage to previewing information with your board members and gathering a little bit of feedback from each of them. 

When you go into a meeting, you need to already have some level of understanding of what to expect and give them time to think through what the implications may be of the news that you may have needed to share with them. 

That is the most fundamental thing that many entrepreneurs can do that’s very easy to do. It builds trust with the board members, when you have more one-on-one conversations, not just in advance of a board meeting but in between board meetings as well.

Q. What are some of the best ways to deal with conflicts as a board member and also as a CEO? What are some of the things that you’ve seen work really well?

Cindy: I’m not a conflict avoider. The simple answer is if you see a conflict, if you’re experiencing it, deal with it, talk about it and be open about it. Don’t be passive-aggressive. Don’t smile when you’re steaming inside. It’s crucial to bring issues to light, to have a candid conversation about them, and to bring others into the process, if necessary, to help resolve the situation. The worst thing you can do is let something fester and destroy the relationship or the trust that you have amongst the board members by not addressing something upfront.

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