Wearing Fiduciary Hats

A Schizophrenic Obligation

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Unfortunately, this is not the article I wanted to be writing today. I had an exceptional conversations with one of my friends recently unpacking the place of non-consensus high-conviction investing in a world increasingly driven by noise and hype alone. But, as fate would have it, I ended up spending the latter part of Friday and then this weekend helping a few of my companies navigate funding rounds and potential exits. Sorry Caroline!

So, until I have time to return to the salient points behind convictional capitalism, I'm left pondering on the topic of fiduciary responsibility. Sexy, right?

I spend a fair bit of time thinking about "the game" that venture capitalists are playing. Different investors thrive at different things but the underlying consistency is that VCs are investing in companies for equity stakes.

However, one of the things that can muddy the waters is how often different parts of a VCs capabilities are at odds with each other. The vast majority of a VC's time is dedicated to finding, picking, and winning deals, to the point that they often shape their whole world view around the thrill of the chase.

And in many cases, that serves them well. Always on to the next deal, with an unquenchable thirst for victory.

But there is one particular part of the job that requires a fundamental paradigm shift in how a VC's brain works: being a board member.

This is far from a "how to" guide on how to be a good board member. I'm still developing that particular skillset myself. Instead, this is a reflection on the mindset of being a board member and how it can sometimes be in fundamental opposite to a VC's traditional day-to-day.

As an equity investor, VCs are used to fighting to win over founders, get allocation, build their position, negotiate the price, or be willing to throw out the playbook and just dump money on a company. And for a venture investor that simply owns ~10-40% of a company, that's fine behavior.

Being a board member, however, carries with it a particular skillset. Being a fiduciary.

When someone joins a company’s board, their fiduciary duty runs to the company and all of its shareholders as a whole, not to their employer. So as a VC, you're used to fighting and winning on behalf of your venture firm. But as a board member, you're required by law to do what is in the best interest of the company and all shareholders; not your own firm.

"But wait," I can hear some people protest. "Isn't whats in the best interest of the company also in the best interest of my firm?" No. Not always.

But VCs, in their endless playing of the game, tend to forget that reality.

The framework I use to help extrapolate what I should advise a founder about who's board I sit on is the idea of "wearing different hats."

Frequently in a board meeting, I'll try to honestly express what my hope is about a particular event from Contrary's perspective (my firm). But then, I emphasize the need to "take off my Contrary hat" and "put on my XYZ board member hat." And then, try to advise them in pursuit of what is best for the company even if it is NOT what is best for my firm.

Having that board member hat on allows me to focus on the first principles of the business and what could be done to most help it. And that multiple hat framework tends to work quite well for me.

That being said, I am (unfortunately) starting to see a lot less even-minded approaches from VCs when it comes to fiduciary board responsibilities. Many venture firms are, increasingly, negotiating in bad faith and allowing themselves to be driven by nothing other than their own agenda. But not everyone used to have an agenda. Today, venture is SO loud that it requires everyone to pay attention to everything all the time. "We can't help it!"

So, in this brief reflection, my takeaway is that being a good board member requires that near-schizophrenic capability to wear multiple mental hats. Using that compartmentalization is meant to limit how much emotion and personal bias people bring to these transactions. Again, that’s hard for VCs that are drowning in noise in pursuit of signal. But it’s necessary.

In my view, the better founders can understand the borderline manic hubris that these investors have and act accordingly. Board members often need to be managed more than they are supportive. Despite it being deeply intellectually dishonest, its also potentially narrative destructive to the asset class as a whole.

Board members have (1) duty of care and (2) duty of loyalty. We're meant to make better decisions on behalf of ALL the shareholders of these companies. But more than just trying to make the right decisions, our duty of loyalty means that by pushing the company to make decisions that benefit your own firm, the mirage ends and you can no longer be trusted as a board member.

If you want to truly stand out in the way you support companies, just follow this one simple trick. Do what is best for the company. Too simple right? But the unfortunate reality is that it isn't exactly that simple. There's a lot of emotional things woven into making sure your career and your capital are protected. So if you look at a given company and see the opportunity to advantage yourself, you have to be able to reframe your "why."

If why you're doing this is to be hyper competitive or win deals or get markups, you shouldn’t be sitting on boards. You're a product of a flash-in-the-pan if you're not doing things for the right reasons. And being willing to put on that XYZ board member hat opens you up to a much broader world of intellectual honesty.

That's not easy to do to traditional venture, but it may be the most important thing you do as you try and help build a new generation of companies. Act accordingly.

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