By David Frankel, Managing Partner
Our mission, to be the most aligned fund for founders at the seed stage, drives us, but it can be hard to measure objectively. A firm aiming to be founder friendly might be able to gauge success via its NPS score, but there is no simple KPI to account for a largely abstract idea like alignment.
Thankfully, now and then we receive validation from a portfolio company, and PillPack’s acquisition by Amazon seems like a good moment to share one specific example.
I was exceptionally lucky to lead PillPack’s pre-seed round and co-lead it’s seed round in 2013. As is custom, I joined the board of directors. In a standard scenario, I would have rolled off the BOD when the company raised its Series B funding from well known institutional funds. If not then, certainly by the time PillPack raised a $50M Series C. But I had the good fortune to remain an active member of the board right up until Amazon acquired it. Why?
It had nothing to do with onerous terms in our deal documents or expanding the board to make room. In a highly unusual move, the PillPack co-founders, TJ Parker and Elliot Cohen, offered me the opportunity to sit in one of the three common board-seats they controlled from the start.
As a general rule, entrepreneurs do well to avoid having too many VCs on their board. As HBS professor Richard Tedlow says, “VC’s are like martinis; 2 are great, more than 2 become toxic.” We also usually advise founders to keep the ratio tight for governance — the best practice is to have an odd number of board seats with one of them being an independent board member to break an impasse. E.g. You’ll often see three common seats, three investors seats, and an independent seat.
As any investor reading this will know, it’s highly uncommon for an investor to sit in a common board seat — so much so that we had to seek legal advice to ensure there were no unexpected conflicts. (Thanks to Nick Guttilla, a partner at Gunderson Dettmer for helping us sort that out.)
In an ideal situation, the founders recruit a successful entrepreneur or senior startup executive to bring industry or function-specific knowledge and advice to founders, while providing a counterbalance to the investors. Allowing the Board of Directors to tilt heavily towards investors is generally a sign the founders have lost control. I can tell you, voluntarily adding an investor to my cap table would have seemed crazy to me as an entrepreneur.
Thankfully for me, this wasn’t the case with PillPack.
As much as I’d like to believe it was my insights and efforts that led TJ and Elliot to invite me to stay on the board, I’d like to think it was more of a structural factor — alignment.
Founder Collective isn’t a life-cycle investor, and we aren’t motivated by pro-rata rights or aggressive about follow-on funding. Our firm is designed so that we have the same incentives as the founding team. While other firms may seek to deploy additional capital to increase or maintain their ownership, we dilute alongside the entrepreneurs. This structure changes the entire dialogue between the founders and Founder Collective as an investor. It allows for an openness and trust that only comes from strongly felt economic alignment.
It has been a sheer joy to be on the same side of the table as the founders from the Series A onwards. We’re exceptionally grateful to TJ, Elliot, and the team at PillPack for the fantastic return they’ve provided. Maybe even more so for validating and reinforcing our mission. We try to live our mission daily, but can only have a fuzzy sense for how well we’re living up to it without inputs like this.