Avoiding The ‘First Board Meeting Surprise’ Problem

By Bob Morse

Over the years, I have experienced that sinking sensation of the investor-CEO disagreement in that first board meeting.

After the back-and-forth negotiation of the deal process, each side having played its hand, everyone gathers for that first board meeting and — surprise! One side or the other shares information or intentions not revealed pre-signing, in a way that can’t be easily reconciled between the private equity partner and the founder or CEO.

Through 25 years in private equity, I am not alone.

The nature of the frustration and emotion with the First Board Meeting Surprise is not that something arose post-investment: It is that something knowable in advance of the deal comes to light after closing and is a material change to expectations.

The surprises I’m referring to don’t arise from bad actors trying to intentionally mislead. In fact, it’s because they regularly occur among well-intentioned individuals that these surprises are so maddening.

Case in point

For instance, consider the operating partner who shows up at the first board meeting and shares vetted candidates to replace an executive the CEO feels loyal to.

The CEO wonders why he was kept in the dark about his new investor’s view on this key executive before signing. Perhaps, thinks the CEO, there are other things I wasn’t told. The new investors wonder why the CEO is reluctant to build an “A” team. Perhaps, thinks the operating partner, this is not our kind of CEO. Neither side backs down; both feel justified. That is a First Board Meeting Surprise.

It’s embarrassing for all concerned, and it happens more frequently than we’d all like to admit. Research from Alix Partners found that roughly three quarters of portfolio company CEOs are replaced during a fund’s hold period, with a majority of those happening in the first two years.

While the sponsor and the founder/CEO want to be aligned, the dynamics of the investment process work against them.

The purchase of a company is a one-time, distributive negotiation with large dollars at stake, and it can be adversarial, full of tension and tiring. On the other hand, the relationship between investor and CEO in operating and building a company is a repeat-player game. That game requires a completely different approach.

Stay prepared

Our solution to the First Board Meeting Surprise problem is to adopt repeat-player thinking before signing the deal. What would happen if our underwriting plans — due diligence findings, best “secret sauce” ideas, and proposed actions — were shared with the founder and agreed to in writing before signing the deal?

It’s not without risks. The founder/CEO might see our work and insist on a higher price, shop those ideas to a competing bidder, or simply adopt our best ideas without taking our investment at all. The founder/CEO might disagree with the course of action entirely and simply walk away. We then lose a deal we could otherwise have closed.

But perhaps the founder/CEO would be excited about the action plan, provide input to improve it, and refocus their energy entirely on where we were going to go together. And, because nothing knowable in advance of the deal on our side would remain hidden, and reciprocal engagement from the founder/CEO on the plan would reveal their true views on critical items, there would be no First Board Meeting Surprise.

Putting this into practice can feel risky for those used to the traditional information-control approach to closing deals. It was for me. Just before founding Strattam Capital, I was trying to recruit a CEO I held in high regard to lead a new platform investment we were evaluating.

He was wary, so I shared our underwriting and diligence. He insisted that we commit to building out a full product suite and adding to the leadership team, so I went to the investment committee and secured an upfront commitment for follow-on capital. Ultimately, we put a set of five actions down on a single page, shook hands, and only then signed the deal.

On the day the deal was announced, he shared that action plan in his all-hands meeting, and it formed the agenda for the first board meeting. Intermedia grew several-fold in size to become a UCaaS leader. I have that one-pager framed on my desk today.

The five-point plan

We turned that approach into a process we call the Five-Point Plan, which requires us and the CEO to agree up front on post-transaction actions. That means we not only agree on the five key actions to take after the deal closes, but the CEO knows he or she has the resources and support to execute them. More importantly, we’ve eliminated the problem of the First Board Meeting Surprise because no one has any surprises to share.

We have accepted that the price for materially improving sponsor-CEO alignment in the deals we do close is that we will lose some deals we could have closed but for agreement on the Five Point Plan. In practice, we have closed several dozen founder-led deals versus a handful of walk-aways. Both we and the founder are better off without doing those deals where we would have discovered a fundamental disagreement the day after closing.

Expecting the unexpected

Of course, the world always intervenes, and the moment the deal closes, events unfold: tariffs, interest rate changes, AI breakthroughs and so on. While we all expect the world to change around us, there are some surprises we can avoid.

We can minimize the risk of friction between the CEO and Board due to differing goals. We can begin our repeat-player relationship before signing the deal.

In the founder-led technology buyouts, we believe that a more transparent pre-signing investment process, like our Five-Point Plan, is the most promising way to begin a partnership between a private equity sponsor and a founder/CEO. I am sharing this approach in the interest of encouraging others to experiment with it. Consider showing your hand more openly before closing. Invite the founder/CEO to do the same. See what happens.

Bob Morse co-founded Strattam Capital in 2014 and is managing partner. He has served on numerous private and public technology company boards, and currently is a director of CloudHesive, Contegix, Daxtra, Green Security, Resource Navigation and Trax Group. Previously, he was a partner and member of the investment committee at Oak Hill Capital Partners. He also worked at GCC Investments and Morgan Stanley. Morse serves on the board of directors of Austin PBS and as member of the advisory board for the HMTF Center for Private Equity Finance at The University of Texas at Austin McCombs School of Business. He attended Princeton University, graduating summa cum laude with a B.S.E., and Stanford Graduate School of Business, where he earned his MBA and was an Arjay Miller Scholar. Morse lives in Austin, Texas.

Illustration: Dom Guzman