“A cap table is really a tool for creating value and aligning incentives. And I think founders need to have a strategy for that as their company grows as much as they need a strategy around revenue growth. ”
— Clay Whitehead
Today’s guest is Clay Whitehead, Founder & Managing Partner @Pomegranate VC, a venture firm focused on making direct secondary investments in private pre-IPO companies. Before becoming a full-time investor, Clay was also CEO & Co-Founder of Presence Learning, the largest online therapy company for kids and teens with mental health issues and special needs.
Clay is part of an exciting, emerging wave of new managers who bring the best of what they have learned as company builders— strategic rigor, empathy, and integrity— to provide funding and support to founders in the tech ecosystem.
In this podcast interview, Clay shares his journey as a founder, and specifically what he learned about managing cap tables and aligning incentives as you grow and evolve as a founder. Founders will enjoy this! :)
“The board is not your boss.”
— Clay Whitehead
Key Themes
Friendly reminder to all founders: the board is not your boss!
How to take advantage of the many forms of capital to grow your company and minimize dilution.
Structuring liquidity programs to retain the right employees and attract the talent you need.
Communicating ownership expectations with your early-stage investors to open doors to later stage investors who will need to write bigger checks.
The important distinction between “endurance” and “resilience.”
Transcript
Clay Whitehead
Thanks so much for having me guys. It's good to be talking to you here. A long time ago, I've been wearing two hats since about 2007. Started in venture at Venrock. Had a great experience there, moved to the operating side and started my own company called Presence Learning. And I knew how hard it would be to start a company going in. And I knew it would take a lot of time to build something to scale. And so I really focused on something that I loved and something that's personal to me, which was my own experience growing up with ADHD and learning disabilities.
So, we set up a telemedicine marketplace that focused on therapies like mental health therapy, speech therapy, occupational therapy for kids and teens who have mental health issues, things like anxiety and autism and depression, and also special needs issues.
It was very fortunate to run a company that was meaningful to me personally, and had a huge impact on the lives of literally just millions and millions of sessions with kids. Grew that company to be about 1000 people. We actually just raised our series D which was very exciting. I stepped away about a year and a half ago to focus on investing, which I've been doing continuously while I was wearing the CEO hat. And it's really a lot of those experiences as a founder and CEO going through the process of scaling a company that got me more excited about investing and really informed what I do today.
Jon Low
Thank you. And can you unpack a bit of some of those things that you experienced in the processes that inspired you to become an investor in VC today?
Clay Whitehead
Yeah, of course. I mean, just for me personally, the one of the most rewarding experiences of running a company was the time I had with other CEOs, and a great coaching organization I was in called Tech CEO or in YPO. I really felt like I found my tribe with other founders, I love those conversations. And what I loved most was this feeling of the shared experiences you have starting something. And the unique ability that gives you as a group to hold each other accountable and push each other and being productive tensions with each other, that you know, you're pushing the other CEO, but you're also doing that to help you know, you're excited, you can ask questions like:
… “Hey, is everyone in your organization really clear on what the strategy is??”
… “Does everyone know the metrics that they're accountable for all the way down?”
…. “And how their job moves those things forward?”
Whatever the question is, I just love those types of relationships and went really deep on those with a lot of great companies. And a lot of that, combined with my own experience, managing my own board and my own company are really what's exciting about the investing side.
So, you know, one, one big lesson that I learned is, hey, you know, the board is not your boss. You know, I was a first time founder. And I think I made that mistake several times to be frank, you know, thinking in that frame instead of gosh, what really is the market that we're focused on? Who is the customer? How are we engaging them? How are we, you know, creating something that they need something that's valuable to them? Like those are the first principles questions you got to be focused on.
And when you get in a boardroom with all these really impressive people who you've, you know, hand selected through competitive rounds, and because you deeply respect them, it's easy to stray from your convictions, right? Because you're a very impressive people that you respect, sometimes putting out ideas that can really distract you.
So that doesn't mean you know, they're great advisors and counselors and other ways, but it's just how you receive that advice. That is the issue for the CEO. And that's something I've talked with a lot of CEOs about and one thing I try and make sure that they're really staying true to the first principles thing, that matter.
You know, I think another thing that for me, I learned and you know, CEO for almost 10 years is I really started out solely focused on just growing revenues, keeping costs at a reasonable level, really just managing to the income statement. And then over time, leveraging products like venture debt, and there's even more sophisticated products out there like things, you know, equity like debt, and just all those innovations out there that can really help you do some powerful things with your company and minimize dilution.
I can't tell you how many times I've had conversations with founders where they're taking an extra 10 points of dilution to do you know, manage inventory or whatever it is that they're doing instead of really understanding how to leverage capital, really understanding what the right amount of debt is, I'm really understanding what the right types of debt products or non interest liabilities are, that are their leverage for driving their their business.
And then you know, one thing that I think is new to the ecosystem I spend a lot of time thinking about is just cap table management. The venture ecosystem has really, really changed dramatically over the past, you know, four years, five years, whatever time frame, you got to look at it, it's continually changed. And one of the biggest changes is that it's no longer your Series A investor who anchors your cap table from startup to IPO. There's a bunch of specialist firms out there who have incredible expertise that can help you in different ways. And part of the dance these days is strategically getting investors in at the right time. And using your cap table to get those people in, and where if you need to, to get investors who aren't, may not be adding as much value as they used to, you know, maybe they're having a different vision than you as the company has grown.
A cap table is really a tool for creating value and aligning incentives. And I think founders need to have a strategy for that as their company grows as much as they need a strategy around revenue growth.
Jon Low
Thank you. How have you or some of the founders you've worked with, used this to their benefit, and to do it arguably at a speed and flexibility they might not have received possible before?
Clay Whitehead
Yeah, well, first, I think there's some positive trends in the ecosystem. You know, a lot of people for a long time have viewed equity compensation as the sole lever for driving, retention and alignment for executives, employees. And that's changed a lot. If you're going for a big win.
Now, a lot of later stage investors have realized and are sort of starting to prioritize aligning themselves better with founders by giving the founder some liquidity. You aren't aligned with your investors as the founder. They're aligned around a multi billion dollar exit, and you're just making a relatively low salary and have this paper rough. If you're going to be aligned in shooting for a big ambitious target, which is what it's all about, you got to be able to take some chips off the table. So I think that's, that's a really important point here.
I think the other thing that's important when you think about managing the balance sheet, and the changing ecosystem that we have is for most companies I speak with and I've interacted with, one of the biggest constraints they have is oftentimes simply engineering hires and scaling their engine product teams. And one of the common frustrations is obviously, you know, Google, Facebook, you name the big guys, they've essentially become talent monopolies. So, they essentially become, you know, monopolies on the buying side, on the demand side for talent, and then you use them on cash and on equity.
But by structuring intelligent liquidity programs for your employees, you can make your stock more valuable to your employees and you can even have a more of a retention impact and recruiting impact if it's done as part of a holistic employee engagement strategy. And if you're giving away the far right, you're probably going to allow people to sell some percent of their shares each year, you know, in terms of more and more strategically using your balance sheet.
I think one important point that a lot of people overlook is the checks these days from investors need to be so large at the later stage, that you often need an early stage investor to be willing to sell some of their shares to bring a large check in to support the company. For example, as CEO, you might really want you to raise 25 million and investors want to put in 50 million. That's a very common scenario. The common way to solve that is have an earlier investor sell some of their shares.
So, one thing I encourage founders to do is have these conversations about the cap table. Start with a strategy around a cap table, right realize how you're going to have to manage it over time and who you want to be the boss at different times at different stages, and be talking to people about that upfront. So that when the time comes and you're raising your Series B, C, or D, you have people who might be willing to help you make room. People who understand you might need to use liquidity programs for your employees to have a talent engagement sense, and really drive the outcomes that you want with your most valuable commodity, which is your equity.
Jon Low
Thanks, thanks for sharing that clay. And just in the interest of time, I want to give you an opportunity to also talk a bit more about Pomegranate VC, because my understanding is a lot of what you shared about founders and how they can actually leverage their understanding of capital and instruments to enable that company— that’s a lot of what the value is that you bring within Pomegranate VC.
Clay Whitehead
I'll try to avoid the infomercial, but I definitely appreciate the softsell there. In terms of look, you know, my why here is just all the experiences seared in me over basically a decade of running a company, it becomes your passion that becomes, you know, just a party. It's something tattooed on your skin for life if you're a founder, and I've been through, like a lot of founders, I've been through hyper growth. I've been through layoffs, I've been through great times, I've been through tough times, and it's become my core identity.
So, for me transitioning into working with other CEOs and they don't always need help, right? Sometimes they just need people to get out of their way and provide resources too. I certainly felt that way a lot of the time, but we're needed. It's about having people around you that can play that role and help you unlock value, which may come in the form of something in your business, or it may come from your own personal development, I think is the really secret back pocket of most great CEOs, despite some of the lessons of the last dance, which a lot of us are watching, Michael Jordan, I think it's really fundamentally about:
… “Hey, how are we gonna be leaders?”
… “How are we going to be a member of our first team and not just the leader of it, because ultimately, everything we achieved in our companies, we achieved with our executive teams and those around us!”
So look, the type of CEOs I love working with and the things that I think are exciting. The big jobs you've got are having a really high functioning executive team, and making your company a great place to work. And the things that you love doing, the things that you're functionally strong and your own passions should probably only be about 10% of your time, most of the time because you're, you know, just like you don't win as a CEO, you don't win when you win arguments. You know, when the best decision is made, right? It's much that way and how the work gets done and how the decisions get made.
And I think right now, particularly with COVID, a lot of these things are very relevant. So some of the things just to share my thinking recently. So one thing I've been talking about is endurance versus resilience. Like I hear a lot of people talking about, hey, we just need to endure, and I know what they mean. But it's just the wrong word, because we're going to have to change. It's just not a matter of keeping them running the same race, resilience is much more apt, because it's about getting back up as soon as you can. And you can also make your team stronger. If that's a message that you're preaching, helping them reconnect with the mission up in them reconnect with each other, helping to find meaning in their work as you go along and make a lot of these painful changes.
Another thing I'm talking about with a lot of CEOs who recently is just I'm hearing from them as they feel the need to be more directive as wartime CEOs and everyone feels like a wartime CEO. And just a few sort of tactical tricks around that are number one, remember that you're always CEO. And this is a time of massive change. But if you go around and brainstorm throughout your company, all of a sudden, all these loose ideas, you're having this brainstorm you're doing will turn into action, sometimes you don't realize the power of our voice. And that can divide our company's focus.
So, remember that you're always CEO. One way to do that is to be very explicit at first, but be very explicit with people, whether you are telling them to do something, selling them on something, informing them of it, or consulting them on it. Some of you really want their input. And similarly, when you're making decisions, I think it's very good hygiene to say, “Here's the type of decision we're gonna make.” It's going to be a me decision. It's going to be a consensus decision, or it's going to be delegated decisions.
There's lots of other things and tools that you can use right now. But I think as CEOs we're going to be changing in front of people on the spot as we just COVID, both in terms of perhaps our strategy, perhaps some of our tactics, but most likely also in terms of how we manage the company. So calling that out, asking people to hold you to account to the values of the company, still being open about these transitions you're making as a leader yourself.