Entrepreneurial Leadership and Management . . . and Other Stuff

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09
Jun

The Role of the Independent Director

For the purposes of this post, I’m referring to a member of the board of directors of a company that does:

  • Offer uninfluenced (by money, power or competition) opinions regarding the company’s strategy, tactics and overall execution decisions.
  • Bring related wisdom gained through experience in the market, product, service, management or company structure.
  • Actively stay informed about what the company is doing, how it’s doing it and how well things are going.
  • Make themselves available to the CEO when needed.
  • Make decisions that are in the best interest of the company, not necessarily in its board or its management team (when these differ).
  • Show up at the vast majority of board meetings. This should state all of them, but stuff happens.

The independent director does not:

  • Have any conflicts of interest with the company, including board participation in a competing company.
  • Own a substantial percentage of the company (through any means including investment) that may cause a bias in decision-making.
  • Have a job inside the company.

That’s actually the simplistic list, biased toward the role of the independent director in a small, private company or startup. The list for public company directors is much longer, more detailed and has a lot of legalese associated with it to cover the asses of the respective company and director.

I’ve been a director of 16 different companies so far in my life. I think I was a good director on most of those boards and I knew that I sucked on at least a couple of them. Several of the companies were publicly traded, but the vast majority were private, venture-backed companies. On those boards, I was (and still am at three companies) usually the only “independent” director. I put quotes around independent because I’m not sure that it’s possible to completely follow the rules I laid out above. As a board member of a small company, I usually get stock options or restricted stock in payment for my services and in larger or publicly traded companies, I get compensated with cash as well. Sometimes, I’m also a small investor in the company. Does that influence my decisions? Well, yes, sometimes it does. I hope and believe that when that happens, though, I’m still working in the best interest of the shareholders – the group that the board works for in the first place.

The boards of small, venture-backed companies actually vary little these days in my experience. There is usually one insider, almost always the CEO (sometimes, there are two – a founder and a CEO when the CEO is not a member of the founding team); one or more VCs; and one or more mutually agreed upon outsiders (sometimes there is more than one, but it’s hard to find qualified directors – in my experience having only one is the norm).

Like all directors, the independent director should help guide the company by taking a participative role in strategy setting; help the management team make high-level financial decisions; contribute to the setting of overall direction; determine compensation when appropriate; ask loads of probing questions; and advise the CEO when asked as well as, as needed, when not asked.

Most board-level decisions are made with reasonable thought and discussion. They are rarely . . . rarely a result of a non-unanimous vote (they are, obviously, always the result of a vote, it’s just usually unanimous). That doesn’t mean that disagreements don’t occur, it just means that reasonable people have a desire to work through things and to try and find consensus – before they vote on it. This is where the independent director has another, somewhat unique role on a board. That of the mediator or synthesizer of the parochial opinions of the insiders. That is, those that are employed by or heavily invested in the company. Often, this means bridging the gap between the management team and the investors of the company. Once in a while, it even means trying to find common ground between investors.

As an independent director, I find myself assuming this role a few times a year when things aren’t going well inside companies and once in a while when things are going according to plan or better. It’s time consuming because no party wants an arbiter. They just want it their way. At times, I feel like the Secretary of State working with Middle East factions. You get the idea. It’s enjoyable and frustrating. When it works out – which it almost always does because all parties want it to – it’s a lot of fun. The process isn’t always pretty, though.

As a CEO, I really appreciated the independent directors that sat on my boards. Even when their energy was directed at talking me off the ledge (i.e. I was wrong and needed to be shown the path), someone stepping in, holding my hand and offering me a different light to see the situation with was a huge help. I really valued having the person and role on my board. Similarly, I knew the independent director was working with other insiders to try to find common ground when he/she felt that the management team was in the right.

So, there are two lessons here. For those interested in being an independent director, be forewarned, you have a unique role to fill in addition to the normal directorship role. It’s an opportunity and responsibility in my opinion. For CEOs, recognizing the value that an independent director brings to the table should help you recruit the right person to fill that role and to, perhaps, think through the value of such a person on your board when it is being established.

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 June 9th, 2010  
 Will  
 Boards  
   
 6 Comments
22
Feb

Every Company Needs a Board of Directors – Startups Too

OK, maybe not every company. Raw startups – two people in a garage kinda thing – shouldn’t waste their time with anything formal. But young companies – those that are established and on their way, regardless of their size or level of funding should, as should any company more established than that. It seems that we frequently relate having a board of directors to some kind of funding event. Of course, it often happens that way. Investors require one or more board seats, which becomes the impetus for creating a formal board – at least one with non-employees on it. But even without funding, companies should establish and use a board of directors made up of people from inside and outside the company.  A board of qualified people can offer great benefits to a company, its management and its founders.

To me, the most important of these is that board members, unlike informal outside advisors, have a fiduciary responsibility to the company and, therefore, offer advice that is often better thought out and more responsible. After all, it’s their job. Additionally, because there is greater long term continuity with board members than other advisors, the input received from directors tends to be more specific, context sensitive and applicable to the company’s long term strategy. Finally, a board tuned in to what the company is doing and how it is doing it can provide dynamic guidance, including a kick in the ass now and then, that advisors without an ongoing, interactive relationship with the company are unable to deliver.

To some new company founders, these advantages may seem to be a bit abstract. In fact, lately, I’ve seen some resistance to the concept of establishing a board of directors entirely. From what I observe, this seems to be primarily driven by three factors:

  • Fear that creating a formal board will somehow turn control of their baby to their new “boss”
  • Reluctance to “spend” the equity necessary to recruit and retain quality board members
  • Belief that they already have advisors who deliver all the guidance they need

Yes, there have been cases where boards have fired CEOs or somehow otherwise wrested control of the company from its leader or founder. I’ve certainly never seen this type of thing from non-investor board members and even with board members who are investors, it’s incredibly rare and definitely a last resort type of move. Virtually no one outside wants your job.  If they did, they’d just go start another company or take their money to another playground.

Yes, you will have to compensate outside, non-investor, board members.  Don’t be cheap. The compensation will be with equity, likely a single percentage point or lower and vesting over four years.  What you will get in return will likely help you immeasurably. It may not be the sole difference between long-term success and short term failure (it might), but the advice you get will at the very least make your life easier and substantially increase your odds for success.

Finally, and I sorta hit on this earlier, having many advisors and mentors is terrific.  You shouldn’t have fewer of these when you establish a board – they are always valuable.  They do not, however, take the place of a dedicated group of individuals who have committed their efforts and wisdom to the success of the fledgling enterprise.  Outside advisors will never have the volume of background data that your directors have to analyze situations nor will they feel the responsibility to do the right thing. Directors are tied to the company’s success and failure. Advisors and mentors are not. There’s a huge difference in responsibility and, ultimately, quality of action.

So there you have it. Do you still have a reasonable excuse for why you shouldn’t establish a board? If so, I’d like to hear it.  “It’s hard,” by the way, doesn’t count. You’re an entrepreneur, just work harder and smarter to get it done.

 February 22nd, 2010  
 Will  
 Boards, Startups  
   
 17 Comments
30
May

Avoid Negotiating by Proxy

In my career, I’ve been fortunate enough to have sold a handful of public and private companies that I was running at the time and acquire about a dozen others.  Looking back, the activities and process around mergers and acquisitions may have been the most fun I ever had as CEO.  Probably even more fun than the IPOs.

I think what makes M&A activity so much fun to me is that I love the chase, the negotiation and the final discovery of a unique solution that makes that last puzzle-piece fit into a picture that makes the deal work for all interested parties.  In my experience, coming to a successful conclusion to any such negotiation requires a thorough understanding of the goals of the parties involved – only by understanding the real goals of each party can a good solution be crafted if, of course, one exists.  Since there is so much information that is conveyed subtly and non-verbally during an M&A discussion, it is difficult, to say the least, to execute a successful negotiation if the negotiator isn’t involved in all stages of the interaction between the parties.  The relationship that is formed between the people at the table and the understanding they gain of each other is part of the fun and ultimately is a big factor in the success or failure of the negotiation.

While I enjoyed the thrill of the chase, there were always parts that were less interesting and greatly inefficient.  Perhaps the greatest of these was the fact that everyone even remotely involved in the deal felt the desire, need or obligation to convey what they believed to be the correct step-by-step negotiation process required to get to a close.  Now, I’m pretty open to advice (well, mostly), but when someone who’s not involved in the deal wants to tell me what to do and in what order, it strikes me as a bit outta whack.  It’s just not reasonable to try to set a process or path for an M&A discussion a priori or from afar – there are just too many variables and unknowns.

While everyone was happy to put their $0.02 in, the most common platform for getting this type of advice was board meetings.  It got so bad at times that 80%+ of the conversation about the deal was often dedicated to how the negotiation should be done rather than what should be negotiated.  Truly absurd.  As a director myself these days, I’m astonished how often other directors want to talk the CEO (I refer to the CEO as being the responsible party here – if applicable, replace CEO with whoever is responsible for the negotiation) through the steps of negotiation rather than giving him/her specific direction on the corporate or investor goals of any such merger or acquisition.

For sure, there are cases where the CEO is inexperienced and needs to have their hand held.  If this is the case, the board or other company advisors should get directly involved in the process and not negotiation through the CEO.  In that way, the negotiation will go better for the company and it will be a great opportunity for the CEO to learn how to go about it for the next time.  If the CEO is an experienced and capable person, however, the group should agree upon the key points to be negotiated, which areas are important to all concerned and which are less important so that the CEO has a few negotiating pawns.  Then, the CEO can best determine how those goals will be obtained during the negotiation because they are the closest to the discussion and have all the data.

There are negotiating fundamentals that can be taught, for sure, but once you get past the basics, negotiating is all about the interaction – the wealth of information that comes from the spoken and unspoken.  Some of these details can be communicated to the people who aren’t directly involved, but the success of the negotiating will often be determined by information that is subtly conveyed and difficult to communicate.  In the end, only the person or people at the table can conduct a reasonable negotiation.  It’s just silly to waste time doing it from afar and almost absurd to try to do it ahead of time.

 May 30th, 2007  
 Will  
 Boards, General Business  
   
 4 Comments
16
May

Communicating with Your Board: The Summary

This is the fourth and final post (for now) in my series on communicating with your board.  You can find the previous posts here, here and here.

As a corporate director, I wince when I get a board package that opens up with a stack of detailed group-level reports and loads of spreadsheets containing every piece of financial data possible about the company’s past, current and future state.  To be sure, such information is a necessary part of running a successful business and should be included in the board package, but when information about the company is only presented this way, it’s difficult for anyone to absorb the key facts and figures about the company so that they can perform a relatively informed advisory role as a board member. 

It’s even more difficult when the audience for the information – think the VCs on your board – get such a package from a large number of companies prior to each of their board meetings.  It’s just not possible to, 1. spend the time to decipher what is going on and, 2. recall how the data presented is related to many of the programs, goals and initiatives that were previously agreed to.  For these reasons, and the fact that it’s easy to get data from various companies confused, such a comprehensive report will often be ignored.

To quote Winston Churchill,

This report, by its very length, defends itself against being read.”

Dealing with this is simple, of course.  Just summarize the information, relating it to previous discussions, goals and objectives and put that document at the beginning of your board package.  It shouldn’t need to be said, but what I mean by summarize is to make it concise and short.  Again, quoting Winston Churchill:

Please be good enough to put your conclusions and recommendations on one sheet of paper in the very beginning of your report, so I can even consider reading it”

Sometimes, it will be the only part of the board package read by some of your board members prior to the meeting.  Sad but true, I’m afraid.

So, the summary should be the first thing in the board package and should contain:

  • High-level sales statistics, including major or important deals
  • Rollouts of products or services
  • Changes in key customer, partner or channel relationships
  • Important legal or accounting issues facing the company
  • Changes from the staffing plan – major hires and unexpected departures that will impact the business
  • Unexpected changes to the financial position of the company
  • Unusual market or competitive moves
  • Status of major initiatives within the company

You get the idea.  Additionally, any item that was reported on before should also include a note making it clear if there has been a change.  This is especially important for items that have specific, timed deliverables.  The key is, again, that if it takes more than one page, you’re not focused enough. 

I’d bet you’ll find that summarizing your board material in this way will not only make the board package more convenient for your audience, but it will also help you discern and focus on the important parts of your business.  There’s nothing quite like trying to make things short and complete when explaining things to others in helping one understand the material for themselves.

 May 16th, 2007  
 Will  
 Boards, Management, Startups  
   
 Comments Off on Communicating with Your Board: The Summary
04
May

Communicating with Your Board: At-A-Glance Financial Information

This is the third post in my series on communicating with your board.  You can find the previous posts here and here.

Consolodating key financial information on a single page is a great tool for communicating some of the most important data about the company in a quickly-grasped snapshot.  Because of this, it’s not only good for your board, but your employees as well.  Presenting the data this way makes it much easier for an audience to understand the financial health of the company without pouring over the complete set of financial statements.  It also gives you the chance to make clear to your audience what you believe are the highest priority financial metrics for the company at any time.

Creating such summary information doesn’t let you skip the troika of financial statements (P&L, balance sheet and statement of cash flows), but it’s no additional work either – another page in your spreadsheet refering to data in the complete statements almost always does the trick.

While the exact format of such a one-page statement should be discussed with your board, the format below describes one that is used in a company that I work with, proposed by another director.  I’ve come to like it a lot and always keep the spreadsheet on my desk a few days before and after the respective board meeting so I can quickly refer to it as I think about the progress of the company.  It has three sections:

  1. Finance
  2. Headcount
  3. Subjective updates that either have an impact on the current period or will likely have an impact on future periods

I’ll go into each one separately . . .

Finance

As is true for much of the operating life of companies, the focus should be on cash.  As such, you should list the key spending areas of the company – the big line items – and sum them up to come up with the gross burn rate for the previous period.  As I mentioned in my previous posts in this series, it’s good to have numbers for previous periods as well.  You should include the last two (for a total of three) to five (for a total of six) months as a minimum in this table.

Once you’ve established the gross burn, you should summarize any cash infusions into the company.  Generally speaking, these will only include a few line items, like investment income, financings and collections.  By subtracting this sum from the gross burn, you’ll derive the net burn for the company.  Again, this should be reported for the previous months as well.

In this section, it’s also a good idea to list the key balance sheet entries and any bookings numbers (so the forward potential for revenue is observable).  For the balance sheet items, I like to see accounts receivable, accounts payable and any deferred revenues.  Of course, given the structure of the company and accounting methods, other data may be important in this section.  Capital equipment should be included if you’re running a business that requires a lot of it.

Finally, for bookings, you should list the bookings for the previous month, quarter and year-to-date.  It’s also a good idea to list the similar data for comparable periods a year earlier.

Headcount

In this section, you should summarize headcount by department.  There is no reason to break your small company into too many small departments here, you can simply lump them together by function if departments don’t work out.  In the cart, you should list the actual headcount as of the time of the last report, any additions or deletions since then and the current headcount.  You should also list the headcount plan per department and indicate any delta between the numbers.

Updates

Finally, you should add a few lines of important data that either had an impact on this current summary or will ikely have an impact on future performance.  Items like tax filings, lawsuits, delayed products, loans being called, key people leaving or being hired, etc, should be listed here.

So, in the end, the consolodated report will look something like this (Google Spreadsheet):

Again, it’s short.  At the most, it should cover a single page.  It’s also easily derived from the financial statments that you already have – your spreadsheet editor will do all the heavy lifting.  In the end, it will improve communication with your board and your company and it will help to make sure your board is up to speed at all times.

I’ll state again that you should discuss the format of this type of information with your board.  It doesn’t make sense to present a summary that doesn’t fit the specific needs that the group has and the format can be easily changed to make it work well.  As Chris Wand over at Ask The VC says in his recent post, Concluding Thoughts About Good Board Packages,

While it’s tempting to look for an example of a “perfect” board package and then replicate it, the perfect board package isn’t something that can be easily copied because it’s company specific and requires a thoughtful case-by-case approach.

 May 4th, 2007  
 Will  
 Boards, Management, Startups  
   
 4 Comments
13
Apr

Communicating with Your Board: Equity Grants

As your company grows, you’ll find yourself frequently seeking approval for grants of equity from your board.  Most often, the desired grants will be for new employees, but you’ll also want to use equity to recognize and retain existing employees, consultants, advisors and even your board members.  Since many grants will be made, it’s important to be able to present a request for equity,

  1. In a standard (for your company) format so the basis for making decisions between meetings is as consistent as possible.
  2. Relative to other similar grants whether being done at the same time or having been made previously.
  3. With as much contextual information as possible about the people and the grants, themselves.

First, I’ll take a step back by saying that in almost all cases, your board needs to approve any grant of equity to anyone.  When you’re starting out, it may be the entire board who approves such grants.  Later, though, there is likely to be a formalized compensation committee of the board that will be responsible for review and approval.  Even though the compensation committee is responsible for being closer to the compensation information than the general board, it would be a mistake to believe that the members of the group remember what has happened before or understand the state of things in the company the way that you do.  There is just too much information to remember when they are not exposed to it on a day-to-day basis. 

The good news is that it’s relatively easy to present all the information needed to bring your board up to speed on the critical and contextual data in this area.  First, always include a cap table with your board package even if it hasn’t changed since the last time one was distributed.  The cap table gives the board/comp committee a great picture of who has what and makes it easy to make sure that there is some consistency in how grants are made.  Additionally, board members, especially those who are also investors, will be thinking about how any grant is going to affect their overall ownership in the company, even if they don’t admit it.  By giving them an up-to-date cap table, they can do the math themselves.  After all, it is all about me.

Second, have a table like the following in your package [note: I include the concept of options to acquire shares as part of shares]:

Name Position # Shares % Ownership # Existing Shares/% Vested Range
           

 Where the columns are:

  • Name: the name of the person who will get the proposed grant if approved.
  • Position: their current position in the company or the position that they will take when hired or retained.
  • # Shares: the number of shares and type of equity the person will receive.  Are they options, restricted stock, performance shares, etc?
  • % Ownership: what percentage of the company is being granted on a fully diluted basis.
  • # Existing Shares: how many shares of the company does this person already have (applicable for existing or former employees or consultants).  It’s also good to include what percentage of their options, if any, have already vested.
  • Range: what is the range of shares previously granted to people in this position or, if the position is new, what is the range of company ownership for this position in other companies at the same stage of development.

Third, be prepared to discuss the background and/or performance of anyone on the table.  In my experience, detailed descriptions are generally only required for people getting big grants, but it really looks bad if you can’t explain why someone is on the list in the first place.

This may seem like a lot, but it’s really quite easy.  It’s likely that you process all of this information already and just don’t formalize it.  The key, of course, is to not just do this one time, but to keep it up.  Consistency is important and will become increasingly important as the company gets larger.  By showing the proposed grants with context and making the comparison to previously approved ones straightforward, you increase the likelihood that you’ll get the grant approved without issue while making the entire process as smooth and fast as possible.  After all, it’s not fun having to go back to a new employee and tell them that their grant was not yet approved because the board needed more information . . .

If this stuff is interesting, you should also check out Chris Wand’s How to Create a Good Board Package series over at Ask the VC and my previous post, Board Meetings – A CEO’s Point of View.

 April 13th, 2007  
 Will  
 Boards, Management, Startups  
   
 8 Comments
05
Apr

Communicating with Your Board: Sales Numbers

I’ve mentioned before that it’s likely that your board remembers less about your business between meetings than you think.  As much as you think that your business is the most important thing in the world to them, your directors are probably on more than one board and many are on several at any given time.  So, with all the various pieces of information they are dealing with, they may not remember everything or sometimes get some facts and figures mixed up between companies.  As such, it’s important to remind your board about the relative nature of what you report to them each time you give them updated information.

What do I mean by this?  All information, especially numbers, should be given in context.  When new numbers are being reported, they should always be linked with plans, forecasts, and previous results.  As always, any communication tool that’s good for your board is likely to be a good one for the company in general, allowing people less familiar with the inner workings of the day to day business to grasp the significance of the data being presented.  You shouldn’t have to do a lot of extra work for your board, but you may want to consider the presentation of data with the board’s unique circumstances in mind.

In this post, I’m going to give some examples of how to report sales numbers.  The problem with sales reporting is that they come in multiple forms and have to account for many components.  There are planned, forecasted and actual sales.  Sales by territory and by channel.  There are sales by product and service and, further, by product line or service area.  There are probably half a dozen other ways to cut the numbers as well.  The goal is to put as much of this data into as condensed a format as possible.  Here are some charts that do that.  Please excuse my obvious US territory bias in these charts.

 Territory  Q1 Plan  Q1 Actual  Q2 Plan  Q2 Actual  Q3 Plan  Q3 Actual Q4 Plan  Q4 Actual  Year Plan   Year Actual
 US East                    
 US Central                    
US West                    
 Asia                    
 Europe                    
                     
 Totals                    

The rows in this chart obviously represent each territory that you sell into.  The columns give a view of the plan, presumably set before the period and likely before the year began, and the actual data for completed quarters. If a quarter is not yet over, you can use “actual” column to show the results of the quarter to date.  If you run your business on periods other than quarters, you can, of course, change the headings of each column to whatever period fits.

Presenting the data this way gives the reader a full view of where you are, where you were planning to be and what the future should look like.  If you adjust your plan during the year, you can, optionally reflect it here or on a chart that compares the old and new plan.  Too often, the old goals are tossed when a new plan is adopted.  In my mind, this is an error because the original numbers are too quickly forgotten.  You can’t learn from or remember why the plan changed if it is left in the dust.  It’s good to reflect on the original plan after the individual periods and the year is over.

Many companies sell their wares through multiple channels.  Ideally, this would be another dimension to the report above.  Since that presentation is difficult, though, we have to settle for an additional chart in which we break down the numbers by channel.  The chart looks just like the one above with “channel” replacing “territory.”    Of course, you may need to further break down each channel by territory.  I leave this extrapolation to the reader <g>. Again, showing plan vs. actual both forward and backward in time is critical to understanding the meaning of the data.

The final use of the basic chart outline above is for product line reporting.  For this, “product line” replaces “territory.”  While small companies will not always break down bookings per product line (although they should as soon as it’s applicable), it’s a good idea to separate product and service sales very clearly.  This basic division of numbers (which will probably also be found on the P&L) tells a lot about the business.

Forecasting sales is fundamental to making good investment decisions inside a company. If you don’t know where and when revenue will be coming in, you won’t be optimizing your use of capital.  Forecasts can come in many forms, but should at least include the following information:

 Customer Territory   Pipeline Stage  Expected Close Date  Sale Value  Prev. Close Date
           
         Total  

For more information on the “pipeline stage”, see my post here.  The “expected close date” is the currently forecasted date for closing the deal and the “sale value” is the total bookings expected for this sale.  The “previous close date” is a very important part of the forecast.  It tells the reader that this sale was previously forecasted to close at another time.  Like the other charts, any data on what should have been or what will be substantially increases the value of any data being given.  Without this, there’s no accountability for the forecast unless the reader remembers the previous forecast or asks further questions about every deal.

The final sales-related chart that I like to see as a board member with a failing memory describes the deals that took place during the previous period.  These are deals that closed and the company reported as a booking.  A chart like this one contains all of the critical information.

Company  New  Add-On  Renewal  Total
         
         
   Total  Total  Total  Total

Here, the closed deals are listed by company name and amount with whether the deal was the first sale into that customer, an add-on to an initial deal or a renewal of a subscription-based earlier sale.  Obviously, the terms aren’t important, but any concept that applies to your particular business is.

  • A new deal is just that, a first sale into that particular customer.  Whether you include different divisions of the same company as the same customer is up to you.
  • An add-on deal is where you’ve sell additional product or service into a customer as a follow-on to an original deal.
  • A renewal happens when either a time-based license is renewed or, perhaps, a service agreement is extended.

These charts can usually be condensed into a few pages.  Small companies with a handful of deals will probably even be able to get them all onto a single page (aside from the huge forecast that might take additional volumes <g>). 

Of course, these are just examples and they may not all completely apply to your business.  They represent the way that I have seen reporting done successfully and in a compact form.  You should discuss the representation of information with your board and decide on the best way of getting comparative data communicated.  I highly urge you, though, to find a way to not only show current period data, but to do so in context, showing comparative data for other periods and versus plan as well.

 April 5th, 2007  
 Will  
 Boards, Management, Startups  
   
 9 Comments
28
Feb

Do Boards of Advisors Work?

I have never seen a board of advisors work after the initial few meetings. I’m sure there are cases where they are managed well and it works out, but for the most part, my experience is that any initial engagement and excitement wanes and the value diminishes fairly quickly.

I think that the reason this happens is that there’s no fundamental attachment between the members of the board of advisors and the company.  Sure, there might be a small financial one, created by offering the members of the group some equity or cash compensation, but it’s very difficult to establish any emotional link that would compel the outside members of the group to put in the long term effort to continue to add value, stay engaged and work to make the company successful.

The problem is that the people who are generally targeted as advisors have other jobs and responsibilities.  After the idea of equity participation and initial interest in what the company is doing wears off – which can happen quickly – the company that they are advising becomes a much lower priority than any of their other responsibilities.  Since they are not involved on a day-to-day basis, there is no other link to keep them thinking about what their advisee needs.  Ultimately, the relationship moves from a mutual one to one driven entirely by the company until it breaks down completely.

As it turns out, while the board of advisor setup doesn’t work that well, there are other ways of achieving the benefits desired in setting up the group in the first place.

  • Compensate company adviser(s) frequently – the value of any compensation dissipates quickly when the advisor isn’t thinking about the company.  More frequent grants of equity or cash payments will serve to keep their attention focused on the tasks at hand.
  • Put them on the Board of Directors – if they add enough global value, put them in a more responsible position with the company, like its board of directors.  The added responsibility will keep them focused on the company. Of course, you can only do this for a small number of people and only for those who are appropriate for such a role.
  • Hire them as a consultant – in this way, they have responsibility for delivering value to the company with an agreed upon income for doing it.  This arrangement has the added advantage that it’s easy to sever If and when the advisor no longer adds value.  The advisor can then be replaced by someone with different experience or knowledge.

Having outside advisors is always a good thing.  They can bring perspective to your efforts and direction.  They can also bring knowledge and wisdom into the company that may be missing in the current team.  Ultimately, the structure of such a group of advisors is critical to its success, though.  The classic board of advisors structure frequently fails because it does not establish an emotional or responsibility link between the company and the advisor.  There are other ways of accomplishing this though.  When these are used, a great relationship between an advisor and company can be established although, perhaps, not as a group.

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 February 28th, 2007  
 Will  
 Boards, General Business, Startups  
   
 15 Comments
19
Feb

Accepting a Seat on a Board

The first time I was presented with an opportunity to join a board, I was so flattered that I agreed to join without really considering whether it was right for me to do so.  That is, right for the company and right for me.  Luckily, it was a strong board and while I don’t feel that I contributed as much as a good director should, I feel that I made a few key contributions while learning a lot about the role of the board and it’s interaction with the CEO.

The next few boards I joined, though, turned out to be far less appropriate for me.  I wasn’t equipped to contribute as much as a director should and, more often than I expected, the CEO wasn’t looking for guidance as much as he/she was simply looking to fill a seat at the table – either to add a known name to the company’s list of advisors, or to satisfy a requirement made by investors.

Thinking back on it, the situation reminds me of the 80s television hit, Night Court, in which a young judge is appointed to the bench in New York.  Judge Harry Stone is as unlikely a judge as one could find and, according to the show, he’s appointed because:

“… the mayor was filling all open seats on the last day of his term, and Stone was the only nominee on the list at home to answer his phone.”

For at least some of the boards I joined, I’m sure my name was pretty low on the list of candidates but I just happened to be available.  Obviously, a crappy reason for either the company or the prospective director for joining as important a group as a board of directors.

While I can’t control the criteria created by the companies that ask me to join their boards, these days, I’ve gotten much better at determining which directorships are a fit for me and which ones aren’t.  In making this determination, it’s always my goal to both make sure that the position will work for me and, to the best of my knowledge, make sure that it’s the right move for the company.  I’ve turned down several invitations to join boards that I thought would be really cool because I didn’t think I could add enough value as a director.  

To make the choice on which boards to join, I’ve set up some basic rules that help me quickly determine if an opportunity is even worth considering. 

  1. Can I handle the load?
    • There are people who take on too many directorships at a time, in my opinion.  Because I tend to be fairly operationally biased, I know that I can only handle 3-5 directorships at a time.  When things are going well in the companies I work with, I have loads of spare time, but when things are going poorly, which seems to happen at all companies I work with at the same time, it wouldn’t be fair if I don’t have the time to help any one of them out.
  2. Am I truly interested in what the company is doing?
    • If I’m not genuinely interested in what the company is up to, I won’t give it my all.  The best boards are those that offer constant learning experiences.  It’s those boards that I’m eager to contribute to.
  3. Can I help?  Do I have knowledge and/or experience that will be valuable to this company.
    • It’s taken me a long time, but I now know the small pool of things that I know and I have a much better understanding of the oceans of things that I don’t know anything about.  If I don’t already know most of what you need me to know, I’m of little value.
  4. Is the CEO looking for guidance or is he/she looking to fill a seat at the table.
    • You don’t have to do what I say, but you have to ask, listen and consider my response.  If you don’t, we’re both wasting our time.
  5. Can I make some money?
    • Unless the Board we’re talking about is a non-profit, any advisor worth his/her salt will want to see a path to some income for their efforts.  Of course, any compensation will most likely be in the form of equity, but for some companies, cash or, some combination, is a better option.  I hate to sound like a greedy bastard, but my efforts, for the most part, are worth what you pay for them.  If they’re not worth something to you, see 4, above.

Since I’ve adopted these criteria (OK . . . guidelines), I think I’ve become a much better board member.  I feel I can contribute more and am much more available to the CEOs of the companies that I work with. 

There are many fewer people available these days to fill the expanding number of directorships being created.  As such, more people will have the opportunity to join boards and build a similar set of rules for how they pick which ones are most applicable.  Those looking to recruit directors should also establish a similar set of rules to make sure they make the best decision.  Understanding the criteria for both sides will ultimately help to establish the best, long-lasting relationship for the company.

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 February 19th, 2007  
 Will  
 Boards  
   
 4 Comments
13
Dec

Board Meeting Attendance and Frequency

Fred Wilson has a great post today on his blog, AVC, titled, Required Attendance Board Meetings.  In the post, Fred discusses his thoughts on face-to-face meetings of which he is in favor and I strongly agree; the frequency of meetings for companies with respect to their maturity – more for younger companies, fewer for older ones; board dinners – a good thing, although not required at every meeting; and management preparation for board meetings – don’t spend too much time preparing material.

Fred’s post is an excellent addition to the growing number of posts concerning board meetings.  Check it out.

 

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 December 13th, 2006  
 Will  
 Boards  
   
 Comments Off on Board Meeting Attendance and Frequency