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Governance 201
Early-‐ and Growth-‐Stage Tech Companies
Dave Litwiller Execu>ve-‐in-‐Residence
March 6, 2013
Copyright, David J. Litwiller 2012 2
Important Disclaimer This presenta>on is made with the understanding that the author is not engaged in rendering legal, accoun>ng, securi>es, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
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Overview
• Difference between Board of Directors and Board of Advisors
• Roles and responsibili>es of directors
• Building, managing and evalua>ng each kind of board
• Evolving governance at the speed of a rapidly changing business
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My Background • Twenty+ year trajectory of R&D, marke>ng, finance and general
management roles in early-‐, growth-‐stage and scaled-‐up tech companies in Waterloo region
• Governance
• Spent a number of years heading M&A, dives>ture, turnaround, and corporate venture finance ac>vi>es in semiconductor and enterprise soXware businesses, as well as work in instrumenta>on, automa>on, and med/biotech
• As EIR, presently advise over sixty tech companies’ founders, boards and investors
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Board of Directors vs. Board of Advisors
Directors Advisors
Choice of Members By shareholders By management
Purpose Oversee business affairs Advise as requested
Obliga>ons Under Statutory and Case Law
Yes: CBCA, OBCA, BIA, OESA, others
No
Agenda Sets own Set by management
Power to Hire and Fire Yes: CEO; appoints officers No
Liability Significant and growing Liele
Du>es Fiduciary, care At convenience of management
Compulsory Disclosure of Business Informa>on
Yes No: informa>on can be selec>vely disclosed
Time Commitment 250 to 450 hours per year Flexible, by mutual accord
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Board of Directors (BoD)
BoD Obliga>ons (I)
• Diligently prepare for each mee>ng • Appoint CEO and other execu>ve officers • Monitor and evaluate CEO performance • Plan for succession • Adopt strategic planning process • Par>cipate with management developing and approving annual business plan and mul>-‐year strategic plan
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BoD Obliga>ons (II)
• Review with management financial plans • Establish opera>ng and financial goals • Establish sufficiency of risk management • Ensure informa>on supplied by management is >mely and sufficient for the BoD’s work
• Review and approve financial statements • Approve material acquisi>ons and dives>tures • Approve securi>es issuances and repurchases • Declare dividends
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BoD Obliga>ons (III)
• Approve nomina>on of directors • Confirm that processes are in place to comply with applicable legal, regulatory, corporate, securi>es and other compliance maeers
• Develop the corpora>on’s approach to corporate governance and improvement thereof
• Carry out other du>es specified in the USA, ar>cles or by-‐laws of the corpora>on
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Directors’ Du>es • Fiduciary
– Honesty, loyalty, trust, maintain confidence, independent judgment, avoid conflicts of interest
• Care – Act carefully, be informed, exhibit diligence and skill
• Manage the business and affairs of the corpora>on Standard of Performance • Due Diligence
– Informa>on access and review – Delibera>ve process – Reliance on experts and independent authori>es when appropriate – Record proceedings
• Business Judgment
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BoD Reali>es • It is work, and people need to be work-‐like about it • Liability is significant • The board needs to collec>vely be knowledgeable about all
salient aspects of the business and its context, even though individual directors’ skills can be more narrow
• All directors need to be engaged, ac>ve contributors, and documented as such
• The risk tolerance of directors needs to match the risk profile and stage of development of the business
• In early and growth-‐stage tech co’s: Liele staff or management board support bandwidth; this isn’t like blue chip company governance
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Evolving the BoD -‐ General
• Term limits, typically three years
• Current directors and officers rou>nely networking to develop director candidates
• Periodic board self assessment to iden>fy weaknesses and skill gaps as the basis for targe>ng new nominees and beeer prac>ces
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Evolving BoD Skills with the Stage of Company Development
Company Stage
Typical # of Directors
Typical Director Mix
Key Skills
Concept 1 1 Founder Business forma>on, F3 funding, early customer and technical discovery
Seed and Start-‐up
3 1 Founder 1 Investor 1 Independent
Recrui>ng, technology, opera>onal set-‐up, angel/VC funding, ecosystem rela>onship development cri>cal to success over next 18 months
Growth 5 2 Founders 2 Investors 1 Independent
Commercializa>on, opera>onal refinement, ins>tu>onalizing know-‐how, scaling, growth finance, working capital management, interna>onal reach
Late Expansion
7 2 Founders 2 Investors 3 Independents
Increasing financial sophis>ca>on, acquisi>on or IPO savvy, governance discipline, reduc>on of surprises
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Leading BoD Issues Company Stage
Sales AccounBng Legal
Seed • Customer discovery
• Managing by bank statements
• IP: rights, deadlines, chain of >tle & assignment, licenses
Start-‐up • Early sales • Strengthening
value prop • Compe>>ve
strength
• P/T bookkeeper • Monthly I/S and B/S • Tax returns done • Source deduc>ons
made and remieed
• Director resolu>ons to approve equity rights grants
• Complete minute book • Material contract review
Growth • Accelera>ng growth
• Revenue predictability and quality
• Rising efficiency
• F/T CFO • Audited financial
statements • Annual forecasts with
predic>ve value • Variance review
• Records management • Compliance • Risk management • Li>ga>on, real or
threatened, especially employment, partner, and IP
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High Impact Board Prac>ces Company Stage
PracBce Helps
Seed and Start-‐up
• Prospec>ve hindsight • Reference class analysis • Pre-‐commitment • Commitment limits
• Manage risk, coaching, coach-‐ability • Reduce sampling and intui>on errors • Catalyze learning, an>dote groupthink • Counter decision driX & confirma>on bias • Do more with less; pivot effec>vely
Growth • Execu>ve sessions • CEO and management
performance feedback • Agenda effort
• Independence of board • Correct quickly and early • Keep up spirited inquiry in the most
impacoul areas
Late Expansion
• Con>nuous improvement of governance
• Methodical director onboarding
• Evolu>on of the BoD as a self-‐regula>ng body
• Accelerates >me to full individual and group produc>vity, facilita>ng renewal
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BoD Advice (I) • There’s no shortcut for spending the >me and doing a lot of reading
and networking for a director to bring an informed, independent viewpoint about a company’s strategic environment
• Speed, decisiveness and dexterity improve with a somewhat smaller board than larger, IFF, sufficiently broad, experienced, and dedicated directors are available to span the requisite disciplines with a marginally smaller group
• Meet eight >mes per year, in person
• Don’t let the flurry of other business push aside a deep dive each mee>ng into the maeers which are keeping the CEO and CFO up at night, and to understand what alternate data , viewpoints and interpreta>ons exist to richen the discussion on those maeers
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BoD Advice (II) • Require board packages be delivered to directors 72 hours in advance of
mee>ng, with a cover memo iden>fying which items are informa>onal only, and those which will be deliberated and decided
• Structure discussion so that management’s recommenda>ons are clear, yet with room for director input, but stopping short (usually) of unbounded possibili>es
• At every board mee>ng, discuss the quality of informa>on, agenda, >me alloca>on, and delibera>on process with each director contribu>ng 1-‐2 improvement s for future mee>ngs
• Conduct brief execu>ve sessions at each board mee>ng to discuss management and board performance without members of management present, as well as who will deliver that feedback
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BoD Advice (III) • Have execu>ve management provide regular feedback on where it has
goeen the most help, and the most frustra>on, from the BoD
• In normal circumstances, use 75% of >me in the boardroom looking forward (strategic, market), and 25% looking back (finance, ops)
• Always know the company’s financial runway, be proac>ve raising funds, and become expert in accessing alterna>ves in the financial model and capital structure to improve funding op>ons
• Rotate which board member will take a hard stand on difficult issues as they arise, so that one person does not always take the role of cri>c
• Designate one responsible director for the CEO performance evalua>on process, even though all directors par>cipate
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Chairmanship (I) • The BoD can only be as good as its chairmanship for seqng the tone
and interpersonal chemistry – Leading among peers – Tact: ability to disagree without being disagreeable; construc>ve
dissent – Bringing everyone into the discussion, and not leqng one voice
dominate – Encouraging debate while sustaining cohesion – Keeping conflict at a task level, and not a rela>onship level – Knowing directors’ leading concerns before each mee>ng – Effort and prepara>on; collabora>ve agenda development w/ CEO
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Chairmanship (II) – Channel delibera>on and decision into a two-‐step process on divisive issues
– Driven improvement of board prac>ces – Quickly reconciling emerging differences among directors’ visions for the board’s role, and those of management
– Promo>ng openness by encouraging board members to make direct proposals, not disguised or oblique ones
– Weaving themes and points of importance together to create an integra>on of each mee>ng around major current issues
– Being able to both cri>cize and support management – Quickly dealing with director underperformance
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Early BoD Warning Signs (I) Signals of insufficient director effort or poor skill correla>on with the needs of the business:
• Overreliance on service providers; they do not just provide expert input, the BoD effec>vely outsources decisions
• Rou>ne over-‐deference to the one board member with the most subject maeer exper>se in a subject area
• Vital decisions are almost always made just with the facts and arguments on hand, rather than spending >me in some instances to ques>on the source informa>on and get more, varied, and beeer data
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Early Warning Signs (II) • Imprac>cal advice from directors
• Insufficient give and take between directors and management
• Lackluster inquiry into areas of underperformance
• Poor mee>ng management – Time – Agenda – Spiraling out of control on issues without an ability to summarize work
to date, forward ac>ons, and move ahead to other business
• Insufficient declara>on of conflicts
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BoD Observers • More voices in the boardroom makes it harder to reach consensus – In most cases, small company BoDs try to reach consensus, and not have split votes
– In prac>ce, having a voice is nearly as powerful as having a vote
• There is also a liability issue that an observer can be deemed a de facto director if the observer func>ons to manage the corpora>on’s business and affairs – By statute, observers are not en>tled to indemnity – May not be covered by D&O insurance
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BoD Observers
If observers are needed, such as, venture investment fund junior analysts, or strategic investor representa>ves:
• Then, the role is best defined contractually as a confiden>ality-‐bound listener, with care taken that the observer not prepare agendas, not influence debate and not to influence mo>ons, and, to otherwise bind conduct – Minutes should note the observer’s role in each BoD mee>ng, and expressly that the observer did not vote for or against mo>ons when votes were cast
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Board of Advisors (BoA)
BoA Roles and Responsibili>es • Provide independent advice to CEO and management without fiduciary or duty of care obliga>ons
• Advise and lend credence to the company in the areas most significant to success over the coming two years
• Can be any number of members, but typically four to seven
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Three Common Forms of BoAs
• Customer – To gain heightened voice of the customer in the company’s product and business strategy
• Scien>fic or Technical – To help with complex underlying science or technology
• Business – To gain selec>ve input on business issues from advisors without either side taking on the mutual obliga>ons or formalism of a fiduciary board posi>on
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Ideal BoA Member Profile
• Expert and nearly invaluable knowledge • World-‐class networks • Aeracts outstanding employees • Provides an aura of success in advance of the business achieving it
• Works hard and is responsive • Comfortable lending name and credibility to the business, and advoca>ng on behalf of the company
• Someone you’d love to have as a senior employee but is not affordable or aeainable on that basis
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BoA Nomina>on Criteria
• Scien>fic or technical skill • Business strategy and company building • Product development • Customer and sales channel development • Business development and ecosystem rela>onships
• Regulatory wherewithal
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BoA Challenges
• Only half of CEOs with BoAs are sa>sfied with them aXer working together
• Typical issues: – Ongoing responsiveness – Advisors taking the >me to fully contextualize the company’s circumstances
– Interpersonal chemistry – Self-‐interested advisor behaviour
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BoA Success • Likelihood of construc>vely using a formal BoA: – Highest: Tech start-‐ups requiring $ millions of funding and several years to get to revenue • Biotech/pharma, med devices, semiconductors, telecom/datacom capital equipment, u>lity-‐scale cleantech, advanced materials
• Enterprises with large regulatory hurdles and risks
– Mid: Enterprise soXware, consumer electronics, industrial technologies
– Low: Consumer web services, mobile apps
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BoA Advice
• In lower investment stake businesses, formal advisors who aren’t also investors can raise more ques>ons about the business for outsiders than they help solve
• Have an hour+ working session at the outset with a nominee BoA member to assess communica>on, thinking style, energy, and mutual fit
• Have a wrieen charter or mandate which lays out expected commitments and contribu>ons
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Managing the BoA for Impact and Produc>vity
• BoA will typically only put out as much as the CEO and management team puts into it: – Be explicit about the expected >me commitment and speed of responsiveness
– Hold mee>ngs regularly, typically two to four >mes per year – Set agendas and send materials beforehand – Ask advisors to present on specific topics for informa>on or discussion to management and the BoA
– Ask advisors for feedback on industry reports and management plans
– Ask for referrals and introduc>ons – Poll for input on point issues 1:1 as they arise – Keep advisors up to date on the company’s progress, such as with a monthly summary e-‐mail
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BoA Advice • Set term limits, typically one to two years – Interest and impact typically wane over longer periods – Forces everyone to revisit relevance and changing circumstances with a fast growing business
– Removes s>gma of departure, par>cularly when customers or partners are represented on the BoA
– Terms should be renewable if the rela>onship is working out well
• To keep aeen>on up, consider compensa>ng not on a retainer basis, but linked to deliverables such as mee>ng prepara>on and aeendance
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Renewing the BoA
• Regularly revisit the top three things that the business needs to achieve to go to the next level over the coming two years – Early stage: De-‐risk value proposi>on or raise funds – Later stage: Drive growth, scale and cash flow
• Ask if the BoA is helping those things happen faster than opera>ng management could on its own – If it is, it is likely the right BoA at the right >me – If not, it is >me to revisit skills gaps, composi>on, and even the ongoing value of a BoA
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Resources and Further Reading • Board of Directors
– Directors’ Du>es in Canada, Barry Reiter hep://www.cch.ca/product.aspx?WebID=3688
– Decisions 2.0: The Power of Collec>ve Intelligence, Bonabeau hep://people.icoserver.com/users/eric/SMR_Collec>ve_Decisions.pdf
– The Big Idea: Before You Make That Big Decision…, Kahneman hep://www.paginasprodigy.com.mx/RPA1958/BigDecision.pdf
– Winning Decisions, Russo and Schoemaker hep://www.randomhouse.com/book/159138/winning-‐decisions-‐by-‐j-‐edward-‐russo-‐and-‐paul-‐jh-‐schoemaker
• Board of Advisors – The Four Steps to the Epiphany, Steve Blank
hep://www.stevenblank.com/books.html
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Follow-‐up Discussion
Contact:
dave [dot] litwiller [at] communitech.ca
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