Governance 201: Early and Growth-Stage Tech Companies - Entrepreneurship 101 (2012/2013)

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.


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


Follow-‐up Discussion

Contact:

dave [dot] litwiller [at] communitech.ca

© David J. Litwiller, 2013 38