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


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In this lecture, you’ll learn the difference between a board of advisors and a board of directors, and what roles they play in running a business. You will also learn how to build, manage, evolve and evaluate each kind of board.

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

  1. 1. Governance  201    Early-­‐  and  Growth-­‐Stage  Tech  Companies   Dave  Litwiller   Execu>ve-­‐in-­‐Residence   March  6,  2013  
  2. 2. Copyright,    David  J.  Litwiller  2012   2  
  3. 3. 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.   Copyright,    David  J.  Litwiller  2013   3  
  4. 4. 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   Copyright,    David  J.  Litwiller  2013   4  
  5. 5. 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   Copyright,    David  J.  Litwiller  2013   5  
  6. 6. 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   Yes:  CBCA,  OBCA,  BIA,   No  Statutory  and  Case  Law   OESA,  others  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   Yes   No:  informa>on  can  be  Business  Informa>on   selec>vely  disclosed  Time  Commitment   250  to  450  hours  per  year   Flexible,  by  mutual  accord   Copyright,    David  J.  Litwiller  2013   6  
  7. 7. Board  of  Directors   (BoD)    
  8. 8. 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   Copyright,    David  J.  Litwiller  2013   8  
  9. 9. 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   Copyright,    David  J.  Litwiller  2013   9  
  10. 10. 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   Copyright,    David  J.  Litwiller  2013   10  
  11. 11. 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   Copyright,    David  J.  Litwiller  2013   11  
  12. 12. 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   Copyright,    David  J.  Litwiller  2013   12  
  13. 13. 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   Copyright,    David  J.  Litwiller  2013   13  
  14. 14. Evolving  BoD  Skills  with  the       Stage  of  Company  Development  Company   Typical  #  of   Typical  Director   Key  Skills  Stage   Directors   Mix  Concept   1   1  Founder   Business  forma>on,  F3  funding,  early   customer  and  technical  discovery  Seed  and   3   1  Founder   Recrui>ng,  technology,  opera>onal  set-­‐Start-­‐up   1  Investor   up,  angel/VC  funding,  ecosystem   1  Independent   rela>onship  development  cri>cal  to   success  over  next  18  months  Growth   5   2  Founders   Commercializa>on,  opera>onal   2  Investors   refinement,  ins>tu>onalizing  know-­‐how,   1  Independent   scaling,  growth  finance,  working  capital   management,  interna>onal  reach  Late   7   2  Founders   Increasing  financial  sophis>ca>on,  Expansion   2  Investors   acquisi>on  or  IPO  savvy,  governance   3  Independents   discipline,  reduc>on  of  surprises   Copyright,    David  J.  Litwiller  2013   14  
  15. 15. Leading  BoD  Issues  Company   Sales   AccounBng   Legal  Stage  Seed   •  Customer   •  Managing  by  bank   •  IP:  rights,  deadlines,   discovery   statements   chain  of  >tle  &   assignment,  licenses  Start-­‐up   •  Early  sales   •  P/T  bookkeeper   •  Director  resolu>ons  to   •  Strengthening   •  Monthly  I/S  and  B/S   approve  equity  rights   value  prop   •  Tax  returns  done   grants   •  Compe>>ve   •  Source  deduc>ons   •  Complete  minute  book   strength   made  and  remieed   •  Material  contract  review  Growth   •  Accelera>ng   •  F/T  CFO   •  Records  management   growth   •  Audited  financial   •  Compliance   •  Revenue   statements   •  Risk  management   predictability   •  Annual  forecasts  with   •  Li>ga>on,  real  or   and  quality   predic>ve  value   threatened,  especially   •  Rising  efficiency   •  Variance  review   employment,  partner,  and  IP   Copyright,    David  J.  Litwiller  2013   15  
  16. 16. High  Impact  Board  Prac>ces  Company   PracBce   Helps  Stage  Seed  and     •  Prospec>ve  hindsight   •  Manage  risk,  coaching,  coach-­‐ability  Start-­‐up   •  Reference  class  analysis   •  Reduce  sampling  and  intui>on  errors   •  Pre-­‐commitment   •  Catalyze  learning,  an>dote  groupthink   •  Commitment  limits   •  Counter  decision  driX  &  confirma>on  bias   •  Do  more  with  less;  pivot  effec>vely  Growth   •  Execu>ve  sessions   •  Independence  of  board   •  CEO  and  management   •  Correct  quickly  and  early   performance  feedback   •  Keep  up  spirited  inquiry  in  the  most   •  Agenda  effort   impacoul  areas  Late   •  Con>nuous  improvement   •  Evolu>on  of  the  BoD  as  a  self-­‐regula>ng  Expansion   of  governance   body   •  Methodical  director   •  Accelerates  >me  to  full  individual  and   onboarding   group  produc>vity,  facilita>ng  renewal   Copyright,    David  J.  Litwiller  2013   16  
  17. 17. 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   Copyright,    David  J.  Litwiller  2013   17  
  18. 18. 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   Copyright,    David  J.  Litwiller  2013   18  
  19. 19. 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   Copyright,    David  J.  Litwiller  2013   19  
  20. 20. 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   Copyright,    David  J.  Litwiller  2013   20  
  21. 21. 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   Copyright,    David  J.  Litwiller  2013   21  
  22. 22. 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     Copyright,    David  J.  Litwiller  2013   22  
  23. 23. 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   Copyright,    David  J.  Litwiller  2013   23  
  24. 24. 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   Copyright,    David  J.  Litwiller  2013   24  
  25. 25. 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   Copyright,    David  J.  Litwiller  2013   25  
  26. 26. Board  of  Advisors   (BoA)    
  27. 27. 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     Copyright,    David  J.  Litwiller  2013   27  
  28. 28. 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   Copyright,    David  J.  Litwiller  2013   28  
  29. 29. 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   Copyright,    David  J.  Litwiller  2013   29  
  30. 30. 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   Copyright,    David  J.  Litwiller  2013   30  
  31. 31. 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   Copyright,    David  J.  Litwiller  2013   31  
  32. 32. 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   Copyright,    David  J.  Litwiller  2013   32  
  33. 33. 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   Copyright,    David  J.  Litwiller  2013   33  
  34. 34. 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   Copyright,    David  J.  Litwiller  2013   34  
  35. 35. 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     Copyright,    David  J.  Litwiller  2013   35  
  36. 36. 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   Copyright,    David  J.  Litwiller  2013   36  
  37. 37. Resources  and  Further  Reading  •  Board  of  Directors   –  Directors’  Du>es  in  Canada,  Barry  Reiter   hep://   –  Decisions  2.0:  The  Power  of  Collec>ve  Intelligence,  Bonabeau   hep://>ve_Decisions.pdf   –  The  Big  Idea:  Before  You  Make  That  Big  Decision…,  Kahneman   hep://   –  Winning  Decisions,  Russo  and  Schoemaker   hep://­‐decisions-­‐by-­‐j-­‐edward-­‐russo-­‐and-­‐paul-­‐jh-­‐schoemaker      •  Board  of  Advisors   –  The  Four  Steps  to  the  Epiphany,  Steve  Blank   hep://   Copyright,    David  J.  Litwiller  2013   37  
  38. 38. Follow-­‐up  Discussion          Contact:   dave  [dot]  litwiller  [at]   ©  David  J.  Litwiller,  2013   38