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Governance 101: Early- and Growth-Stage Tech Companies - Entrepreneurship 101 (2013/2014)


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This lecture will present foundational considerations for building your board of directors, as well as compare and contrast it to an advisory board. The session will emphasize how to build and adapt the board of directors for high productivity and impact, and describe how to do so at the pace of high-performing startup and growth-stage technology businesses.

Lecture takeaways:

-Understand the difference between a board of advisors and a board of directors and how the structures relate to each other
-Understand the basics of building, managing and evaluating your board of directors
-Be equipped to make both incremental and larger changes in how governance is addressed in your business

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Governance 101: Early- and Growth-Stage Tech Companies - Entrepreneurship 101 (2013/2014)

  1. 1. Governance  101     Early-­‐  and  Growth-­‐Stage  Tech  Companies   Dave  Litwiller   Execu>ve-­‐in-­‐Residence   March  5,  2014  
  2. 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.   Copyright,    David  J.  Litwiller  2014   3  
  3. 3. Overview   •  Board  of  Directors  and  Board  of  Advisors   •  Roles  and  responsibili>es  of  directors   •  Building,  managing  and  evalua>ng  the  Board  of   Directors   •  Evolving  governance  at  the  speed  of  a  rapidly   changing  business   •  Director  compensa>on   Copyright,    David  J.  Litwiller  2014   4  
  4. 4. My  Background   •  Twenty+  year  opera>ng  trajectory  in  early-­‐,  growth-­‐  and   scaled-­‐up  tech  companies  in  the  Waterloo  region     –  R&D;  marke>ng  and  sales;  manufacturing;  finance  and  accoun>ng;  HR;   general  management;  acquisi>ons,  dives>tures  and  turnarounds     •  Board  director  of  three  early-­‐  and  growth-­‐stage  companies;   two  in  enterprise  SaaS,  and  one  in  photonics  instrumenta>on   •  Board  observer  to  several  other  technology  company  boards   •  Advisor  to  many  technology  start-­‐ups  spanning  soYware   through  clean  energy  and  medical  technology   Copyright,    David  J.  Litwiller  2014   5  
  5. 5. 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   Lible   Du>es   Fiduciary,  care   At  convenience  of  management   Compulsory  Disclosure  of   Yes   Business  Informa>on   No:  informa>on  can  be   selec>vely  disclosed   Time  Commitment   Flexible,  by  mutual  accord   250  to  450  hours  per  year   Copyright,    David  J.  Litwiller  2014   6  
  6. 6. Board  of  Directors   (BoD)    
  7. 7. Duty  of  Loyalty  (Fiduciary  Duty)   •  To  act  honestly  and  in  good  faith  with  a  view  to   the  best  interests  of  the  corpora>on   –  Unqualified  priority  to  the  corpora>on  over  personal   interests  or  other  compe>ng  claims   –  Act  openly  and  honestly   –  Disclose  significant  informa>on  within  his/her   knowledge   –  Maintain  confiden>ality  of  the  corpora>on’s   informa>on   –  Exercise  independent  judgment   –  Act  with  one  voice  outside  of  the  boardroom   Copyright,    David  J.  Litwiller  2014   8  
  8. 8. Duty  of  Care   •  To  exercise  the  care,  diligence  and  skill  that  a   reasonably  prudent  person  would  exercise  in   comparable  circumstances   –  Act  in  good  faith   –  Act  ra>onally,  reasonably  and  on  an  informed   basis   –  Iden>fy  and  act  upon  problems  which  should  have   been  apparent   –  Follow  reasonable  processes  and  prac>ces   Copyright,    David  J.  Litwiller  2014   9  
  9. 9. Further  Obliga>ons   •  Inform  and  Advise  Shareholders   –  Provide  shareholders  with  all  material  informa>on   rela>ng  to  mabers  for  which  shareholder  ac>on  is   sought   Copyright,    David  J.  Litwiller  2014   10  
  10. 10. 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   –  Act  in  a  manner  reasonably  believed  to  be  in  the  best   interests  of  the  corpora>on  at  the  same  >me  as   fulfilling  other  du>es   Copyright,    David  J.  Litwiller  2014   11  
  11. 11. Leading  Prac>cal  Issues   •  Mentoring  CEO   –  Support  and  appraise   –  If  necessary,  remove  and  replace   •  Never  running  out  of  cash   •  Delibera>ng  strategic  shiYs   •  Selling  the  company;  building  buyer  value   –  Next  round  investors,  liquidity  event   •  Shareholder  communica>on   Copyright,    David  J.  Litwiller  2014   12  
  12. 12. Director-­‐CEO  Rela>onship   Good  Directors:   •  Indicate  important  ques>ons  in  advance  of   mee>ngs  to  the  chair  and  CEO   •  Don’t  always  demand  more  data  to  make  a   decision   •  Forewarn  the  CEO  about  the  director’s  stance   on  major  issues   •  Avoid  ganging  up  on  the  CEO  to  the  extent   possible   Copyright,    David  J.  Litwiller  2014   13  
  13. 13. BoD  Reali>es   •  It  is  work,  and  people  need  to  be  work-­‐like   •  Liability  is  significant   –  Good  directors  will  require  D&O  insurance   •  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   Copyright,    David  J.  Litwiller  2014   14  
  14. 14. BoD  Reali>es   •  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   •  Lible  staff  or  management  board  support   bandwidth;  this  isn’t  like  blue  chip  company   governance   Copyright,    David  J.  Litwiller  2014   15  
  15. 15. 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  beber  prac>ces   •  Lead  director  or  non-­‐execu>ve  chairman  (not  the   CEO)  to  provide  improvement  feedback  to  other   directors   Copyright,    David  J.  Litwiller  2014   16  
  16. 16. Evolving  BoD  Skills  with  the       Stage  of  Company  Development   Company   Stage   Typical  #  of   Typical  Director   Key  Skills   Directors   Mix   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   Copyright,    David  J.  Litwiller  2014   17  
  17. 17. Changing  Nature  of  BoD  Issues   Company   Stage   Sales   AccounAng   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   •  •  •  •  Growth   •  Accelera>ng   growth   •  Revenue   predictability   and  quality   •  Rising   efficiency   •  F/T  CFO   •  Audited  financial   statements   •  Annual  forecasts   with  predic>ve  value   •  Variance  review   P/T  bookkeeper   Monthly  I/S  and  B/S   Tax  returns  done   Source  deduc>ons   made  and  remibed   Copyright,    David  J.  Litwiller  2014   •  Director  resolu>ons  to   approve  equity  rights   grants   •  Complete  minute  book   •  Material  contract  review   •  •  •  •  Records  management   Compliance   Risk  management   Li>ga>on,  real  or   threatened,  especially   employment,  partner,  and   IP   18  
  18. 18. High  Impact  Board  Prac>ces   Company   Stage   PracAce   Helps   Seed  and     Start-­‐up   •  •  •  •  Growth   •  Execu>ve  sessions   •  CEO  and  management   performance  feedback   •  Agenda  effort   Late   Expansion   •  Con>nuous  improvement   •  Evolu>on  of  the  BoD  as  a  self-­‐regula>ng   of  governance   body   •  Methodical  director   •  Accelerates  >me  to  full  individual  and   onboarding   group  produc>vity,  facilita>ng  renewal   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  driY  &  confirma>on  bias   Do  more  with  less;  pivot  effec>vely   •  Independence  of  board   •  Correct  quickly  and  early   •  Keep  up  spirited  inquiry  in  the  most   impacnul  areas   Copyright,    David  J.  Litwiller  2014   19  
  19. 19. 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  mabers  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  mabers   Copyright,    David  J.  Litwiller  2014   20  
  20. 20. 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   improvements  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  2014   21  
  21. 21. BoD  Advice  (III)   •  Have  execu>ve  management  provide  regular  feedback  on  where  it  has   goben  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  2014   22  
  22. 22. BoD  Advice  (IV)   •  Know  what  is  in  the  ar>cles  of  incorpora>on,  corporate  by-­‐laws  and   shareholders’  agreement  detailing  which  issues  require  board  approval   and  which  ones  require  shareholder  approval   •  If  there  is  debt  in  the  business’  capital  structure,  have  a  summary  of   covenants  as  an  appendix  to  each  board  reading  package   Copyright,    David  J.  Litwiller  2014   23  
  23. 23. Board  of  Directors  Compensa>on   As  a  company  moves  towards  IPO,  Board  of  Directors  op>on  grants  decline.  The  following  chart  presents   the  low  to  high  ranges  of  typical  Board  op>on  awards  (for  independent  Directors).  Cash  compensa>on  is   not  generally  employed  un>l  the  IPO  run-­‐up  period.  Appropriate  levels  of  cash  compensa>on  are  highly   dependent  upon  firm  size  and  industry.   Independent Director Pre-IPO Equity Participation Equity Participation (unadjusted for dilution)   2.00% 1.50% 1.00% 0.50% 0.00% Pre-Angel Pre-Round 1 Pre-Round 2 Post-Round 2 IPO Run-Up Extremely Rare Rare More Common • Tend to be significant advisors or mentors • Tend to be significant advisors or “names” 1st Independent Director Almost Mandatory • At most 1-2 Directors • At most 1-2 Directors Source:  DolmatConnell  &  Partners   • Tend to be industry figures • 2-3 Directors • Tend to be industry figures, related businesses • 2-3 Directors • Tend to be industry figures, “brand enhancers” • 3-5 Directors
  24. 24. Board  of  Directors  Compensa>on   For  an  independent  director:     •  Three  to  four  year  ves>ng,  with  the  ves>ng  term  oYen  matched  to   s>pulated  director  term  limits  (typically  three  years)   •  One  year  cliff  for  new  independent  directors,  no  cliff  for  incumbent   directors   •  Monthly  or  quarterly  ves>ng  aYer  the  cliff   •  Post-­‐service  exercise  term  of  one  year   •  Full  accelera>on  of  ves>ng  upon  acquisi>on  (since  directors  have  a   large  amount  of  work  in  the  run  up  to  an  acquisi>on)   Copyright,    David  J.  Litwiller  2014   25  
  25. 25. Resources  and  Further  Reading   •  Board  of  Directors   –  Directors’  Du>es  in  Canada,  Barry  Reiter   hbp://     –  Startup  Boards,  Brad  Feld  and  M.  Ramsinghani   hbp://­‐1118443667.html     -­‐  Angel  and  VC-­‐Backed  Compensa>on,  DolmatConnell   hbp://       •  Board  of  Advisors   –  The  Four  Steps  to  the  Epiphany,  Steve  Blank   hbp://   Copyright,    David  J.  Litwiller  2014   26  
  26. 26. Follow-­‐up  Discussion           Contact:   dave  [dot]  litwiller  [at]   ©  David  J.  Litwiller,  2014   27  
  27. 27. Supplementary  Slides:   Board  of  Advisors   (BoA)    
  28. 28. 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  2014   29  
  29. 29. 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  2014   30  
  30. 30. Ideal  BoA  Member  Profile   Expert  and  nearly  invaluable  knowledge   World-­‐class  networks   Abracts  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  abainable  on  that  basis   •  •  •  •  Copyright,    David  J.  Litwiller  2014   31  
  31. 31. 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  2014   32  
  32. 32. BoA  Challenges   •  Only  half  of  CEOs  with  BoAs  are  sa>sfied  with  them   aYer  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  2014   33  
  33. 33. 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  soYware,  consumer  electronics,  industrial  technologies   –  Low:     •  Consumer  web  services,  mobile  apps,  soYware-­‐in-­‐plas>c  gadgets   Copyright,    David  J.  Litwiller  2014   34  
  34. 34. 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  wriben  charter  or  mandate  which  lays  out   expected  commitments  and  contribu>ons   Copyright,    David  J.  Litwiller  2014   35  
  35. 35. Managing  the  BoA  for  Impact  and  Produc>vity   •  The  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  2014   36  
  36. 36. 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  aben>on  up,  consider  compensa>ng  not  on   a  retainer  basis,  but  linked  to  deliverables  such  as   mee>ng  prepara>on,  abendance  and  referrals     Copyright,    David  J.  Litwiller  2014   37  
  37. 37. Renewing  the  BoA   •  Regularly  revisit  the  top  three  things  that  the   business  needs  to  achieve  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  2014   38