2. Stephen Fleming
• 13+ years venture capital investment
experience.
–General Partner, Alliance
Technology Ventures.
–18 investments as lead
investor, 15 exits to date.
• BS, Physics, Ga. Tech (Highest Honors).
• 15 years operational experience at AT&T Bell Labs,
Nortel, LICOM (venture-backed startup).
–Supervised startups developing first ADSL modem and one of the
first cablemodems in early 1990s.
• Multiple advisory boards at Georgia Tech; endowed
chair in telecommunications; occasional instructor in
MBA entrepreneurship program.
• Strong regional technology leader.
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3. • The Fundamentals
• Board Responsibilities
• CEO Relationship
• Other Board Relationships
• The Mechanics
• Difficult Times
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4. “All happy families are
alike; each unhappy
family is unhappy in its
own way.”
–Leo Tolstoy,
Anna Karenina
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5. Board Composition
• By the time a company has attracted venture
capital, the board will consist of:
–Usually one or more VCs
–Usually one or more founders/C-level execs
–Ideally, one or more outsiders
• Potential problems:
–Family members of founders
–Well-meaning but irrelevant angel investors
–Founders who are no longer C-level execs
• May still be employed in technical capacity
• May have left the company
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6. Board Size
• Each round of financing will involve new lead
investor(s), each of whom will want at least
one board seat.
• Other syndicate partners may want observer
seats.
• Mechanics of scheduling and maintaining
open communication break down when you
exceed 7 members
• 16-member boards are fine for GE, but not
for a startup!
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7. Odd or Even?
• Conventional wisdom: You want to have an
odd number of directors so you can never
have a tie vote.
• Reality: It doesn’t matter.
–In “happy family” boards, all votes will be
unanimous. If you’re down to counting noses to
get a majority, you’re already in trouble.
–Who’s to say that one member won’t be absent, or
sick, or recuse himself/herself, or...?
• Get the right people around the table. Don’t
worry about odd or even.
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8. How Do You Get Paid?
• You don’t.
–This is your job.
• Neither do the management team members.
–It’s their job, too.
• True outside board members (not investors,
not management, not strategic partners)
should be compensated:
–Cash (usually limited to expense reimbursement)
–Stock
–Options
–Company-paid D&O insurance
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9. • The Fundamentals
• Board Responsibilities
• CEO Relationship
• Other Board Relationships
• The Mechanics
• Difficult Times
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10. Your Responsibilities
• Very definite hierarchy:
–All shareholders — Fiduciary responsibility
–Your class(es) of shareholder
–Your Limited Partners
–Your partnership
–Yourself
• If you ever find two roles in conflict, the
higher responsibility wins!
• “Fiduciary responsibility” is a magic phrase...
use it cautiously and with great restraint
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11. List of Responsibilities
• Loyalty
• Candor
• Good Faith
• Disclosure
• Transparency
• Confidentiality
• Best Effort
• Above all: Act ethically and honestly
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12. Board Committees
• At a minimum, your board will have:
–Audit Committee
–Compensation Committee
• May also have Executive Committee
(especially as board size grows).
• Various ad hoc committees will be
established as needed to help the company.
–May give you an opportunity to work with
management team members who are not on the
board. This is a Good Thing™.
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13. D&O Insurance
• Directors and Officers Insurance used to be
rare for private companies.
–Purchased only in the run-up to an IPO.
• Becoming more common in earlier-stage
companies.
–Usually just handled by the CFO... a mistake.
–Policies vary widely. Alternatives should be
explored by a committee of the board, and ratified
by the entire board.
–If the D&O doesn’t cover you for a stockholder or
employee lawsuit, you may be personally liable.
Ouch!
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13
14. • The Fundamentals
• Board Responsibilities
• CEO Relationship
• Other Board Relationships
• The Mechanics
• Difficult Times
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15. Two Key Questions
• When you walk into a board meeting, you
should only have two questions:
–Are we going to fire the CEO today?
–If not, how can we help?
–Al Paladino, Advanced Technology Ventures
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16. CEO Relationship
• Critical that this relationship works well.
–Significant part of CEO’s job.
–Too many of them neglect it... thinking it only is
relevant during the actual board meeting. Wrong!
• Responsibility goes both ways
–Coach
–Confidante
–Killer
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17. Coach
• You’re not the CEO.
–If you want to run a company, go get one funded.
Until then, you’re there to advise and encourage,
not run the show.
–Especially difficult for VCs who have been CEOs in
prior companies!
• Make useful connections using your industry
contacts.
• Provide a different perspective.
• Don’t hesitate to suggest professional
development activities for the CEO.
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18. Coach: Perspective
• Your key asset:
–You’ve (hopefully) seen many more deals than the
CEO, and you’re currently involved in half a dozen
others.
–You have a perspective that’s impossible for the
CEO—who is 100% committed to this business.
• What worked in other cases? What didn’t
work? Why?
• Other experiences:
–How long can you take to make a decision? When
does this become a critical problem? Who should
you call? Where should you look?
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19. Confidante
• Even happy families hit rough patches.
• CEO cannot share all fears/concerns with
employees... since the good ones may quit!
• You have to be available as a sounding board.
–On a moment’s notice.
–In person, if humanly possible.
–Preferably over coffee/alcohol/whatever.
• Much of your value as a board member will
be exercised at informal meetings like this,
not at the actual board meeting!
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20. Confidante or Friend?
• The obvious reality:
We invest in people we like, and we don’t
invest in people we don’t like.
• It’s easy to become friends with the CEO.
• That’s fine, but:
“When the need arises—and it does—
you must be able to shoot your own dog.”
–Robert A. Heinlein
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21. Killer
• Sometimes, the CEO has to go.
–Very common in early-stage investments... the
required skill set changes dramatically as company
grows. It always becomes tangled with emotions.
• Three paths:
–Friendly: CEO says “I can see where I’m going to
be out of my depth soon. Can you help me recruit
a successor to take the company to the next level?”
–Not-so-friendly: Board tells CEO it’s time for a
change, start a transition period, launch a search.
–Hostile: CEO has to be removed from office by
hired security.
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22. Killer: Guarantees
• When you change out the CEO:
–Everyone in the company will know it’s time for a
change before the board does.
–Once you make the change, you’ll say “We should
have done this 6 (or 9, or 12) months ago.”
• To ensure a happy family, you should have
regular “Executive Board” meetings...
–Consisting of investors and outsiders, but not the
CEO or other company representatives.
–If you have them regularly, then scheduling one
isn’t sudden evidence of an impending coup!
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23. • The Fundamentals
• Board Responsibilities
• CEO Relationship
• Other Board Relationships
• The Mechanics
• Difficult Times
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24. Other Board Relationships
• Management Team
• Key Customers
• Key Suppliers
• Legal counsel
• Auditors
• External CFO (if applicable)
• External HR (if applicable)
• Other Investors on the Board
• Your Partners (in your VC Firm)
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25. Other Investors
• In an ideal world, all investors would have
identical objectives:
–Obscene capital gains for their stock.
• In the real world, other factors intrude:
–Serie(s) of Preferred Stock owned by each firm.
–Size of VC fund.
–Age of VC fund entity owning stock (still investing,
or ready for harvest?)
–Other investments:
• Overlapping board memberships.
• Time commitments.
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26. Series Mismatch
• As multiple series of Preferred are issued,
incentives begin to diverge:
–Liquidation preferences begin to pile up.
–Series A (and Common!) shareholders may want
to hold out for an IPO, where all stock converts to
Common.
–Series D (or E, or J!) shareholders may settle for a
quick M&A exit to double their money in a year.
• This is when the “unhappy family” dynamic
kicks in... every troubled company is
unhappy in its own way.
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27. Your Partners
• At some point, you’re going to ask your
partners for more money to support this
deal.
–That’s the wrong time to start telling them about
how well (or how poorly) it’s doing.
• Frequent updates... if your Monday meetings
are too crowded, write monthly emails.
• Bring a partner as a board observer to a
meeting.
–He or she can build relationships with CEO, other
board members; form an independent opinion.
• Don’t be afraid to swap deals sometimes.
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28. • The Fundamentals
• Board Responsibilities
• CEO Relationship
• Other Board Relationships
• The Mechanics
• Difficult Times
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29. Before the Meeting
• Ideally, board meetings should never contain
surprises... good or bad.
–Surprises should have been communicated
instantly, by email/phone calls.
–You may choose to defer the discussion of possible
courses of action to the board meeting, since that
works best with everyone in the room.
–But everyone should enter with a rough idea of the
company’s situation, good or bad.
• CEO responsible for reaching out to board.
• Board members are responsible for doing
their homework!
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30. The Mechanics
• How often?
–Monthly, until it’s obvious that it’s overkill.
• How long?
–It depends, but 90 minutes is a good target.
• In person or audio/videoconference?
–In person.
• Where?
–Company offices... unless there’s a particularly
relevant trade show or customer event that the
board members should attend.
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31. The Mechanics (cont.)
• Scheduling?
–Schedule a full year in advance, twice a year
(January and July are good).
• Formal agenda?
–Yes.
• Detailed minutes?
–No. Just what the law requires.
• Board package in advance?
–Yes. (See next slide.)
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32. Board Package
• Insist on a standardized board package to be
emailed 3-7 days in advance of the meeting
–Agenda
–Financials
–Dashboard/metrics (varies by deal)
–Sales pipeline
–Technology roadmap/issues
–HR issues
–Capitalization table
• CEO will complain this is a huge monthly
admin burden. He’s right. Do it anyhow.
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33. Who Should Be in Room?
• All the board members, obviously.
–If two or more can’t make it, reschedule.
–If one is a perennial problem, explore replacing
with another representative for that class of stock.
• CFO:
–Yes. (Even if contracted to outside firm.)
• Other management team representatives:
–For part of the time. Not for HR/financing/etc.
• Legal counsel:
–It depends.
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34. • The Fundamentals
• Board Responsibilities
• CEO Relationship
• Other Board Relationships
• The Mechanics
• Difficult Times
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35. Down Rounds
• Selling a new series of Preferred at a lower
price than the last round.
–Can dramatically dilute the stake of earlier
investors and of management.
–Especially painful for earlier investors who cannot
participate in the new round (pay-to-play).
• End-of-life for their fund.
• Other deals have drained their capital.
• Cross-ownership prohibitions.
• Down rounds will strain board relationships.
• Keep focused on doing what is right for the
company, not for your class of stock.
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36. Fire Sale
• Selling the company (or its assets) for less
than invested capital.
–Depending on liquidation preferences, different
classes of Preferred may have dramatically
different payback percentages.
–Common stock (founders, employees, etc.) will be
at the back of the line.
• Usually means that the existing investor
group cannot or will not continue investing
in the company.
• Guaranteed to strain board relationships!
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37. Firing the CEO
• Discussed earlier.
–Always an emotional decision, but not an
uncommon one.
• Employees can see this as a betrayal of
founding principles of the company.
–Identify the “must keep” employees early.
–Need to have retention plans in place.
• One or more directors may need to step in as
temporary CEO or “Office of the President.”
–Meet with key customers and suppliers right away.
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38. Killing the Company
• Sometimes it’s not the CEO that has to go...
it’s the whole company.
–Emotionally painful decision for the entire board.
• Frequently, but not always, tied to “zone of
insolvency” issues/impending bankruptcy.
–Triggers a change in director responsibility.
• In rare cases, board decides to pull the plug
while there’s still cash in the bank to pay off
creditors and then be distributed to
shareholders.
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39. Zone of Insolvency
• Grey zone where company is nearly or
actually insolvent
–Fuzzy criteria: Cash flow? Balance sheet? Both?
• In private companies in the Zone of
Insolvency, responsibility of directors
expands to include creditors.
• Actions in this zone can, and probably will,
lead to lawsuits by aggrieved creditors.
–Especially if your actions “deepen insolvency.”
• Consult frequently with experienced counsel.
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40. Time to Leave?
• When is it time for you to resign from the
board?
–When conflicts between your roles make it
difficult or impossible to fulfill your
responsibilities.
–When your schedule makes it impossible to devote
sufficient time to this investment.
–When your financial stake is diluted to the point
where your ownership is no longer relevant.
• Unless you’re universally perceived as still adding
value.
–When you don’t think you’re making a difference
anymore.
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41. Time to Leave? (cont.)
• When is it time for you to resign from the
board?
–When you reach irreconcilable differences over
company strategy and you’re no longer able to
invest in future rounds.
–When the board grows to an unwieldy size, and
you believe other members will add more value.
–When the company goes public.
• Okay, that’s partially facetious. But in the era of
Sarbanes-Oxley, make darned sure you know what
you’re doing before participating as a board member
during and after an IPO!
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42. For Further Information
Stephen Fleming
Chief Commercialization Officer
Georgia Institute of Technology
Personal blog: <http://www.academicvc.com>
<fleming@gatech.edu>
(404) 385-2360
Download this file at <http://www.gtventurelab.com>
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