Governance 201

Early- and Growth-Stage Tech Companies Dave Litwiller

Executive-in-Residence March 6, 2013

Important Disclaimer
This presentation is made with the understanding that the author is not engaged in rendering legal, accounting, securities, 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

Overview
Difference between Board of Directors and Board of Advisors Roles and responsibilities of directors Building, managing and evaluating 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, marketing, 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, divestiture, turnaround, and corporate venture finance activities in semiconductor and enterprise software businesses, as well as work in instrumentation, automation, 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 Choice of Members Purpose Obligations Under Statutory and Case Law Agenda Power to Hire and Fire Liability Duties Compulsory Disclosure of Business Information By shareholders Oversee business affairs Yes: CBCA, OBCA, BIA, OESA, others Sets own Yes: CEO; appoints officers Significant and growing Fiduciary, care Yes Advisors By management Advise as requested No Set by management No Little
At convenience of management

No: information can be selectively disclosed

Time Commitment

250 to 450 hours per year

Flexible, by mutual accord

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Board of Directors (BoD)

BoD Obligations (I)

Diligently prepare for each meeting Appoint CEO and other executive officers Monitor and evaluate CEO performance Plan for succession Adopt strategic planning process Participate with management developing and approving annual business plan and multiyear strategic plan
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BoD Obligations (II)

Review with management financial plans Establish operating and financial goals Establish sufficiency of risk management Ensure information supplied by management is timely and sufficient for the BoDs work Review and approve financial statements Approve material acquisitions and divestitures Approve securities issuances and repurchases Declare dividends
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BoD Obligations (III)

Approve nomination of directors Confirm that processes are in place to comply with applicable legal, regulatory, corporate, securities and other compliance matters Develop the corporations approach to corporate governance and improvement thereof Carry out other duties specified in the USA, articles or by-laws of the corporation
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Directors Duties
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 corporation Standard of Performance Due Diligence
Information access and review Deliberative process Reliance on experts and independent authorities when appropriate Record proceedings

Business Judgment
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BoD Realities
It is work, and people need to be work-like about it Liability is significant The board needs to collectively 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, active 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 cos: Little staff or management board support bandwidth; this isnt like blue chip company governance
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Evolving the BoD - General

Term limits, typically three years Current directors and officers routinely networking to develop director candidates Periodic board self assessment to identify weaknesses and skill gaps as the basis for targeting new nominees and better practices

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Evolving BoD Skills with the Stage of Company Development

Company Stage Concept Seed and Start-up Typical # of Typical Director Key Skills Directors Mix 1 3 1 Founder 1 Founder 1 Investor 1 Independent 2 Founders 2 Investors 1 Independent Business formation, F3 funding, early customer and technical discovery Recruiting, technology, operational setup, angel/VC funding, ecosystem relationship development critical to success over next 18 months Commercialization, operational refinement, institutionalizing know-how, scaling, growth finance, working capital management, international reach

Growth

Late Expansion

2 Founders Increasing financial sophistication, 2 Investors acquisition or IPO savvy, governance 3 Independents discipline, reduction of surprises
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Leading BoD Issues

Company Stage Seed Sales Customer discovery Early sales Strengthening value prop Competitive strength
Accelerating growth Revenue predictability and quality Rising efficiency

Accounting Managing by bank statements

Legal IP: rights, deadlines, chain of title & assignment, licenses Director resolutions to approve equity rights grants Complete minute book Material contract review
Records management Compliance Risk management Litigation, real or threatened, especially employment, partner, and IP
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Start-up

P/T bookkeeper Monthly I/S and B/S Tax returns done Source deductions made and remitted
F/T CFO Audited financial statements Annual forecasts with predictive value Variance review

Growth

Copyright, David J. Litwiller 2013

High Impact Board Practices

Company Stage Seed and Start-up Practice Prospective hindsight Reference class analysis Pre-commitment Commitment limits Helps Manage risk, coaching, coach-ability Reduce sampling and intuition errors Catalyze learning, antidote groupthink Counter decision drift & confirmation bias Do more with less; pivot effectively

Growth

Executive sessions CEO and management performance feedback Agenda effort Continuous improvement of governance Methodical director onboarding

Independence of board Correct quickly and early Keep up spirited inquiry in the most impactful areas Evolution of the BoD as a self-regulating body Accelerates time to full individual and group productivity, facilitating renewal
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Late Expansion

Copyright, David J. Litwiller 2013

BoD Advice (I)

Theres no shortcut for spending the time and doing a lot of reading and networking for a director to bring an informed, independent viewpoint about a companys 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 times per year, in person

Dont let the flurry of other business push aside a deep dive each meeting into the matters which are keeping the CEO and CFO up at night, and to understand what alternate data , viewpoints and interpretations exist to richen the discussion on those matters
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BoD Advice (II)

Require board packages be delivered to directors 72 hours in advance of meeting, with a cover memo identifying which items are informational only, and those which will be deliberated and decided Structure discussion so that managements recommendations are clear, yet with room for director input, but stopping short (usually) of unbounded possibilities At every board meeting, discuss the quality of information, agenda, time allocation, and deliberation process with each director contributing 1-2 improvement s for future meetings Conduct brief executive sessions at each board meeting 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 executive management provide regular feedback on where it has gotten the most help, and the most frustration, from the BoD In normal circumstances, use 75% of time in the boardroom looking forward (strategic, market), and 25% looking back (finance, ops) Always know the companys financial runway, be proactive raising funds, and become expert in accessing alternatives in the financial model and capital structure to improve funding options 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 critic Designate one responsible director for the CEO performance evaluation process, even though all directors participate

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Chairmanship (I)
The BoD can only be as good as its chairmanship for setting the tone and interpersonal chemistry Leading among peers Tact: ability to disagree without being disagreeable; constructive dissent Bringing everyone into the discussion, and not letting one voice dominate Encouraging debate while sustaining cohesion Keeping conflict at a task level, and not a relationship level Knowing directors leading concerns before each meeting Effort and preparation; collaborative agenda development w/ CEO

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Chairmanship (II)
Channel deliberation and decision into a two-step process on divisive issues Driven improvement of board practices Quickly reconciling emerging differences among directors visions for the boards role, and those of management Promoting openness by encouraging board members to make direct proposals, not disguised or oblique ones Weaving themes and points of importance together to create an integration of each meeting around major current issues Being able to both criticize 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 correlation with the needs of the business: Overreliance on service providers; they do not just provide expert input, the BoD effectively outsources decisions Routine over-deference to the one board member with the most subject matter expertise in a subject area Vital decisions are almost always made just with the facts and arguments on hand, rather than spending time in some instances to question the source information and get more, varied, and better data
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Early Warning Signs (II)

Impractical advice from directors Insufficient give and take between directors and management Lackluster inquiry into areas of underperformance Poor meeting management
Time Agenda Spiraling out of control on issues without an ability to summarize work to date, forward actions, and move ahead to other business

Insufficient declaration 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 practice, 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 functions to manage the corporations business and affairs
By statute, observers are not entitled 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 representatives: Then, the role is best defined contractually as a confidentiality-bound listener, with care taken that the observer not prepare agendas, not influence debate and not to influence motions, and, to otherwise bind conduct
Minutes should note the observers role in each BoD meeting, and expressly that the observer did not vote for or against motions when votes were cast
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Board of Advisors (BoA)

BoA Roles and Responsibilities

Provide independent advice to CEO and management without fiduciary or duty of care obligations 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 companys product and business strategy

Scientific or Technical
To help with complex underlying science or technology

Business
To gain selective input on business issues from advisors without either side taking on the mutual obligations or formalism of a fiduciary board position
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Ideal BoA Member Profile

Expert and nearly invaluable knowledge World-class networks Attracts 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 advocating on behalf of the company Someone youd love to have as a senior employee but is not affordable or attainable on that basis
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BoA Nomination Criteria

Scientific or technical skill Business strategy and company building Product development Customer and sales channel development Business development and ecosystem relationships Regulatory wherewithal
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BoA Challenges
Only half of CEOs with BoAs are satisfied with them after working together Typical issues:
Ongoing responsiveness Advisors taking the time to fully contextualize the companys circumstances Interpersonal chemistry Self-interested advisor behaviour
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BoA Success
Likelihood of constructively 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, utility-scale cleantech, advanced materials Enterprises with large regulatory hurdles and risks

Mid: Enterprise software, consumer electronics, industrial technologies Low: Consumer web services, mobile apps
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BoA Advice
In lower investment stake businesses, formal advisors who arent also investors can raise more questions about the business for outsiders than they help solve Have an hour+ working session at the outset with a nominee BoA member to assess communication, thinking style, energy, and mutual fit

Have a written charter or mandate which lays out expected commitments and contributions
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Managing the BoA for Impact and Productivity

BoA will typically only put out as much as the CEO and management team puts into it:
Be explicit about the expected time commitment and speed of responsiveness Hold meetings regularly, typically two to four times per year Set agendas and send materials beforehand Ask advisors to present on specific topics for information or discussion to management and the BoA Ask advisors for feedback on industry reports and management plans Ask for referrals and introductions Poll for input on point issues 1:1 as they arise Keep advisors up to date on the companys 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 stigma of departure, particularly when customers or partners are represented on the BoA Terms should be renewable if the relationship is working out well

To keep attention up, consider compensating not on a retainer basis, but linked to deliverables such as meeting preparation and attendance
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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 proposition or raise funds Later stage: Drive growth, scale and cash flow

Ask if the BoA is helping those things happen faster than operating management could on its own
If it is, it is likely the right BoA at the right time If not, it is time to revisit skills gaps, composition, and even the ongoing value of a BoA
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Resources and Further Reading

Board of Directors
Directors Duties in Canada, Barry Reiter
http://www.cch.ca/product.aspx?WebID=3688

Decisions 2.0: The Power of Collective Intelligence, Bonabeau

http://people.icoserver.com/users/eric/SMR_Collective_Decisions.pdf

The Big Idea: Before You Make That Big Decision, Kahneman
http://www.paginasprodigy.com.mx/RPA1958/BigDecision.pdf

Winning Decisions, Russo and Schoemaker

http://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
http://www.stevenblank.com/books.html

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Follow-up Discussion
Contact:

dave [dot] litwiller [at] communitech.ca

David J. Litwiller, 2013

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