catching stars: recruiting advisors and directors for startups and
TRANSCRIPT
Catching Stars: Recruiting Advisors and Directors for Startups
and Early Stage Companies
Dr. Martin R. Lautman* Wharton, Lecturer in Marketing
Musketeer Capital, LLC [email protected]
610-996 3353
March 6, 2016
©Copyright, Martin R. Lautman, 2016
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Catching Stars: Recruiting and Managing Advisors and Directors for Startups and Early Stage Companies
In the world of startups and early stage ventures, there are very few
insurmountable barriers to entry or formidable competitive advantages that can
successfully defer determined and/or well-capitalized competitors. In their place,
successful ventures substitute moats such as extraordinary talent, exemplary
operational excellence, and an uncompromising drive to be the first to market with
a new, revitalized or uniquely integrated/composite product or service. Often
overlooked as a critical ingredient in a successful venture’s secret sauce are
dedicated, experienced and motivated advisors and directors who have agreed to
actively serve either informally or formally on a company’s board of advisors or
board of directors.
All advisors and directors are expected to rely on their knowledge, experiences and
insights to provide valuable guidance and honest business advice to the CEO and
the rest of the board. Excellence in providing those services is presumed. After all,
that is why they were recruited and asked to serve.
In contrast to typical advisors and directors, star advisors and directors are unique.
Their extensive networks and relationships in domains relevant to the company’s
current and/or future business interests disproportionately advantage their
potential contribution to the venture. By virtue of their willingness to mine their
Rolodex and leverage their contacts, personal relationships and networks to
actively advocate for the interests of the company, star advisors and directors can
gain timely access to hard-to-reach, extremely busy, and well-connected
individuals who can provide the right information and/or the right support and
resources to the company at a time of critical need.
While interventions of this type can be meaningful for all companies, they are
especially critical for startups or early stage ventures. Companies in these stages of
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development often find themselves operating with short lifelines due to modest
funding, few outside resources, limited technical knowhow and incomplete teams.
Often it is the personal engagement and intervention provided by star advisors and
directors at critical business tipping points that can determine whether or not
developing companies survive or fail.
The purpose of this article will be to illustrate the benefits of recruiting star
advisors and directors. We will provide a model and present guidance on how to
get the “right” people, both stars and non-stars, to serve and suggest processes for
managing powerful advisors and a high performing board. One of the premises of
this article is that recruiting star advisors and directors by startups and early stage
companies is a qualitatively different task from hiring traditional directors and
advisors. The recruiting process for these individuals will be contrasted with the
equally important goal of hiring A-player employees who are early in their careers
where motivation and technical capabilities are typically valued far more highly
than experience and connections.
We will start off by providing several examples of how the “right” advisors and
directors have provided extraordinary, if not existential, value to startups and early
stage companies in helping them remain on the path of creating potentially
significant financial returns for their investors and employees. Not surprisingly,
some of the principles, concepts and models we will be presenting are also
applicable to large companies. In that regard, as appropriate, we will also provide
some examples from well-established companies. Finally, we will address some
procedural issues related to “star management” to insure that the significant time
and effort invested to recruit these individuals as advisors and board members can
translate into extraordinary value consistent with their personal capabilities and
extensive networks.
Advisors and Directors Provide Value
Neverware, a startup founded by a recent college graduate from The Wharton
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School of The University of Pennsylvania, was originally created to provide
elementary and high school students in disadvantaged schools with in-school
access to high-speed Internet performance by seamlessly configuring and remotely
monitoring old desktop computers. The founder, Jonathan Hefter designed and
built a “Juicebox” that literally and figuratively sat between the servers of Boards of
Education and the machines currently being used in school computer labs. The
Neverware technology also enabled schools to reclaim and resurrect unused
computers being stored in locked rooms and recycle them so that they could
become fully functional in providing high speed Internet performance and thereby
obviating the need to purchase new computers. In effect, Neverware was able to
create state-of-the-art performance at less than one-third the cost of new machines
with minimal local IT support on-site at the schools.
Neverware had booked multi-year contracts with highly credit-worthy public
schools and demonstrated a strong growth rate. Despite their sales success, on
multiple occasions The Dell Corporation had rejected their request for a line of
credit to purchase servers that they could convert to Juiceboxes. Neverware’s
management was repeatedly told that they were simply “too early” to obtain credit.
The startup team was fearful that their inability to acquire the servers necessary to
deliver on their pre-sold contracts would destroy their credibility and cripple their
new and promising company.
A call from one of the company’s star advisors/investors to the company to a long-
time friend, the General Manager of the Small Business Division of Dell, helped
resolve the impasse. The company was quickly introduced to the “right people”
and was approved for a line of credit enabling it to continue on its rapid growth
trajectory. Neverware subsequently raised a strong A round led by a well-known
venture fund in the education space, ReThink Education, and currently has over
20,000 installations. With the rather sudden evolution of the market to low-cost
Google Chromebooks, the company now had sufficient funding in place to pivot and
service the school market in a more capital efficient way operating primarily as a
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cloud-based software company.
When Aaron Patzer of Mint.com went live with his consumer-oriented financial
services website he was unexpectedly overwhelmed by demand. He needed
additional servers immediately. A call by one of his investors and star directors to
Jeff Bezos, the CEO of Amazon, promptly led to a significant increase in server
availability.
Securly, a San Francisco based startup formed by two former employees of McAfee,
developed a product to provide classroom teachers with the ability to manage and
monitor in real time the Internet content being accessed in class by elementary and
high school students. Distribution of the company’s “white hat-black hat”
technology had been swift with 265,000 students worldwide quickly adopting it.
Nevertheless, like Neverware, raising expansion capital proved to be a challenge.
The founders were highly skilled technologists but were continually challenged to
find a way to succinctly present their current and future business model
(expanding their in-school sales to the parent-controlled at-home market) in a
simple and easily understood format. After multiple “bad meetings” with venture
capitalists and significant frustration on the part of the founders, two of the
company’s investors/advisors offered to help by providing detailed critiques of
every page in the company’s pitch deck. They also contacted their network to gain
intelligence on the “bad meetings.” Facilitated by these individuals who had been
both founders and funders of startups, multiple rewrites of the company’s pitch
deck were executed. This effort led to a work product that was satisfactory to the
founders and more consistent with decks Tier 1 venture funds expected to see. The
company’s funding opportunities took a turn for the better, even though it faced
reduced venture capital interest due to secular headwinds in the sector.
Sometimes traditional and even star advisors and directors do not move quickly
enough to save a company. First Flavor was a promising venture-supported
university startup formed to market a novel, quick dissolving edible filmstrip that
was able to replicate the flavor of almost any food or beverage. The CEO was a
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successful entrepreneur but new to the consumer products industry. He was
committed to a strategy of growing the business by marketing the strips to large
companies as an inexpensive and a low risk alternative for new and reduced cost
product formulation testing. Unfortunately, multiple sales efforts to convince large
companies to adopt this innovative filmstrip technology were unsuccessful. It was
determined that they already had well-accepted standardized testing protocols
managed by their R&D and marketing research departments; and, that the
replacement of those protocols would be challenging even though their legacy
testing systems required significant resources, incurred high costs, and
experienced long development times. In essence, these companies did not perceive
that they had a problem.
The board members had relied on the founder CEO to develop the business
strategy and marketing and sales model. They were late to recognize that he was
not sufficiently knowledgeable about the standardized product testing protocols of
large corporations. Star board members finally decided to personally contact key
decision makers in the space. They learned that even though the filmstrips were an
innovative and less expensive alternative to traditional testing procedures
widespread adoption would require demonstrating superior performance relative
to the existing testing options using formal and rigorous head-to-head ROI-based
tests. Without that data and the subsequent hiring of a business
development/sales team well versed in the standard testing protocols of large
companies, given the long sales cycle, there was little chance of success in an
acceptable time frame.
As a result of those insights, it was determined that by the time the appropriate ROI
analysis could be authorized, funded, and executed, the sales team hired, and the
industry contacts established, the venture would run out of money. Shortly
thereafter the First Flavor venture was shut down.
The task of recruiting motivated and value-add advisors and directors can be time
consuming and difficult especially for first time entrepreneurs. To address this
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challenge, it is imperative that all stakeholders, including investors, founders, and
managers are fully vested in the task of identifying and recruiting the “right” ones.
After all, it is in the interest all stakeholders to help increase the likelihood of
creating and realizing value for the company.
Once the “right” advisors and directors are fully engaged, their ability to help
mitigate risks, avoid pitfalls and enhance the potential upside of a venture can be
significant. Based on their knowledge and experience of “having seen this movie
before,” they can be expected to reduce the risk of failure by offering a CEO faced
with unexpected and unforeseen challenges, insights, recommendations,
suggestions and access to key industry leaders that can mitigate if not solve their
challenges. Under these circumstances, nearly all first-time CEOs and the majority
of experienced CEOs can be expected to recognize the merit of input from
experienced advisors and directors and be expected to act accordingly. From a
practical perspective, this behavior is especially likely if a CEO fears that ignoring
that advice might lead to a hostile advisor-board level confrontation, potentially
raising the issue of the their own longevity as stewards of the enterprise if they
have taken in money from outside investors who now have a say regarding the
leadership of the venture.
Sometimes even experienced, long time CEOs in large public companies will choose
to disregard or ignore the advice of directors and advisors. Not surprisingly, the
consequences of that decision, good or bad, regardless of the size or life stage of the
venture, will rest squarely on the shoulders of the CEO. In 1992, with the aid of
some middle managers, Ben Rosen, the Board Chairman of Compaq Computers,
conducted his own due diligence on technology market trends at the annual
industry trade show in Las Vegas. He determined that Compaq could significantly
reduce the costs of its computers if management was willing to use less expensive
but equally effective standardized parts. Rod Canion, the founder and long time
CEO of Compaq Computer, had rejected Rosen’s less expensive sourcing option,
insisting that the “q” in Compaq stood for quality.
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Rosen feared a quickening of the continuing erosion of Compaq’s sales to cheaper
machines (clones) if the company remained on its current high cost path. As an
early star board member and investor in Osborne Computer, he had “seen this
movie before.” He had watched that company’s sales first skyrocket and then fizzle
as it continued along a path of an inordinately slow response to market changes
and was determined not to let that happen again. With the board’s support, Rosen
fired Canion.
In 1999 Rosen recreated his role as a CEO executioner. At that time, the Compaq
board had reached the conclusion that the company needed to evolve from being
essentially a hardware company to becoming more like the “new” IBM, an
integrated services provider transitioning to the new technology world order by
leading the movement to the Internet. Eckhard Pfeiffer was an operationally
focused CEO whom Rosen had elevated to replace Canion. Pfeiffer had been
pushing back against bringing in new executives who understood this growing
trend and continued ignoring the board’s direction to find a successor. After
watching Compaq’s stock price erode as a result of missing revenue and/or
earnings over a series of quarters, Rosen fired Pfeiffer.
Even CEOs who have worked for decades in an industry can benefit from
recommendations from advisors and directors. In 2004 Stonemor Partners, a
private company created as the result of a leverage buy out with the financial
support of private equity firm (now a New York Stock Exchange company, NYSE:
STON), was the first cemetery and funeral home (“Deathcare”) company be listed
as a Master Limited Partnership, a unique financial structure typically found in the
oil and gas industry. Lehman Brothers enlisted some of its best financial engineers
to create a corporate structure to maximize the likelihood that the company would
qualify for this tax-advantaged status.
At a Stonemor board meeting, one of the company directors suggested that the
company apply for a patent for this unique financial structure. After some debate,
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the CEO and full board came to recognize the value of filing an application with the
Patent Office. With continuous upgrading, improvements and extensions, the
patent application and review process could be expected to take years to resolve.
Deathcare competitors would be uncertain whether the pending patent would be
granted and, therefore, less likely to expose themselves to potential litigation by
copying Stonemor’s financial structure. In fact, years later, Richard Verdi, a
Ladenburg Thalmann equity research analyst covering the company, cited the
potential patent as a competitive advantage for the company.
The director’s idea for filing a patent application for creating a fear, uncertainty and
doubt (“FUD”) marketing strategy came from a morning breakfast meeting the
prior day with an early stage venture capitalist who had mentioned that several of
his startup companies, while not expecting their patents to be granted, had filed for
them as barriers to discourage competition.
Exhibit 1
Mentors, Advisors and Directors
Pre-Institutional Funding
Concept and Early Stage
Post-Institutional
Funding
Friends and
Family
Seed Angel/Super Angel
Series A, B, C…
Public
Mentors X X X X X
Advisors X X X X X
Advisory Board
X X X
Board of Directors
X X
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The “Right” Advisors and Directors for Startups and Early Stage Ventures
How does an entrepreneur identify and entice the “right” advisors and directors to
work with their startup or early stage venture? At the pre-institutional friends and
family funding stage, especially for a first time entrepreneur without a track record,
attracting the “right” value-add advisors who are not investors can be expected to
pose a significant challenge, one that is likely to entail expending an extraordinary
amount of valuable time and effort to bring to a successful conclusion.
Recruiting high profile individuals requires a finely honed sales pitch, not totally
different from the typical elevator pitch entrepreneurs diligently prepare for
presentation to potential investors. However, in the case of approaching potential
advisors, “the ask” can be even be more challenging since it is a request for
assistance that often is defined in terms of an uncertain time obligation and non-
financial terms.
An understanding on the part of the entrepreneur of the magnitude of time and
effort being sought needs to be well thought out. New entrepreneurs are not always
cognizant of the fact that they are seeking access to an advisor’s most precious
resources, his time, knowledge and network on a high priority basis; and, that it is
likely that their request for access to those resources will occur at unplanned times
under challenging circumstances with short fuses available for their resolution.
A pitch positioning the company to a prospective advisor or director should follow
the same basic format used by an entrepreneur in communicating to potential
investors. The content of the pitch should be why they are creating this company,
what product/service they are offering, and how they will create it (Business
Model), market it (Marketing Model) and make money (Revenue Model). The
entrepreneur should also be able to clearly articulate the businesses’ capabilities,
core competencies, and competitive advantages. This should be supplemented
with the qualitative and quantitative benefits that will be realized by an advisor or
director as a result of agreeing to work with the company.
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Providing compensation in the form of advisory shares or partnership interests can
help support an entrepreneur’s case for recruitment. However, unless the
entrepreneur is a serial entrepreneur and has a record of successful ventures, for
many highly sought after high profile potential advisors and directors it is unlikely
that the value that the startup CEO will ascribe to his company shares or profits
would be commensurate with what the candidate might be more certain to earn in
their own ventures or business activities. For this reason, the entrepreneur’s pitch
must be well rehearsed, highly compelling, and appeal to the advisors and directors
own motivations and interests (see below).
Not surprisingly, recruiting star advisors and directors is easier post institutional
investment. By that time, along with the external validation provided by funding by
“smart money,” a company should have a structure for a Board of Directors and/or
Board of Advisors in formation or in place. Meaningful compensation with some
degree of expectation that there will be a realization of their value can then be
provided to advisors and directors in the form of options, profits interests and/or
direct financial incentives, as discussed below.
Advisor and Director Motivations
In developing a sales pitch to attract advisors and directors, the founding
entrepreneurs would be wise to seek to understand the unique interests,
capabilities and motivations of the individuals being recruited and tailor their
solicitations accordingly. Careful and well thought out preparation and
idiosyncratically crafted approaches are critical for approaching each of the two
types of prospects, those who may be investing their own money in the company
(or that of a fund they represent) and those who are not investing, but rather are
being compensated explicitly for their time, experience, knowledge and contacts.
Different motivations can be expected to underlie a prospective advisor or
director’s decision to accept or reject an offer to serve. At least seven basic types of
intrinsic and extrinsic motivations can be identified. The first five listed below are
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generally the most prevalent among advisors in seed and early stage startups.
1. As a favor or obligation to the founder(s)/friendship
The entrepreneur relies on his personal relationships (‘good-will capital“) to
recruit advisors. In this case, an advisor’s motivation for agreeing to serve is likely
a function of his or her loyalty to the entrepreneur rather than as the result of a
detailed analysis and formal understanding of and belief in the viability of the
business. This point is important for the entrepreneur to keep in mind if he intends
to rely on these types of advisors and directors to motivate others to join his
venture or his board.
2. Interest in the venture, possibly as an extension of their own academic
interests and/or business activities
Many early stage university-based ventures take advantage of the time and
resources freely offered by academics to students. These academic advisors may
even view a startup as relevant and potentially valuable to their own academic
research—their primary motivation for academic notoriety and professional
advancement. For example, David Bell, a professor at Wharton, recently wrote a
book on eCommerce largely based on insights gained from startup ventures by
Wharton students. While advisory positions occasionally can turn out to be
extremely lucrative (as in the cases of student startups Diapers.com, Milo, Warby
Parker and BazaarVoice), it is generally not an expected outcome by the advisor.
Senior executives may view their participation as enhancing their business skills by
expanding their knowledge base in less familiar contexts and circumstances, some
of which may be more “cutting edge” than they experience in their own companies.
Some business executives will view this opportunity very positively, since it will
enable them to sit on the other side of the table and gain a better appreciation of
how they should deal with their own advisors and directors.
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3. For love/benefit of society based on the company’s mission (non-profit)
Socially minded advisors and directors can be recruited for startups and
established companies that have altruistic or environmental missions. However,
even if a company has not been formed as a social entrepreneurship venture it can
still committed to a social mission, such as donating some of its future profits (or
time of its executives) to a worthwhile cause. This commitment can assist a CEO in
recruiting socially minded advisors and directors (as well as employees). Warby
Parker adopted this corporate strategy by donating a pair of eyeglasses for each
pair sold.
4. To build up their own credentials for other endeavors
Some individuals are motivated to become advisors or directors to advance their
own professional standing. Being associated with a successful venture can provide
advisors and directors not only with interesting fodder for cocktail party talk, but
also help them gain access to other opportunities and individuals reflective of their
newly enhanced “advisor or director” business status for a “hot” startup.
5. To be in the game/for personal gratification
Simply wanting to be where the action is and experiencing the excitement of being
associated with a “hot” venture is sufficient to entice some individuals to serve as
advisors and directors. Any financial remuneration offered by the company for
serving likely would be considered as relatively inconsequential and primarily
viewed as providing an affirmation that their value to the enterprise is being
recognized.
6. To protect/enhance their own investment (investors)
Individual investors, especially if they consider the magnitude of their investment
(potentially) financially significant, are likely to be motivated to serve as advisors
and directors. Providing the opportunity to monitor and possibly contribute to
significantly enhance the value of their investment can be a very powerful
motivator for an investor to serve as a company advisor and/or director.
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Investment funds can be expected to demand a role as a director (or at least a
board observer) in return for their financial commitment to the company.
7. For compensation (professional advisors and directors)
Some advisors and directors serve primarily because of current compensation. In
the case of startups and early stage companies, this tends to be a very small
minority due to the importance of cash flow. As startup and venture companies
evolve and start to enter the business mainstream, having paid advisors and
directors on a board can be beneficial to a company by gaining needed expertise
from experts who will now feel obligated to help it grow and flourish.
Advisors and directors in early stage companies and startups tend to be rewarded
in stock, options or partnership interests, depending on the corporate structure.
Standard ranges for remunerations are discussed below.
The Issues of Fiduciary Responsibilities and Independence
Advisors provide support, guidance and direction reflective of their diverse areas
of expertise that are not resident in the company without incurring the obligations
and liabilities of directors. From a judicial perspective, they get a “free ride” and do
not bear any fiduciary responsibilities.
Directors are differentiated on the basis of whether or not they are considered
independent. With private companies, this distinction is of much less importance
than with public companies where independent directors must meet standards and
reporting requirements that are rigorously enforced by governmental bodies. The
definition of independence in public companies varies from country to country,
business type to business type and even by listing exchange. In the U.S. the
Securities and Exchange Commission (SEC) sets the rules.
Independent private company directors are generally recruited to provide a
perspective to insure that board level issues are addressed from the point of view
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of all shareholders, not just the investors or management, neither of whom, by
definition, can be independent. An independent perspective can be extremely
valuable when decisions that disproportionately affect a sub-class of shareholders
need to be addressed. For example, the business purpose related to the allocation
of additional equity to a sub-group of employees should be viewed from the
perspective of the company as a whole, rather than from the perspective of the
owners of any single asset class of stock.
Venture or private equity funding can often lead to the recruiting of independent
and often star board members. Individuals recruited to serve in this capacity tend
to be highly respected and well known with specific experience, skills, knowledge
and networks than can provide significant value to the company. From the
perspective of the entrepreneurs, it is very important to their future to insure that
they have a formal say, if not a veto, on who fills these roles. At the very least, the
individuals filling these roles need to be people the entrepreneur feels are credible
and trustworthy.
The Experience-Primary Skills Advisor and Director Matrix
Before initiating a search process for advisors and directors, it is advantageous for
all relevant stakeholders to take a formal inventory of the skills and experiences
that they believe will be needed to enhance the performance of the venture and
enhance its likelihood of success. Exhibit 2 shows such a matrix.
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Exhibit 2 Experience-Primary Skill Set Advisor and Director Matrix
Experience Primary Skill Set
Relevant Domain Knowledge
Relevant Technology Knowledge
Start up Entrepreneurial Experience
Exit and M&A Experience
Extensive Network and Connections “Stars”
General Management
Research and Development
Sales and Marketing
Technology and Internet
Accounting and Finance
HR and Recruiting
Operations and Logistics
Manufacturing and Sourcing
Governance/ Legal
While not every empty cell in the matrix requires an entry, the recognition of a void
can help company management identify the existence of a gap which a consultant
or some other part time individual could fill on an as needed basis.
The selection process should recognize that there are three kinds of advisors and
directors: (1) Subject matter experts, typically academics or industry experts; (2)
general business advisors who are skilled in critical business areas; and (3)
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investors, ranging from friends and family to sophisticated venture angels, super
angels, venture capitalists, and private equity/hedge fund managers. Each kind of
advisor and director may serve in single or multiple roles based upon their
experiences and skills. Star advisors and directors also can fall in any of the three
categories.
In addition to advisors and directors, entrepreneurs typically have mentors who
have provided guidance and direction at various stages of their lives. Mentors
should be differentiated from advisors and directors. A mentor can be defined as
an individual who has the trust of the entrepreneur and who can counsel them on
any matter, personal, family or business, including non-traditional topics such as
work-life balance. Sometimes mentors are informal supporters, such as friends of
the family and relatives; other times they function in more formal roles, such as
teachers and professors.
Typically mentors are counseling the entrepreneur and therefore are focused only
them in terms of their needs, desires and goals. Regardless of the success or lack of
success of the venture, it can be expected that mentors, as long-time confidants,
will continue to serve as personal counselors to the entrepreneur.
An Experience-Skills Advisor and Director Matrix demonstrates how the three
kinds of advisors and directors can be categorized into the areas of corporate need.
As noted above, recruiting the best people to fill in the boxes identified as critical to
success likely will require a significant level of salesmanship by the entrepreneur.
While the exact definitions of the columns and rows in the matrix may vary for a
given business and industry, it is important that a CEO and all other decision
makers formally go through the exercise of developing their own matrix as part of
the process of creating a human resource roadmap for the company. Getting
counsel from experienced entrepreneurs in creating a company’s own matrix can
be a worthwhile investment of CEO time and effort, since it is highly likely that the
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hiring decisions made early in a company’s evolution will have a significant and
disproportionate impact on its future.
It can be very difficult and especially painful for both governance and emotional
reasons to remove non-contributing advisors and especially directors from boards
if they turn out to be disruptive, dysfunctional or simply unable to provide the
anticipated value to the enterprise. A CEO should pay particular attention to the
personality and communication style for each candidate advisor and director to be
sure that that it will mesh with his own.
Sometimes an individual’s motivation to contribute as an advisor or director will
change. Often this is a function of the evolving life stage of the company. It is
particularly likely to occur when the business looks like it will fail (“abandoning a
sinking ship”) or become a big hit (the intoxicating “smell of money”). The contacts
and network that a company will need as reflected by the experience and skills of
the star advisors and directors can also be expected to evolve as a venture grows
from early seed to institutional funding and as a full fledged company transitions
into different life stages of its development. To the extent possible, both current
and future needs should be considered and anticipated when filling slots in the
matrix.
All advisors and directors should also be explicitly informed when they are
recruited that as the business matures, changes may have to be made to the
company’s advisory/director cadre to provide new skills that will be more in line
with the it’s evolving needs. Informing advisors and directors that their
appointments will be periodically reviewed on a formal basis can also facilitate any
future transition process.
The Advisor and Director Recruitment Process
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Since recruiting the “right” advisors and directors can be a challenging and
daunting task, the following six suggestions are offered to help a startup or early
stage company accomplish that goal.
1. Source broadly and solicit referrals from multiple disparate sources
While it is readily recognized that this will require more effort, the wider a
recruiting net is cast and the more people identified and interviewed, the greater
the likelihood of turning up candidates that might be ideal for the role(s) the
company needs filled. Tendencies to be avoided include concentrating searches for
advisors and directors solely in certain geographic areas (such as Silicon Valley) or
among current and former employees of a small group of “hot” companies. While
the usual pool of suspects should be considered, conveniently restricting the search
process to that group runs the risk of missing the opportunity for fresh and
innovative thinking.
2. Take the recruiting process as seriously as you take building your
executive team
CEOs and other founders typically spend lots of time and effort hiring their team.
Particularly in the case of early stage companies, there is a strong emphasis on
identifying and hiring only “A” players since there is a belief that a startup company
is highly dependent on so few people that there is little room for hiring missteps.
Just as it has been claimed that “A” players are worth 5-10X “non-A” players, a
similar calculus should be made for all advisors and directors and especially stars.
In essence, the recruitment of advisors and boards should receive the same level of
attention as hiring top employees.
3. Interview face to face and spend as much meaningful time as you can with
each candidate
Telephonic or Skype interviews with candidates as a sole method of interviewing
should be avoided. In this age of sophisticated technology, the assumption is
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occasionally made that these communication vehicles will provide sufficient
information to assess a candidate. With well-known individuals and potentially
star advisors and directors who have “busy schedules,” this procedure is even more
likely to be considered acceptable.
In our experience, while these methods of communication might suffice as initial
screening mechanisms, it is critical for both the CEO and each candidate to
determine that their personal “chemistries” and management styles are well
matched. This is especially important for directors where it is likely that the CEO
will be “married” to them for the duration of the venture. A productive on-going
relationship requires mutual trust and confidence and these can only be realized
with an investment of time in personal face-to-face contact while engaging in joint
activities and meaningful experiences.
4. Have other board members and trusted advisors conduct interviews
Most CEOs, advisors and board members, are not trained in effective screening and
interviewing techniques. Professional HR assistance should be considered a
central part of the interviewing process. If company executives are managing the
screening process, then it is particularly important that individuals who have
experience serving in other advisory roles and on boards of similar size companies
be involved. Executives with this type of experience are more likely to make good
hiring decisions by recognizing the personality traits and “advisory communication
styles” needed to be effective.
In the case of startups and early stage ventures it is likely that the initial and
possibly only screening and interviewing tasks will fall on the CEO. When this
happens, the CEO should have a basic model in mind for how interviewing should
be done. In the case of the startup Neverware, after several failures to hire and
retain a lead engineer who could lead the team, the CEO recognized the need to
change the way he interviewed. A 45 minutes session with an investor on how to
ask questions focusing on past behavior and relating a candidate’s responses to a
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model based on a target set of needed skills subsequently led to a successful hiring
process.
5. Get references
If a candidate has served or is currently serving as an advisor or a director, then it
can be particularly helpful to seek references from individuals who are familiar
with them in that capacity and not only in their “day-jobs” as CEO’s, academics,
golfing buddies, etc. Likely sources for this kind of information on candidates
would be other CEOs, venture fund principals, co-workers, etc. It is best if these
reference checks are done either by professionals, such as headhunters, or other
advisors or board members who are personally acquainted with the candidate.
Personal familiarity or even friendship with a referring source will help minimize
standard reference-check responses consistent with commitment to the HR-mantra
of “don’t say anything bad that later might be attributed to you and/or might
legally expose us.“
Utilizing a professional vetting procedure is much more important in recruiting
directors than advisors due to the ease of ignoring/firing advisors relative to
directors.
6. Star players want to work with star players
Target and land the most challenging prospects as early as possible in the search,
even if it necessary to work harder, invest more time and/or pay more to get them
on-board. The better known and capable your advisors and directors and the
wider their network the easier it will be to recruit additional advisors and
directors. Success breeds success.
A star advisor or director can help the company not only in the recruiting of other
star advisors and directors but also in the process of hiring star employees. It can
be flattering and highly motivating for a job candidate to receive a recruitment call
from a well-known individual who is currently serving as an advisor or director for
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the company. That contact will help validate for that potential new hire the belief
that the company is likely to be well run and have a significant opportunity for
success.
As a company grows and takes in outside money, it is likely that not all advisors
and directors will be (solely) of the CEO’s choosing. Nevertheless, entrepreneurial
CEOs are wise to insist on a strong voice, if not a veto, in the director selection
process.
Non-alignment of Interests
At times, a founder’s best interests may not fully align with those of their directors
and investors. When Intuit called and Aaron Patzer from Mint.com took the
meeting, he had no intention of selling the company. According to one of his
directors, Aaron claimed he just wanted to hear them out. When he returned to the
office, to the chagrin of some of his venture capital partners, he announced he had
taken Intuit’s offer. To the investors, Mint.com was a potential billion-dollar
company. To Aaron, Intuit’s offer (reported to be $160MM) was a life-changing
event. It provided him with the opportunity to eliminate the risk of the Mint’s
failure, take money off of the table and become a venture investor himself.
Examples of other scenarios that can lead to non-alignment include dilution,
accepting funds from certain venture groups, and support for different strategies to
achieving sustainable growth. In all of these cases it is important that there be an
open dialogue among all stakeholders and a recognition of who has the ultimate
control to make decisions. As noted above, independent directors can play a very
important role in these types of discussions.
Managing Boards
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Fast growing early stage and start up companies can experience multiple corporate
challenges, each with its own inherent characteristics and evolving demands in
rapid succession. All boards expect the CEO to recognize the importance of their
time and act accordingly, addressing challenges with clear agendas and board
materials received with sufficient time to review them prior to meetings. CEO’s are
also wise to contact board members both before board meetings (to brief them on
the issues and get feedback on issues they want to discuss) and post board
meetings to get a sense of their perceptions of how the meeting went and whether
they had any unanswered questions. Requests to star advisors and directors to tap
into their networks should be relatively infrequent and only when there is a clear
need that is critical to the company and its mission. When these requests are too
frequent they tend to lose their sense of urgency.
To the extent CEOs treat all of their board members as stars, they will find it easier
to work with the current directors and, if necessary, recruit new ones.
Nevertheless, while engaging in all of these activities to facilitate working with
board members, a CEO needs to never lose sight of the fact that he is in control, that
the board is there to help him and that their money is already in the deal. In the
end, it is all about performance.
In addition to the “work-phase” of the board, it is important that a CEO orchestrate
informal get-togethers, such dinners the night prior to board meetings, site visits,
retreats, etc. to facilitate building camaraderie among the board members and
management. Stars like to get to know other stars and these events can serve to
motivate both management and the board to commit to the company’s mission.
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The Board Meeting*
Well-organized and well-run board meetings will significantly enhance the
satisfaction (and retention) of board members. To that end, an organized agenda
and effective time management are key success factors.
In terms of content, management should address five core questions at the start of
each board meeting. These questions should relate to cash, staffing,
products/services, strategy and needs for assistance.
1. What is our current and expected cash, cash-burn and fund-raising (if relevant)
situation?
2. How is our staffing? Is our hiring pipeline full? Are we getting high quality
candidates? Have we lost any critical team members and, if so, why?
3. Is our product/technology on plan? Can we expect to hit our milestones?
4. Has anything occurred in the marketplace that might cause us to change our
positioning or strategy? Have any new competitors emerged and what are their
offerings and how do they compare to ours?
5. How can we as board members help you? What assistance with clients,
recruiting, technology, introductions, etc. can we provide?
Following a review of the five items listed above, a review of the status of the to-do
items from the prior meeting should be reviewed and checked off.
*This section includes recommendations adapted from those suggested by Mike
Maples of Floodgate to Jeff Bonforte, the CEO of Xobni that was eventually sold to
Yahoo.
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Board meetings should have defined start and end times and agendas with
specified times allotted to each topic. Emphasis should be on topics that can create
value for the CEO rather than serve to provide updates for board members. The
written documents sent to the board members prior to the meeting should provide
an update of all critical issues. Some board meetings start off with the very
productive process of the CEO asking if there are any questions on the materials
that were sent to the board members prior to the meeting. Board members who
have not read the material are thereby put on notice. Particularly with boards
made up of stars that are likely to be intense and direct in their questioning, it is
important for a CEO to be willing to listen. In the words of Jeff Bonforte of Xobni,
“You don’t have to show up in a Teflon suit. You can be vulnerable on points where
you genuinely need help.”
Detailed to-do notes with assignments and timelines should be maintained with the
CEO responsible for insuring that follow-ups are accomplished in a timely manner.
Enhancing the likelihood of a success for a venture requires that all stakeholders--
management, employees, advisors and directors—find ways to reduce sources of
friction that can hinder the company from maintaining a rapid growth trajectory.
Sources of friction can emanate from any member of the stakeholder groups.
Dealing with this issue can be particularly challenging when board members who
at one time were major contributors not only are no longer adding value but whose
continued involvement may be detrimental to the growth of the company.
An extreme case of friction would be a board member who is disruptive and/or not
fulfilling their fiduciary responsibilities. In large, more established companies,
where there is capable HR assistance, self-assessments and cross-assessments (360
degree reviews) among board members can lead to the identification of needed
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behavior change. With startups and early stage companies, board-related problems
need to be uncovered early with decisions made and actions executed quickly.
Direct intercession and calling out of non-acceptable performance of board
members in a private session by the CEO founders, sometimes with the assistance
of other board members is warranted and necessary. Simply put, there may not be
enough time or financial runway to provide extensive intervention and
remediation.
Compensation of Advisors and Directors
Providing advisors and directors with what is perceived to be fair and market-
based compensation should be considered an ante or “cost of entry” in the
recruiting process. While “star advisors and directors” might ask for slightly
different compensation, the guidelines presented below can serve as a benchmark.
In our experience advisors and directors typically receive common stock options
that vest quarterly over one to two years with no cliff and a single trigger (an
equity acceleration with either a change of control or a change of control and a
liquidity event). Occasionally there is a double trigger (a change of control plus
termination without cause). While compensation for advisors and directors can
vary widely, some guidelines we have used with our companies are are as follows:
Advisors typically receive .05% to .5%. Super advisors and stars, those whose
value is viewed as critical to the company on multiple levels, typically receive .5%-
2%. Members of the board of directors are typically treated as Super
Advisors/Stars and receive .5%-2%. Prior to a Series A funding, advisors often will
receive a “making whole” gross up of 30% to 50% to account for dilution from seed
investors, Series A investors, option pools, and the like. Advisors recruited after
the Series A can expect to receive .1%-.4%. Board members appointed by
institutional funding sources are most often compensated directly by the
institutions.
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Final Comment
This article has focused on the time and effort needed to recruit, manage and
extract maximum value from advisors and directors. While getting the “right” star
advisors and directors can help grow a business, a CEO should recognize that the
only factors that ultimately will validate a business and create value are its team
and its products, services, revenues, growth trajectory, and customer base.
References Bonforte, Jeff. The Secret to Making Board Meetings Suck Less.
http://www.firstround.com. Accessed, February 17, 2015.
Verdi, Richard. Stonemor Partners, L.P. An Overlooked MLP Possessing Solid Returns
without Commodity Exposure. Landenburg Thalmann and Co., 2015.
Dr. Lautman, one of the founders of Musketeer Capital, has been a super angel investor in startups and early stage companies, an advisor to venture capital and private equity firms and an advisor and director on multiple boards of early stage, private, family, and public companies. He has taught courses on Marketing Strategy, Marketing Management and most recently in Entrepreneurial Marketing at The Wharton School of Business and The Penn State University Smeal School of Business in the undergraduate, MBA, and Executive MBA programs. He has also been a guest lecturer at Columbia University School of Business in Decision Making and Leadership, and Princeton University in Leadership in Entrepreneurial Start-ups.