introduction to governance presentation communitech - dave litwiller - jan 21 2014 - copy
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Introductory presentation about boards of directors and boards of advisors in start-up technology companiesTRANSCRIPT
Governance 101Early- and Growth-Stage Tech Companies
Dave LitwillerExecutive-in-Residence
January 21, 2014
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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.
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Overview
• 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 operating trajectory in early, growth, and scaled-up tech
companies in the Waterloo region – R&D– Marketing and sales – Manufacturing– Finance and accounting– HR – General management– Acquisitions, divestitures and turnarounds
• Board director of three early- and growth-stage companies; two in enterprise SaaS, and one in photonics instrumentation
• Advisor to several technology start-ups spanning software through clean energy and medical technology
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Board of Directors vs. Board of Advisors
Directors Advisors
Choice of Members By shareholders By management
Purpose Oversee business affairs Advise as requested
Obligations 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 Little
Duties Fiduciary, care At convenience of management
Compulsory Disclosure of Business Information
Yes No: information can be selectively disclosed
Time Commitment 250 to 450 hours per year Flexible, by mutual accord
Board of Directors(BoD)
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Duty of Loyalty (Fiduciary Duty)
• To act honestly and in good faith with a view to the best interests of the corporation– Unqualified priority to the corporation over
personal interests or other competing claims– Act openly and honestly– Maintain confidentiality of the corporation’s
information– Exercise independent judgment– Act with one voice outside of the boardroom
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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 rationally, reasonably and on an informed
basis– Identify and act upon problems which should have
been apparent– Follow reasonable processes and practices
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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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Responsibilities of the BoD
• Appoint officers• Set goals, policies and strategy• Evaluate and approve budget, monitor
ongoing performance and course changes relative to budget
• Appoint auditors (if required)• Review by-laws from time to time and put
forward changes
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Leading Practical Issues
• Mentoring CEO– Support and appraise– If necessary, remove and replace
• Never running out of cash• Deliberating strategic shifts• Selling the company; building buyer value– Next round investors, liquidity event
• Shareholder communication
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Director-CEO Relationship
Good Directors:• Indicate important questions in advance of meetings 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
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BoD Realities
• It is work, and people need to be work-like
• Liability is significant– Good directors will require D&O insurance
• 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
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BoD Realities
• 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
• Little staff or management board support bandwidth; this isn’t 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 Corporation Development
CompanyStage
Typical # of Directors
Typical Director Mix
Key Skills
Concept 1 1 Founder Business formation, F3 funding, early customer and technical discovery
Seed and Start-up
3 1 Founder1 Investor1 Independent
Recruiting, technology, operational set-up, angel/VC funding, ecosystem relationship development critical to success over next 18 months
Growth 5 2 Founders2 Investors1 Independent
Commercialization, operational refinement, institutionalizing know-how, scaling, growth finance, working capital management, international reach
Late Expansion
7 2 Founders2 Investors3 Independents
Increasing financial sophistication, acquisition or IPO savvy, governance discipline, reduction of surprises
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Changing Nature of BoD IssuesCompanyStage
Sales Accounting Legal
Seed • Customer discovery
• Managing by bank statements
• IP: rights, deadlines, chain of title & assignment, licenses
Start-up • Early sales• Strengthening
value prop• Competitive
strength
• P/T bookkeeper• Monthly I/S and B/S• Tax returns done• Source deductions
made and remitted
• Director resolutions to approve equity rights grants
• Complete minute book• Material contract review
Growth • Accelerating growth
• Revenue predictability and quality
• Rising efficiency
• F/T CFO• Audited financial
statements• Annual forecasts with
predictive value• Variance review
• Records management• Compliance• Risk management• Litigation, real or
threatened, especially employment, partner, and IP
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High Impact Board PracticesCompany Stage
Practice Helps
Seed and Start-up
• Prospective hindsight• Reference class analysis• Pre-commitment• Commitment limits
• 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
• Independence of board• Correct quickly and early• Keep up spirited inquiry in the most
impactful areasLate Expansion
• Continuous improvement of governance
• Methodical director onboarding
• Evolution of the BoD as a self-regulating body
• Accelerates time to full individual and group productivity, facilitating renewal
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BoD Advice (I)• There’s 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 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 times per year, in person
• Don’t 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 management’s 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 company’s 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
Board of Advisors(BoA)
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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 company’s
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 you’d 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
company’s 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 aren’t 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
• The 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 company’s 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, attendance and referrals
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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 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
– Startup Boards, Brad Feld and M. Ramsinghanihttp://www.wiley.com/WileyCDA/WileyTitle/productCd-1118443667.html
• 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