Month: April 2007
Chris concludes our series on board packages. Chris, take it away…
Now that I’ve given you an outline to what I think makes a good board package, I’m going to exercise my VC prerogative 🙂 and immediately caveat that advice. In my mind, the trick to effective board packages is less about the outline of the content and more about finding the right balance between being so deep in the details that the board book gets bloated and lost in the weeds and being so high level that it becomes perfunctory and glosses over the important things.
While it’s tempting to look for an example of a “perfect” board package and then replicate it, the perfect board package isn’t something that can be easily copied because it’s company specific and requires a thoughtful case-by-case approach.
– When you distribute your board package, assemble it into a single electronic document (in my world, ideally it’s a PDF) so your board can easily print it out, follow the flow of the board package, etc., rather than sending it as a bunch of separate documents.
– Put page numbers on every page (you can easily do this once you’ve got everything into a single PDF) so the group can stay on the same page and easily reference various sections during the board meeting.
– When in doubt, ask your board before the meeting what they want to discuss.
This concludes our board package series. We hope that you’ve enjoyed.
If you read our term sheet series, you know that we spent a fair amount of time discussing liquidation preferrences. Jesse Fried and Brian Broughman, a professor and graduate student at Berkeley, respectively, recently published a paper about the emergence of common stock carveouts and some of the reasons why they belive venture capitals are not getting the liquidation preferences that the VCs originally bargained for.
It’s an interesting read. I agree with most of their conclusions, but am not sure that state law plays as big of a factor as they think. Jesse and I are shooting emails back and forth about this and I have found the discussion robust and intelligent.
The abstract of the paper:
The literature on venture capital contracting implicitly assumes that VCs’ cash flow rights – including their liquidation preferences – are fully respected. Using a hand-collected dataset of Silicon Valley firms sold in 2003 and 2004, this paper is the first to document that common shareholders often receive payment before VCs’ liquidation preferences are satisfied. We show these carveouts are larger when governance arrangements give common shareholders more power to impede the sale. Our study shows how VCs’ control rights and cash flow rights interact to affect VCs’ cash flow outcomes, and contributes to a better understanding of VC exits.
You can find the paper here, it’s downloadable from bottom of the page.
Jesse’s bio is here.
We continue our board package series with perhaps the most important section of any meeting and package: the CEO executive summary. Again, Chris takes us through his thoughts.
In my humble opinion, this section of a board package is really where the rubber meets the road. Think of this section as part state of the union address (i.e. a top level review of what key activities are going on at your company), part post-game analysis (i.e. an analysis of what’s going well and what’s not going well), and part Socratic lesson (i.e. posing the probing questions about your business).
Typically this section is what sets the tone as well as the topics for substantive discussion at your upcoming board meeting. Some questions that should be asked (and answered or theorized) in this section might include:
– What’s going well in the business and what recent successes should be celebrated? What are the implications of those successes for the business?
– What’s not working in the business and what recent failures should the business learn from? What will the impact(s) be to the business as a result of those challenges?
– What changes (in your business, your market, your competitors, etc.) are on the horizon that could bode well (or poorly) for your success?
– Where are you (the CEO) and the rest of the executive team focusing your efforts going forward? If those areas represent a change in priorities, why change?
– What keeps you awake at night (either because of the excitement of the opportunity or the fear of the challenge)?
– Where do you need the board’s input and assistance?
Recognize that there likely won’t be (and probably shouldn’t be) nice, pat answers to everything that is raised in this section. In order to be most effective, this section needs to be an open and honest “discussion” that can expose your business’ vulnerabilities but in turn presents an opportunity for the board to be most effective in asking the tough questions, challenging your assumptions, and giving you useful advice/feedback.
CEO’s that really know their business also know what they need from their board and how their board can help them. Asking your board questions is not a sign of weakness, but a sign of security and depending upon the questions, a sign that the CEO really knows what’s going on.
Thanks to all who came and made the last event a success. Josh Dorkin has a good summary of what it’s all about. Check it out here.
We quickly outgrew Amante Coffee on Broadway, so we are going to move a block away to Vic’s Coffee at 1800 Broadway in One Boulder Plaza for future events.
The BIG news is that we now have our own Website! We’ll make the site an open forum where we can communicate to each other and going forward I’ll discontinue updates on the this site. Please be patient while we build it out. At some point, I’d like to have a true forum / posting so that people can start their own discussion threads.
My partner Brad has confirmed attendance next Tuesday, the 24th, so if you are interested in meeting the better half of AskTheVC, stop on by and say hello, although I’ll be the one who is better dressed.
As you may recall, Brad and I have been blogging about 409A since the initial proposed regulations were released. You can find our series here.
The final regulations were released. The work of artistry is 397 pages. Since most of you will not find the need to read all 397 pages, you might be asking “so what’s the deal with the final regs?”
Basically, the final regs reaffirmed everything that we’ve been saying about 409A. Nothing major has changed, although the tax experts are still sifting through the regulations and we’ll update you as info is delivered to us.
One thing that the final regs did articulate (better, not great) was regarding start up companies potentially using their own internal finance people to conduct their 409A valuations. As you might recall, our guidance was that all private companies should use an outside valuation firm, as the internal valuation method was too tough to comply with and potentially would lead to liability for the company and its financial officer.
Specifically, the regs say that an internal finance person can conduct a presumably valid 409A valuation if the person has “significant experience.” This generally means at least five years of relevant experience in business valuation or appraisal, financial
accounting, investment banking, private equity, secured lending or other comparable experience in the line of business or industry in which the service recipient operates.
I don’t know if we have any financial folks at our start ups who fall under these guidelines. It’s a pretty tough standard to meet. Our original thoughts stand that the safest way is to employ outside valuation experts.
We’ll keep our eyes on all the different interpretations of the final regs and post from time to time on the latest and greatest thoughts.
In our continuing series of creating effective board packages, we now turn to business reporting. Chris, you have the floor…
This is the stuff that most CEOs think of when they think of board reporting packages—financials, departmental overviews, etc. And this stuff is indeed a core component of any good board package, because the more you include this in a board package, the less time you need to spend “reporting” on it and the more time you can spend discussing the implications of it on the business.
Examples of typical monthly board reporting include:
– Company financials – I like to see prior month, quarter to date and year to date actual financials (as well as comparisons to your budget) along with a rolling 13 month P&L by month and an A/R aging summary. I also like to get company financials in Excel format (in addition to what’s included in the board package) since that lets me reformat and play with the numbers to get a better sense of what’s going on;
– Financial performance guidance – for the next month/quarter/remainder of year. Being able to project your company’s financial performance obviously requires a certain level of maturity in your business, but this is a good way to make sure that financial reporting isn’t only about looking in the rear-view mirror;
– Key operating metrics – i.e. the non-financial metrics you and your executive team use to judge how the business is doing;
– Sales/biz dev pipeline report – including accompanying narrative on what deals were won, what deals were lost (and why), where sales efforts seem to be stalling out, what progress has been made on key deals, etc.;
– Product/technology development updates;
– Administrative and HR updates – current headcount by department, hiring plans for the upcoming month/quarter/year; and
– Current Capitalization Table – (with sufficient shareholder detail for it to be meaningful). It may seem redundant to include a cap table in each board package when a company’s capitalization typically doesn’t change frequently, but remember that many of your board members sit on multiple boards and work with a lot of companies. Since capitalization often plays an important role in a lot of early stage company discussions (such as upcoming financing discussions, option grants, etc.), it’s helpful to just get in the habit of including it in every board package.
Depending on the stage of your company, this “reporting” section may be more product/technology oriented (as it would be in an earlier stage company) or may be skewed more towards sales and business development (if your company is at the critical go-to-market stage) or may emphasize financial reporting (for a more mature company). Most board reports should include departmental updates for all of your company’s departments, but the granularity/depth of those updates will vary depending on what’s going on in your business.
All of these types of reporting are very important, but to reinforce something that Chris brings up the “why” is just as important (and sometimes more) than the “what.” Be sensitive that these reports aren’t just history, but lessons learned and that the executives who head up the functional areas understand and agree with the board on the metrics that are used to judge success.
In our next posting in the Board Package Series, Chris tackles what he deems (and I agree) as the least interesting board material that finds its way into the package: Board Administrative Issues.
There’s no getting around it—there’s always going to be administrivia that a board of directors has to deal with, so your goal as CEO is to get your board through these materials as quickly as possible so you can get on to the valuable part of a board meeting (the discussion). And the way to do that is to 1) organize all of the administrative matters in one section with all of the appropriate information and 2) get that information out well in advance of your board meeting.
Examples of typical administrative matters you should include in your board package include:
– Minutes of the prior board meeting that need to be reviewed/approved by the board;
– Reports or recommendations to the board from any board committees (i.e. audit, compensation, etc.);
– Option grants requiring board approval;
– Board resolutions and other board consents such as establishing stock plans, benefits plans, etc. (and, to the extent that those resolutions or consents need explaining, provide the appropriate context);
– Reminder list of upcoming board meeting dates/times/location; and
– Ed – also any other general operations, legal, real estate and other non-critical things that the board should be aware of.
There’s no greater waste of board time than having a half dozen (or more people) sitting in silence during the actual board meeting reading the prior meeting’s minutes so they can approve them. Ditto for the board having to spend time discussing what a particular board consent is for because it was included in the board package without the necessary contextual information. By religiously including this kind of stuff in your board package, you can breeze through the administrivia a whole lot faster (or at least focus on the substantive conversations, if necessary, rather than trying to get everyone up to speed on the basics).
– Detailed option grant info is important. When you include your proposed option grants, give your board enough information to understand what you’re proposing and the context. I like to see a table that shows the grantee’s name, title/position with the company, proposed option grant, existing options (if any) held by the grantee, what percent of the company (on a fully-diluted basis) the proposed grant represents, what percent of the company the grantee would hold including all prior grants, grant strike price, and vesting schedule for the proposed grant
– Organize all board signature pages in one place. If you need board signatures on a bunch of stuff and will need board members to sign them remotely, organize the signature pages, along with instructions for sending them back to the company, into a single separate document. That way your board won’t have to hunt through their board packages for signature pages to sign.
Bottom line, this should be but an efficient exercise to get to the stuff that really matters. The next posts in the series will deal with the important stuff.
Question: When you evaluate startups to invest in what are the key qualities and what emphasis do you place on it? Is management as high as 50% or more?
Every young venture capitalist learns several cliches about how important either (a) the team is or (b) the idea is. Unfortunately for the young venture capitalist, these cliches are directly contractor as some wise old VCs are believers that it’s all about the team and others are believers that it’s all about the idea. Such are the paradoxes of life.
Looking back on the investments that I’ve done, it’s clear that a combination of team and idea is key. If the team is weak, that’s a non-starter. If the idea is weak, that’s a non-starter. So – it ends up being a classic 2 x 2 matrix: strong team + strong idea is good; weak team + weak idea is bad; and strong team + weak idea or weak team + strong idea is – well – questionable at best.
The big challenge is determining whether a team or an idea is a strong one. Just because someone has had success doesn’t mean they are good (since I’m feeling cliche-ish tonight “better lucky than good” comes to mind.) The converse is also true – I’ve met plenty of great entrepreneurs with a failure or two under their belt.
The same goes for the idea. Those online pet food stores seemed like a great idea at the time in 1999. And – in the same time frame – “yet another search engine” didn’t seem like such a great idea to lots of other folks (YASE = Google.) Of course, there’s always a lot more to the story – but on the surface it’s not an easy evaluation, which of course is the point.
So – the answer to your question will vary by investor. There are several distinct philosophies as well as numerous investors who probably don’t have a clear set of rules (e.g. I can’t tell you the number of times I’ve heard something like “I always invest in people, but the idea here is so great that we can fix the team later.”) Whenever in doubt, remember the answer is 42.