Category: Board of Directors
Tom and Tony of tastytrade talk with Brad about Foundry Group, Techstars and Bootstrapping…
Fred Wilson (USV) must not be at SXSW because he’s got a great post up titled The Board Of Directors – Selecting, Electing & Evolving. While having a great post up and being at SXSW don’t have to be mutually exclusive, all of the other VC Posts that I saw this morning said something like “here’s where I’m going to be at SXSW – come find me.” Or they are tweeting “I’m still awake and I’m at an epic party.” Or they are asleep and hung over. But they are definitely not writing posts about boards of directors.
Fred talks about why a company should have a board, how the board evolved over time, and what the high level function of the board is. Having been on some boards with Fred, I hope he goes deeper in a series about boards on what boards should and should not do, especially in cases where the company is doing well, or not doing well.
As a bonus, he snuck in a tidbit near the end about the dynamics of the Twitter board. I wonder if anyone will notice.
I’ve gotten several emails recently from folks complaining that their VCs are wasting their legal spend on changing indemnification agreements. What is going on and why is this important?
Let’s say you’re a VC and you sit on the board of a portfolio company. Something goes wrong at the company; and the plaintiffs sue everyone in sight, including you. You don’t welcome the idea of paying litigation costs out of pocket, but luckily you have an indemnity agreement from the portfolio company – saying that the company will cover litigation costs and liabilities. You also are indemnified by your VC fund, but until recently most people thought that was just a “backup” – in case the portfolio company was insolvent.
But that was before the recent Levy v. HLI Operating Company case. There, a Delaware court surprised most experts by holding that where the individual board member had indemnity rights both from the portfolio company and his fund, the fund and the portfolio company had to share claims for any indemnity claims required to be paid. [This clearly will lead to a financial and process nightmare dealing with different insurance carries and attorneys. – Ed.]
The result? VCs are changing their indemnity agreement forms. The NVCA form of indemnity agreement has been changed to make it clear that the portfolio company indemnification is the board member’s primary source of protection, and the VC fund will have to pay only if the portfolio company is unable to do so. Since most people assumed that was true prior to the Levy case, our experience is that most companies aren’t fighting this change.
Q: My company is backed by VC firm to whom we also pay a $2k/month "consulting fee." We have raised approximately $2MM from them in a Series A. Is that type of consulting payment typical in an early stage venture?
A: (Jason) I want to vomit again. We received this question just a few short days after posting that entrepreneurs should NOT pay their lawyers for introductions to VCs and how scummy of a practice that was.
Now today, we get this question. This is even worse. The answer is NO. Companies should never pay their VCs consulting fees, board attendance fees, or any type of fees related to their involvement in their company. I’ve never worked with a reputable VC firm that charges their companies to help them succeed.
As a venture capitalist, we are paid a management fee by our investors that is our "salary" and we receive a percentage of the profits (called "carry") on our fund. We don’t get paid to sit on boards and certainly it is not appropriate for them to "round trip" your investment capital by paying themselves part of it. I would wager to guess if their investors knew they were doing this that the investors would revolt.
I’m sorry to report, but not only is this not typical, it’s unheard of in the venture world when dealing with reputable folks.
(Note, private equity is a totally different matter and fees are commonplace, but it’s a totally different model)
Q: I am trying to determine the appropriate equity position for my startup’s board members. They are arguing that they are "founding" board members. They have put in a few hours a month of their time for around a year, have been very helpful with introductions, and have sat in on VC meetings. We are seed stage (pre-A). Can you suggest a range of equity for a "founding" board member? While you referenced the concept in your "Compensation for Board Members" article, you did not detail any specific ranges.
A: (Brad) I think their equity as "founding board members" – given your description of what they have been doing for you – should map to the post Compensation for Board Members or Board Member / Advisory Member Compensation. Specifically, you are in the 0.25-1.0% vesting over 2 to 4 years zone.
I don’t really believe there is a "founding board member" construct. The opportunity for these early board members – in addition to the options you will give them – is to be able to invest at a very low valuation ($1m to $2m pre-money). You should give them this opportunity well in advance of approaching VCs.
Dick Costolo (aka Mr. Ask the Wizard) – the founder/CEO of FeedBurner (now a Googler) has another outstanding post up titled Early Stage Board of Directors. In his delicious way, Dick talks through how he thinks about the potential composition of a Series A board and gives entrepreneurs some ammunition for their potential investors when they say “let’s have a board with five Series A investors and no founders.”
I have 57 unanswered questions in my “AsktheVC” folder. There are 77 days left in 2007. That’s less than one a day. I should be able to get the folder to 0 by the end of 2007. Nothing like a little goal. Of course, that assumes no new questions which you – fair reader – would probably assert is a bad assumption. Oh well.
Q: For a very early stage company (pre-funding), what role should the board of directors play?
A: (Brad). We’ve written about this a lot in the past. See the Board of Directors category on AsktheVC, the Board of Directors category on Feld Thoughts, and an article I wrote in the late 1990’s titled Boards That Are Not Bored.
Your early stage board can cover a wide variety of roles, but fundamentally you want them to be strong advocates and support for what you are doing and what you are trying to create. They will help you with fundraising, recruiting, strategy, early founder issues, business partnerships, and a variety of other tactical things.
While there is a governance role with every board, the founders of an early stage company should not simply defer to the board. In all cases the founders should also be members of the board and collectively should view the board as a constructive group that is working together, rather than one where there are two separate entities (e.g. “the board” and “the founders”). In addition, the “board” shouldn’t be anthropomorphized (as in “the board wants me to do this”) – your early stage board consists of people that each likely have a point of view, will contribute, but shouldn’t “dictate.”
I went back and reread Boards That Are Not Bored and continue to think it’s one of the better articles I’ve ever written about boards. The construct of a Working Board still resonates with me, especially for a very early stage company.
These are boards that role up their sleeves and help the founders and management team of the company get the job done. They meet frequently, have animated, engaged discussions, and offer significant ongoing support and help to the key owners and managers of the company.
As a company grows and takes funding, these dynamics will change. A post funding board is different than a very early stage / pre-funding board. Both can be powerful, have huge impact (positive and negative), and are important. But – they are different.
56 to go.
Q: We are in the process of raising early financing. Should the board be built after money is raised to meet the needs of the company and investors or should the board be used as a method to recruit angel investors?
A: (Brad) I view the creation of a board and the raising of an angel round as two separate activities that mutually reinforce each other.
Given that you have already started raising your angel round, you have the opportunity to use a board seat or two to help recruit your angel investors. However, you shouldn’t just give a board seat to whomever wants one – your board members should serve the interest of all shareholders, not just theirs or the angels that participate in the round with them.
You should always carefully and thoughtfully pick your board members. You want the best possible folks you can attract on the board. You should value experience and perceived contribution as a board member over the absolute dollar amount being invested, although often larger angel investors (and almost all VC investors) ask for a board seat as part of their investment.
All of your early board members should have a financial stake in the company – hopefully, they will all participate in the angel round. However, this shouldn’t be a requirement for a board member (and vice versa – just because someone invests in your angel round, they shouldn’t be entitled to a board seat.)
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.