Managing your Board
By Victor H. Boyajian and Josh Grotstein
Reprinted by permission of Capital Growth Interactive’s Venture Guide
The board of directors of any company is the statutory center of authority. In a venture-backed company, the board becomes something more; it is the hub of idea exchange and decision making between the founders, management, and venture and other investors. It is the place where trial balloons are floated, where the sensibilities and preferences of the investors come to be better understood and where the direction of the business is honed. The board also serves as an important venue in which the confidence of the investors in management (and management in its investors) is enhanced or undermined.
While a founding management team previously may have made decisions on the fly without the formalities of board meetings, once venture funding is secured the dynamics of corporate governance is altered. An understanding of the new governance paradigm is an important element to the success of the company and its various stakeholders.
The structuring of the board is often one of the most difficult negotiating and psychological hurdles for the founders to deal with next to valuation (and perhaps the hiring of a new CEO). It is this aspect of the transaction that clearly delineates the shift in control of the company. Depending on the negotiated arrangements with the venture and other investors, it is customary for an early-stage technology company to have a five-person board in any one of a variety of configurations, including:
- three management, two investors
- two management, two investors
- one independent member selected by the investors or jointly
Subsequent rounds of financing could see the reconfiguration of the board to allow for the seating of a representative of the new investors (at the expense of the existing angel investors or venture capital firm, which will cede a seat) or the expansion of the board to seven members to make room for other financial/strategic investors or other industry players.
While state law and the contractual arrangements with investors may impose certain limits, the board generally is the statutory center of authority for the corporation. While such items as the adoption of the stock option plan, the business plan/budget, incurrence of indebtedness, raising of additional capital, large capital expenditures and entering into large contractual commitments and other extraordinary actions such as the sale of the company require the formal approval of the board, many other actions require developing a consensus among the different constituencies on the board, including founders, angel investors, the venture capital firms, strategic investors, independent board members and management.
It is rare that a company will proceed to take action where the board is split as to direction or approach. In addition, many of these actions may also require the consent of shareholders as a class (in some cases, each of the separate classes) and individual investors.
So while the consent of the board may be required to take a certain action (and the majority of the votes to take an action is in hand), the taking of any vote should be a mere formality. The key to successful board management and governance is the laying of the necessary foundation in the weeks (if not months, depending on the issue) leading up to the board meeting. Building consensus requires the understanding of each board member’s preferences, risk tolerance, experience with other portfolio companies and strategic view. In fact, some argue that game theory is an important element of the successful management of the board. And it is often the case that one-on-one communications between management and individual board members provides a more successful road to general consensus than floating concepts to the board as a whole. Developing alliances on particular issues can be tremendously helpful where a key board member can act in concert with management or others as one of the proponents of a proposal. The benefit of having a key board member validate a proposal cannot be overstated. The ability to integrate the views of the board into the proposal is tantamount to success.
The higher the level of confidence in management and, in particular, its ability to implement the business plan and articulate a strategic vision, the easier the task of getting buy-in from the board. Communication with the board is critical to achieving success.
The meetings of the board for emerging growth companies are typically held every four to 12 weeks, with venture capital investors of the earlier-stage companies seeking meetings on a monthly basis. The more frequent meetings impose a communication discipline on management and enable the investors to have a finger on the pulse of the company. Keeping in mind that one of the benefits of venture investors is their experience and knowledge base, frequency of meetings at the early stage better ensures that this experience is tapped into and harnessed.
The meetings of the board are intended to facilitate communication. The investors typically seek to have management discuss the financial performance and condition, sales and marketing activities, strategic efforts, product development and the like in a formal presentation distributed in advance of each meeting. Critical attention is paid to performance against plan, burn rate, cash position, staffing and hiring, and sales and pipeline analysis. Strategic forward thinking in terms of product positioning in markets and new industry verticals is typically of concern to the board.
Pre-revenue companies spend significant amounts of time on a product development timeline and strategic and beta customer initiatives. It should be borne in mind that organized, well thought out and crisp presentations instill confidence. Focusing on building the business and implementing the business plan (and all the time and energy required) is essential but not an excuse for poor preparation or for meetings that are unfocused or run on too long.
But the formal presentation is only one aspect of communication. The meetings typically see the exchange of ideas. Management taps into the experience of the investors and can informally gauge reaction to an intended course of action while investors have the opportunity to drill down into the thinking of the team. A good management team should also have the confidence to push back on what may appear to be a good idea to a venture capitalist based on an experience at another portfolio company but which upon reflection is an ill-conceived idea given the particular facts and circumstances. Fact-based dialogue is key. All too often, overbearing participants will upset the delicate balance among the various constituencies. This is not to suggest that positions should not be presented with conviction, but rather that each of the participants needs to understand the unique perspective of the others. There is no room for truculence, lack of respect or arrogance at the board.
Perhaps most importantly, board meetings encourage other levels of communication before and after formal meetings. Quick email and voice communications on a variety of other issues keep the various stakeholders informed. In fact, the most important element of good communication is to ensure that the parties are in sync.
Further, an effective management team will have its board on top of developments before meetings. It is imperative that all events that affect critical business milestones be communicated quickly to all board members. A rosy discussion at meetings followed by a totally different result undermines confidence. Surprises put to either side are not productive.
In the end, successful management of the board also involves an element of common sense and good personal relations skills reinforced by the counsel of experienced advisors.