Introduction to Technology Company Governance - Dave Litwiller - March 2014 - copy

Governance 101Early- and Growth-Stage Tech Companies

Dave LitwillerExecutive-in-Residence

March 5, 2014

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Copyright, David J. Litwiller 2014 2

Important DisclaimerThis 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.


Overview

• Board of Directors and Board of Advisors

• Roles and responsibilities of directors

• Building, managing and evaluating the Board of Directors

• Evolving governance at the speed of a rapidly changing business

• Director compensation


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

• Board observer to several other technology company boards

• Advisor to many technology start-ups spanning software through clean energy and medical technology


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)


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– Disclose significant information within his/her

knowledge– Maintain confidentiality of the corporation’s information– Exercise independent judgment– Act with one voice outside of the boardroom


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


Further Obligations

• Inform and Advise Shareholders– Provide shareholders with all material information

relating to matters for which shareholder action is sought


Standard of Performance

• Due Diligence– Information access and review– Deliberative process– Reliance on experts and independent authorities when

appropriate– Record proceedings

• Business Judgment– Act in a manner reasonably believed to be in the best interests

of the corporation at the same time as fulfilling other duties


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


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


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


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


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

• Lead director or non-executive chairman (not the CEO) to provide improvement feedback to other directors


Evolving BoD Skills with the Stage of Company 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


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


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


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


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


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


BoD Advice (IV)

• Know what is in the articles of incorporation, corporate by-laws and shareholders’ agreement detailing which issues require board approval and which ones require shareholder approval

• If there is debt in the business’ capital structure, have a summary of covenants as an appendix to each board reading package

Board of Directors Compensation

As a company moves towards IPO, Board of Directors option grants decline. The following chart presents the low to high ranges of typical Board option awards (for independent Directors). Cash compensation is not generally employed until the IPO run-up period. Appropriate levels of cash compensation are highly dependent upon firm size and industry.

Extremely Rare• Tend to be

significant advisors or

mentors• At most 1-2

Directors

Rare• Tend to be

significant advisors or

“names”• At most 1-2

Directors

1st Independent Director

• Tend to be industry figures• 2-3 Directors

More Common• Tend to be

industry figures, related

businesses• 2-3 Directors

Almost Mandatory

• Tend to be industry

figures, “brand enhancers”

• 3-5 Directors

Independent Director Pre-IPO Equity Participation

0.00%

0.50%

1.00%

1.50%

2.00%

Pre-Angel Pre-Round 1 Pre-Round 2 Post-Round 2 IPO Run-Up

Equi

ty P

artic

ipat

ion

(una

djus

ted

for d

ilutio

n)

Source: DolmatConnell & Partners


Board of Directors Compensation

For an independent director:

• Three to four year vesting, with the vesting term often matched to stipulated director term limits (typically three years)

• One year cliff for new independent directors, no cliff for incumbent directors

• Monthly or quarterly vesting after the cliff

• Post-service exercise term of one year

• Full acceleration of vesting upon acquisition (since directors have a large amount of work in the run up to an acquisition)


Resources and Further Reading• Board of Directors

– Directors’ Duties in Canada, Barry Reiterhttp://www.cch.ca/product.aspx?WebID=3688

– Startup Boards, Brad Feld and M. Ramsinghanihttp://www.wiley.com/WileyCDA/WileyTitle/productCd-1118443667.html

- Angel and VC-Backed Compensation, DolmatConnellhttp://www.hr.com/en?t=/documentManager/sfdoc.file.supply&s=iQATS1TdtcHxlqC5L&fileID=1207584777466

• Board of Advisors– The Four Steps to the Epiphany, Steve Blank

http://www.stevenblank.com/books.html

http://www.cch.ca/product.aspx?WebID=3688

http://www.cch.ca/product.aspx?WebID=3688

http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118443667.html

http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118443667.html

http://www.hr.com/en?t=/documentManager/sfdoc.file.supply&s=iQATS1TdtcHxlqC5L&fileID=1207584777466





Supplementary Slides:Board of Advisors

(BoA)


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


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


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


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


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


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, software-in-plastic gadgets


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


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


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


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

Introduction to Technology Company Governance - Dave Litwiller - March 2014 - copy

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Transcript of Introduction to Technology Company Governance - Dave Litwiller - March 2014 - copy