Introduction to Technology Company Governance Start-up, Growth-Stage and Later-Stage

1. Governance 101
Early- and Growth-Stage Tech Companies
Dave Litwiller
Executive-in-Residence
March 5, 2014

2. 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.
Copyright, David J. Litwiller 2014
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3. 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
Copyright, David J. Litwiller 2014
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4. 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
Copyright, David J. Litwiller 2014
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5. 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
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6. Board of Directors
(BoD)

7. 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
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8. 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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9. Further Obligations
• Inform and Advise Shareholders
– Provide shareholders with all material information
relating to matters for which shareholder action is
sought
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10. 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
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11. 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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12. 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
Copyright, David J. Litwiller 2014
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13. 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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14. 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
Copyright, David J. Litwiller 2014
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15. 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
Copyright, David J. Litwiller 2014
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16. Evolving BoD Skills with the
Stage of Company Development
Company
Stage
Typical # of
Directors
Typical Director Key Skills
Mix
Concept
1
1 Founder
Business formation, F3 funding, early
customer and technical discovery
Seed and
Start-up
3
1 Founder
1 Investor
1 Independent
Recruiting, technology, operational setup, angel/VC funding, ecosystem
relationship development critical to
success over next 18 months
Growth
5
2 Founders
2 Investors
1 Independent
Commercialization, operational
refinement, institutionalizing know-how,
scaling, growth finance, working capital
management, international reach
Late
Expansion
7
2 Founders
Increasing financial sophistication,
2 Investors
acquisition or IPO savvy, governance
3 Independents discipline, reduction of surprises
Copyright, David J. Litwiller 2014
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17. Changing Nature of BoD Issues
Company
Stage
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
•
•
•
F/T CFO
Audited financial
statements
Annual forecasts with
predictive value
Variance review
•
•
•
•
•
•
Accelerating
growth
Revenue
predictability
and quality
Rising efficiency
•
•
Copyright, David J. Litwiller 2014
Records management
Compliance
Risk management
Litigation, real or
threatened, especially
employment, partner, and IP
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18. High Impact Board Practices
Company
Stage
Practice
Helps
Seed and
Start-up
•
•
•
•
•
•
•
•
•
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 areas
Late
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
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
Copyright, David J. Litwiller 2014
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19. 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
Copyright, David J. Litwiller 2014
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20. 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
Copyright, David J. Litwiller 2014
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21. 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
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22. 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
Copyright, David J. Litwiller 2014
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23. 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.
Independent Director Pre-IPO Equity Participation
Equity Participation (unadjusted for dilution)

2.00%
1.50%
1.00%
0.50%
0.00%
Pre-Angel
Pre-Round 1
Pre-Round 2
Post-Round 2
IPO Run-Up
Extremely Rare
Rare
More Common
•Tend to be
significant
advisors or
mentors
•Tend to be
significant
advisors or
“names”
1st Independent
Director
Almost
Mandatory
•At most 1-2
Directors
•At most 1-2
Directors
Source: DolmatConnell & Partners
•Tend to be
industry figures
•2-3 Directors
•Tend to be
industry figures,
related
businesses
•2-3 Directors
•Tend to be
industry figures,
“brand
enhancers”
•3-5 Directors

24. 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)
Copyright, David J. Litwiller 2014
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25. 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. Ramsinghani
http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118443667.html
- Angel and VC-Backed Compensation, DolmatConnell
http://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
Copyright, David J. Litwiller 2014
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26. Follow-up Discussion
Contact:
dave [dot] litwiller [at] communitech.ca
© David J. Litwiller, 2014
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27. Supplementary Slides:
Board of Advisors
(BoA)

28. 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
Copyright, David J. Litwiller 2014
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29. 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
Copyright, David J. Litwiller 2014
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30. 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
Copyright, David J. Litwiller 2014
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31. 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
Copyright, David J. Litwiller 2014
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32. 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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33. 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
Copyright, David J. Litwiller 2014
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34. 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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35. 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
Copyright, David J. Litwiller 2014
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36. 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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37. 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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