Hot tips for emerging company boards
Emerging companies comprise a significant portion of Colorado businesses. Venture capitalists, angel investors and founders make up the shareholders and the boards of directors of many of these companies.
I spoke recently to Fran Wheeler, a partner in the Business Department of the Colorado Office of the Cooley LLP, about board practices for emerging companies. Cooley represents more than 5,000 private company clients, including more than one-third of the Wall Street Journal's "Billion Dollar Startup Club". Cooley also was a founder of the Colorado Chapter of the National Association of Corporate Directors (NACD) when the Cooley-sponsored Colorado Directors Guild, which focused on directors of private companies, became a NACD chapter. Fran currently serves on the Colorado Chapter’s Board of Directors and as its secretary.
“A great way for your company to improve board contribution and increase shareholder value is to establish good governance practices," Fran says. "A well-functioning board of directors, which holds regular meetings, is one way to inform and engage your investors, and is a critical component of sound corporate governance.”
Many of the best practices of public companies apply to emerging companies, Fran says. She offers these tips for emerging companies and their boards:
• HOLD FREQUENT, REGULAR MEETINGS. Following an initial venture financing, expect to hold as many as six to twelve board meetings per year. Be adequately prepared – there should be no important disclosures that were not covered in the due diligence pre-closing. Work with each of your Board members to set a schedule of meetings for the year. Consider alternating between in-person and teleconference meetings with the latter being more operationally focused and shorter in duration.
• USE A BOARD BOOK. Send a Board "book" several days in advance. The book should include, at a minimum: a "dashboard" highlighting key financial and operational metrics (talk with your VCs to see what info they want to see); summary financial statements, including comparisons against plan/budget; operational reports; minutes from prior meetings for approval; listing of proposed stock option grants for approval; and an up-to-date capitalization table that includes a full listing of outstanding stock options.
The principal objective of each meeting is to review critical operational and financial issues as well as short term and long term strategy – consider picking one functional area for focus at each meeting. Consider inviting management team members on a rotating basis to drill down on select topics and empower them to make presentations to the Board on their functional areas. Most Board meetings can be concluded in a two-hour period if efficient.
• HOLD TARGETED SESSIONS. Allot time for an "executive" session (i.e., Board members only, no management team members) at the beginning or end of each Board meeting, even if there is no set agenda. Consider scheduling an investor designee-only session at the end of each meeting.
• TAKE MINUTES. Minutes are intended to be "summaries" of the meetings. Most venture capitalists and counsel would advise you that "less is more.” These should be a very high-level summary of discussions and actions, and any resolutions that were adopted should be included. Have counsel prepare, or at least review, the minutes.
• DON'T SURPRISE BOARD WITH BAD NEWS. Although it is fine to spring good news on your Board, consider calling individual Board members in advance with bad news so that they are not surprised at the meeting. Similarly, if you will be discussing difficult or controversial topics, communicate with each Board member individually before the meeting, so you know what to expect and can manage the discussion.
• ELECT INDEPENDENT DIRECTORS AND CREATE COMMITTEES. Identify and elect independent directors with relevant experience. Aside from the "checks and balances" these independent directors provide between founders and investors, having them is essential for review and approval of related party transactions. Set explicit term limit expectations for outside directors - if a person is not a fit, the director will be easier to replace if there is no perception of a permanent seat.
Create Compensation and Audit Committees, each comprised of all or mostly independent directors, if possible. Have the Board adopt compensation guidelines for salary, bonus and option grants that will provide parameters to management between meetings.
• SET AN ANNUAL BUDGET/PLAN. Management should present their proposed budget/operating plan for the following fiscal year at one of the Board meetings held near the end of the each fiscal year. Allocate more time for this meeting.
• CREATE PROCESS FOR TRANSACTIONS. In the context of corporate transactions, such as M&A and future financings, the Board should be mindful of demonstrating a careful and deliberate process. Showing that the Board is knowledgeable of the transaction and alternatives is critical. Consider creating a special committee of the Board, comprised of independent directors, to review and/or approve a transaction where there is a significant “related party” component.
• PROTECT ATTORNEY-CLIENT PRIVILEGE. Be sensitive to protecting the company’s attorney-client privilege. Privilege is different than just protecting “confidential information”. Never discuss sensitive legal matters, including the potential liability of Board members, with non-Board members or without counsel present.
• TAKE ACTION TO AVOID DYSFUNCTION. If you sense that your Board is becoming dysfunctional, act and bring in new members or discuss swapping out existing members to change the dynamic.
Excellent tips. Consider them as your emerging company attracts new investors and shareholders.