The Board Of Directors: Role and Responsibilities

This is the first of a series of MBA Mondays posts on the topic of The Board Of
Directors. I want to dig into the role and responsibilities of the Board as a way
to kickoff this series. But first a few disclaimers. I am not a lawyer and I am not
giving out legal advice on this topic. I am a practicioner and am telling you the
way I see it and what I've learned over the years. I think both are important
perspectives. You will have to look elsewhere for the legal view on this topic.

The Board of Directors is the governing body for a company. All major
decisions will need to be ratified by the Board. You will need the Board's
approval to sell your company. You will need the Board's approval to hire or fire
a CEO. You will need the Board's approval to do a major acquisition. You will
need the Board's approval to do a major financing, including an IPO. On all
matters of major strategic importance, the Board will need to be engaged,
involved, and supportive.

However, the Board should not run a company. That is the role of the CEO and
his/her senior management team. The Board's job is to make sure the right
team is at the helm, not to be at the helm themselves. Boards that meddle, that
get too involved, that undermine the management team are hurting the
company, not helping the company.

Boards work for the company. The company is their responsibility. They must
always act in the best interests of the company and its major stakeholders; the
employees, the customers, the shareholders, the debtholders, and everyone
else that is relying on the company to deliver on its promises.

Some would say that the company works for the Board. But I think that is
wrong. The company works for the market (and I am using the word market in
all of its meanings) and the Board and the management team work for the
company. Every director must put the interests of the company first and their
interests second. This is called fiduciary responsibility.

About ten years ago, I was in a Board meeting when management told the
Board that they had uncovered significant accounting issues in a recently
acquired company. This was a public company Board. And these accounting
issues had flowed through to several quarterly financial statements that had
been reported to the public. Every Board member who was also a material
shareholder (me included) knew that the minute this information was disclosed,
our shareholdings would plummet in value. But there was no question what we
had to do. We had to hire a law firm to investigate the accounting issues. We
had to immediately disclose the findings to the public. And we had to terminate
all the employees who had an involvement in this matter.

Things like fiduciary responsibility seem very theoretical until you find yourself
in a moment like this. Then they become crystal clear. Directors often must act
against their own self interests. They must do the right thing for the company,
its shareholders, and its stakeholders. There is no wiggle room on this rule. For
directors, it is the golden rule.

The hard thing about being a director is that many times, the right answer is
not clear. Should we accept this extremely generous offer and sell the
company? Should we ask the CEO to leave the company? Should we go public
or wait a few more years? There are no formulas that you can run to tell you
the answers to these questions. There is no "right answer." Only time will tell if
the right decision was made. And even then, there will be debate.

Debate is what good Boards do. They put the key issues on the table and
discuss them. Good directors are deeply engaged in the important issues and
they are upfront and open about their opinions on them. They are respectful of
the other Directors and listen carefully to opposing opinions. Boards should try
to reach a consensus and then act on it. Board should not procrastinate on the
big decisions. Boards need a leader to drive them. That leader is commonly
called the Chairman. I plan to write an entire post on the subject of the Board
Chair as part of this series.

There are many CEOs who want to manage their Board. That is a mistake in my
opinion. A great Board manages itself and treats the CEO as a peer and gives
the CEO's opinion great weight. But a great Board is not a rubber stamp. A
great Board pushes the CEO and the company to make the most of the
opportunities in front of the company. It makes sure that the CEO and the
management team are pushed out of their comfort zone from time to time. It
asks the hard questions that must be asked.

Boards are fluid. They should evolve. Members should come and go
occasionally. There should not be too much churn but some churn is good.
Board members should not coast. Board members should not treat their seat as
a right (even if it is). Boards should always be looking for new blood.

I will end with a somewhat controversial statement in light of the way some of
the most successful tech companies are run. Boards should not be controlled
by the founder, the CEO, or the largest shareholder. For a Board to do its job, it
must represent all stakeholders' interests, not just one stakeholder's interest.

Next week I will talk about how a Board is selected, elected, and how it evolves
over time.

YOUR D UTIE S AS A
DIRECTOR:THE BASICS
Entrepreneurs are used to juggling many roles on their way to building a great company
–you’re a founder, employee, director and officer. When you’re wearing the director
“hat” for a private Delaware corporation, make sure to be mindful of your fiduciary
duties to limit potential personal liability. This is a complex area of the law, but here are
some of the basics.

Directors have fiduciary duties of loyalty and care to the company and its stockholders

 Duty of loyalty. You must put the interests of the company and its stockholders over
your own personal interests in making decisions for the Company and evaluating
opportunities. This includes not taking opportunities that arise for yourself before
offering them to the company, and not divulging or using company confidential
information for personal gain.

 Duty of care. You must exercise care in making decisions as a director, based on
adequate information and a good faith belief that your decisions are in the best interest
of the company and its stockholders

These duties also extend to creditors if a company is insolvent or in the “zone of

insolvency” – this shift of duties is outside the scope of this article.
Exercising fiduciary duties protects you and your fellow directors

If you fulfill these fiduciary duties in a transaction in which you don’t have a material
personal interest, a Delaware court will generally defer to your business judgment,
presuming that the board decision was made on an informed basis, in good faith and in
the honest belief that it was in the company’s best interests.

A plaintiff could rebut that presumption, but a court generally will not second guess a
director’s business judgment and find you personally liable for a bad decision.

Steps you can take to fulfill your fiduciary duties

 Do your diligence – diligence is key when evaluating significant deals, contracts, new
hires, investors and business partners (see below about engaging experts)

 Hold regular board meetings – the company should have regularly scheduled board
meetings (and special meetings as needed) at which management and advisors provide
information regarding the company’s business, and other relevant inputs for decisions
facing the board. This is particularly important if you have any non-employee directors
on the board, who are not as close to the company’s operations

 Respect the process – conduct a thorough and thoughtful board decision-making

process for significant transactions

 Draft clear minutes – while board meeting minutes often don’t include the nitty gritty
of all board discussions, a description that demonstrates the extent of the information
presented to the board and the breadth of the board’s analysis and discussion is essential
for the record

 Disclose conflicts – if you have a conflict of interest in a potential key transaction with
the company, you must disclose it to the board. The board, with counsel, would then
determine how to proceed – you may recuse yourself from the vote or the board could set
up a disinterested committee to review and approve the transaction

 Engage experts – retain outside counsel and other advisors to advise the company on
financing transactions, acquisitions, strategic alternatives and corporate governance

The Fiduciary Duties of Founders

TL;DR Nutshell: The moment someone is added to a startup’s cap table, founders (as
majority stockholders, directors, and officers) becomes fiduciaries of that stockholder.
This means that, regardless of how much control founders may have over a company,
corporate governance law draws a hard line on how that control can be used. Crossing
that line can result in a lawsuit.
 This is one of those “core concepts” posts that, to lawyers and professional investors,
will seem laughably basic; and yet the topic is something that I regularly see first-time
founders get very wrong. And like most SHL posts, I’m going to explain things without
referencing statutes or complicated terms. Founders need to understand the concept of
Fiduciary Duties. The details they can learn from their lawyers or on-the-job.

State Corporate Law

Most Angel/VC-backed startups are Delaware corps. If they are not Delaware corps,
they are usually incorporated in their home state and will be required by institutional
investors to become Delaware corps if/when they ever are offered a check. Whether you
are a Delaware corp or not, your state certainly has corporate governance rules giving
founders (as directors and majority stockholders) varying degrees of fiduciary
responsibility to minority holders in their company. The concept is the same.

At the most fundamental level, to say that founders have fiduciary duties to
their stockholders means that they cannot, without seriously risking a
lawsuit, unfairly enrich themselves at the expense of other people on their
cap table. They can certainly get rich by making everyone on the cap table
rich; by growing the pie. But they can’t, without some kind of very credible
case that it is necessary for the well-being of the entire business, improve
their part of the pie at the expense of the rest of it.

Hypothetical: Founders X and Y hired Employee A and gave her 5% of the Company
that, because of some big contributions she made, was 40% fully vested on the date of
issuance (meaning 2% of the Company’s equity, of her holdings, is fully vested). After a
few months after the issuance, they have a big dispute and the founders fire Employee
A, which they are certainly entitled to do. Under the Stock Issuance Agreement terms,
3% worth of the Company gets returned (because it wasn’t vested yet), and Employee A
walks away with the 2% she had vested.

But Founders X and Y are pissed off that Employee A has that 2%. “She doesn’t deserve
it. She totally ruined the product” they say. Then the light bulb switches on. “We control
the Board and the stockholder vote! We’ll just dilute the hell out of her by issuing
ourselves more shares!” they say.

Sorry, dudes. If it was that easy to screw minority stockholders, no one would ever
invest in a company.

Delaware and other states have rules around “Interested Party

Transactions.” Without getting in the weeds, Interested Party rules boil down to:

 A Board of Directors has a duty (a fiduciary duty) to do what’s best for

the company and all of its stockholders taken as a whole, without unfairly
enriching its own members.
 Any transaction in which the Board members themselves are specific
beneficiaries – meaning they are getting something that others are not – is inherently
suspect. It is an “Interested Party Transaction” and is open to claims by minority
stockholders (the people who didn’t benefit from the transaction) that it was a fiduciary
duty violation.

 In order to “cleanse” (so-to-speak) the transaction and, in some cases,

give it a safe harbor protection from lawsuits, extra steps must be followed
to ensure the transaction really was fair.Those steps usually are (i) obtaining
approval by the disinterested members of the Board (if any) and/or (ii) obtaining
approval by the disinterested stockholders of the company. The disinterested people are
the ones who aren’t getting the special benefits.

Put the above 3 bullets together, and it’s clear that Founders X and Y (i) are planning an
Interested Party Transaction and (ii) without getting a “cleansing” vote of that
transaction, are assuming a very serious risk of a lawsuit. If there were 5 people on the
Board, and the planned dilutive issuance to X/Y was approved by the rest of the Board,
then the risk profile of the transaction would be very different. Similarly, if there are
other people on the cap table besides Founders X/Y and Employee A, then if their votes
make up a majority of the stock not held by X/Y (the disinterested stockholders) and
they approve the dilutive new stock, we’re again in much safer territory.

The key is that, in an interested party transaction, you need to get a

majority of the people who aren’t getting the ‘special benefits’ to approve
the deal. If you can’t, then you’re asking for pain.

If the entire cap table is X, Y, and A, then X & Y are just asking for trouble and (frankly)
deluding themselves by thinking that they can dilute A (without her consent) in a legally
air-tight manner. I’ve seen founders throw out a phrase like “let’s just do a recap” (short
for recapitalization) as if recaps are a magical get-out-of-fiduciary-duties card. I think
that idea was spread by ‘The Social Network,’ but I’m not entirely sure. Recaps are
complicated, and you still have to worry about fiduciary duties to get them done
properly.

Corporate Governance is Real

The overarching umbrella of the rules, processes, etc. that govern how corporate
directors and officers interact with stockholders is called ‘corporate governance.’
Founders sometimes think it’s all silliness reserved for when they go IPO, but it’s not.
From Day 1, corporate governance matters. Yes, it becomes more formalized as you
grow as a company and the stakes get higher, but it’s the same rules at Seed v. at Series
D, just being applied differently. You better believe it matters the moment a VC is on
your cap table.

Fiduciary duties do not mean that you always have to do what your minority
stockholders want. That would be impossible. It just means that, as a
director/officer, you have to do what’s best for the Company(the whole pie), and not just
for yourself. If there’s a financing coming up that some of your stockholders don’t like,
you should be safe if disinterested parties approve it as something that is the best move
for the entire company. I say should, because the rules, the process, and even the
language in your board resolutions matter. They can be (and often are) the
difference between moving forward knowing that your decisions can’t be challenged v.
handing disgruntled stockholders a loaded gun to use against you when you least want
them to.

W H AT D E C I S I O N S N E E D A P P R O VAL
FROM YOUR BOARD OF
DIRECTORS?

If your company is a Delaware corporation, you need

a board of directors.
Delaware law provides that the business and affairs of every Delaware corporation shall
be managed by or under the supervision of a board of directors. However, a single
director is sufficient and you can serve as a director of your own company (in addition to
being the founder and/or the executive officer). As your company grows and raises
capital, your board of directors should grow as well (in terms of the number of directors
and their respective areas of expertise).

While the board of directors delegates to officers of a

corporation (such as the president) the authority to
manage “day-to-day” matters, material actions
require prior board approval.
Whether a proposed action is “material” to your business (as opposed to “day-to-day”)
will depend on the then current circumstances of your company. So when in doubt, you
should check with your attorney. While there is no “one-size-fits-all” answer, for an
early stage company, the following actions will almost always require prior board
approval:

1. amendments to the certificate of incorporation or bylaws;

2. equity grants or transfers (whether stock, options or warrants);

3. distributions to stockholders;
 4. borrowing or lending money;

5. adopting an annual budget;

6. hiring or terminating members of senior management (or amending the terms of their
employment);

7. adopting employee benefit plans (401(k), profit-sharing, health insurance, etc.);

8. a sale or other distribution of all or substantially all of the assets of the company;

9. a dissolution or winding up of the company; and

10. entering into any agreements that could be of material importance to the company
(intellectual property licenses, customer contracts, vendor contracts, consulting
agreements, office leases, equipment leases, etc.).

Examples of “day-to-day” matters that typically would not require board approval would
be purchasing office supplies, making purchases covered by a budget previously
approved by the board of directors, signing non-disclosure agreements, and hiring rank-
and-file employees.

It’s not that hard to follow best practices.

The board can take action by adopting resolutions at a duly called meeting of the board
(which may be held in person or by video- or telephone conference) or by a written
consent signed by all members of the board of directors. So if you are the sole member
of the board of directors of your early stage company, you need only create a written
record of your approval of an action by the company prior to the action being taken.
Your attorney can provide you with a simple form of written consent that you can tailor
based on the facts and circumstances. However, as a general rule (and in particular for
equity grants and transfers (including stocks, options, warrants)), we recommend that
you at least check in with your attorney to ensure no additional corporate action or
filings are required.

Don’t be penny-wise and pound-foolish.

You may be asking “what’s the big deal?”, or why should a busy entrepreneur spend
valuable time on technicalities such as board approvals rather than simply paying
attorneys to clean up any mistakes after your company has raised money (or otherwise
generated revenue). There are at least three reasons why this is all a “big deal.” First,
you could lose the confidence of potential investors during their diligence of your
company if they conclude that you do not take corporate governance matters seriously.
After all, your future investors likely will expect to join your board. Second, it will cost
you more to have attorneys fix mistakes rather than simply avoiding the mistakes in the
first place. Finally, and most importantly, there are some mistakes that cannot be fixed,
or that can only be fixed at a very high cost.

https://bothsidesofthetable.com/running-more-effective-board-meetings-at-startups-e96cb5180de2

Running More Effective Board

Meetings at Startups
Like many of you I’ve sat through my fair share of Board Meetings
over the past decade. For the most part I’d call them Bored
Meetings.

The first 7 years I was running them and the past 3 years I’ve been
attending them. Most board meetings aren’t as effective as they
could be. Everyone has their own opinion on board meetings so
you’ll get conflicting advice. Here’s my non-conventional guide to
improving them.

In my first few years of running board meetings I found them

frustrating. I felt that my team and I spent too much time
preparing for them and that they were mostly “update” meetings
to remind investors what we did and what we were working on. I
got very little value from them despite having very smart and
talented people around the table. I’m sure many of you feel that
way.

The reason the meetings felt like update meetings is because we

spent hours walking through our board deck sequentially. We
started with our financial statements. We then walked through our
sales pipeline and discussed major campaigns. We then talked
about our product roadmap. Then competition. I think our
investors walked away with a very good understanding of our
businesses and always complimented us for being their most
thorough and prepared board. But I felt like it wasted too much of
OUR time.

So I changed things up and became much happier with my results.

Here are some notes on what I did differently and what I’ve
learned since then.

1. Set two strategic topics per board meeting and start

with them — I bet most of you feel that you have pretty talented
people around the table but you get stuck talking about the
minutiae of your business. You didn’t intend it to happen that way.
You put some update slides on things like key hires or biz dev
deals being negotiated and you didn’t plan to talk about them. But
they were in a slide and people asked you questions so it ended up
chewing up 30 minutes.

I recommend that the the first two slides in your deck be the two
most important strategic topics your management team is
grappling with. Make sure to send the deck in advance and have
enough details about the issue for the board members to be able
think about it before hand. If you’re expecting board members to
react on the fly you won’t get the best out of them.

Tell the board that you’re going with this new structure because
you really want to be sure that while you have all these talented
people assembled you want to maximize the impact that they can
have in helping you set your strategy. Take 30 minutes or so for
each issue. If you make this one change in your board meetings
you are more likely to get value out of them rather than being just
an update meeting.

But wait? How can we discuss strategic issues if we haven’t gone

through all of company update? Easy. People can read. Send your
deck in advance and require people to read it. If you’ve done a
good job they generally know the key issues before they’ve arrived.

2. Facilitate — Board meetings often end up being a debate

between the CEO and the non-exec board member who likes to
hear himself speak the most. You probably have lots of great ideas
around the table and could have great conversations but the same
people speak over and over again.

The best way to stop this as a CEO is: a) don’t let yourself be the
“chalk and talk” type who wants to drive through all your key
points at the board meeting and b) whenever you bring up a topic
for discussion (as in the strategic topics above) make sure to call
on everybody. When the “talker” keeps jumping in politely say,
“That’s great. I appreciate your input.” and then write down what
they said on a white board (so they feel listened to) but then go
around the room and call on everybody and ask, “so what do you
think?”

Sounds obvious, I know. But 70% of board meetings I’ve attended

in my days have been a tea party between the CEO and the
“talker(s)”.

3. Have a standard pack. Use time series and use graphs 

— Produce the standard of what you want to report to the board in
terms of business performance and produce the same thing every
time. Each board pack should have the history of performance
over the past year, a comparison of performance relative to plan
and your forecasts going forward.
You’ll obviously have some data in a spreadsheet format (copied
into PowerPoint) for things like your Income Statement, Balance
Sheet and Cashflow Statements. But make sure that you do as
much of your performance measurements in a graphical format.
Most people are visual thinkers and being able to see things like
revenue, total sales pipeline, conversion rates, error rates or
whatever the measure, putting it in a time series graph helps
people to quickly digest business performance.

4. Send board pack 3 days in advance — this is one of my

biggest tips. Most people in really early stage companies send out
board packs the day before the meeting or if you’re luck 2 days
before. Don’t let that be you. Send it three days in advance. Why?
You’re goal is to have all of the board members be super
productive. Many times board members read the pack the
morning of your meeting. They haven’t thought in advance about
the business and don’t come primed with valuable questions or
input.

If you consistently send your deck 3 days prior to the meeting you
have the right to ask board members to have read the deck at least
24 hours prior to the board meeting. Tell them that this is
important to you because it gives you a chance to call key board
members before the meeting and because it gives them time to
understand the current state of the business before the board
meeting.

5. Don’t allow computers, iPhones or Blackberries — I

know that they’re going to tell you that they like to take notes
while you’re speaking or to look at your deck online in real time.
Politely don’t let them. I know of no board members who can’t
resist the temptation to just quickly check if that important email
came in (let alone the headlines or their latest Tweets). I used to
say, “I’d greatly prefer that nobody uses computers or Blackberries
during the meeting. I’ve got a stack of notebooks and pens if
anybody needs.” People complain a bit. People like to complain.
Let them. If you want to have a really productive meeting you need
100% of people’s attention. And you know how VCs love their
Blackberries! One work around — you could promise everybody a
10 minute break after the first 90 minutes so they can make any
urgent calls.

6. Have in the afternoon. Reserve three hours — Many

people like to have board meetings in the morning. Investors fly in
the night before and have a dinner. I prefer board meetings from
2–5pm. Why so specific? First, I like to have the morning to plan
any last minute things so I’m ready to facilitate properly. I like to
have 3 hours. Most people prefer 2. They prefer two because most
board meetings are boring. If you run a tight ship you’ll hold their
interests. If you have really controversial issues to be agreed you
can easily ask for some time with key board members before the
meeting. Harder to do that when you have an 8am start.

I don’t find that 2 hours is really long enough to get people

engaged is strategic discussions. You end up talking a lot about
some issues and then running out of time for others. A 2–5
meeting allows people from out of town plenty of time to get to the
meeting that day. And the final reason I like 2–5 is point 7 below.

7. Plan dinners afterward, keep it social — Many boards

(especially those with out of town members) will hold dinners the
night before the board meeting and then have the actual meeting
in the morning. I’ve been to many of these. The problem is that
you end up discussing all of the key points at the dinner and the
dinner essentially becomes the de facto board meeting. When you
meet the next morning it’s a repeat of what was discussed the
night before. And talk about boring;
If you have a 2–5pm board meeting then you can have a 6pm
dinner afterward that ends at 8:30. I suggest you try your best to
keep the dinner social rather than an extension of the board
meeting. It is really important to build deep relationships with
your board members and they with each other. The more
everybody knows, likes and respects each other the easier it is to
deal with issues in difficult times (and there will be difficult times).
I like to tell people to plan board dinners every other board
meeting. If a VC is on 7 boards it becomes impossible to always
have board dinners.

8. Write up notes immediately afterward and distribute — 

People go to so many board meetings and are so busy these days
that they seldom remember what was discussed / agreed. This is
coupled with the fact that lawyers now routinely advise you not to
put any of the substantive discussion points in the legal meeting
minutes. So you should produce the set of notes that are unofficial
but cover the real valuable stuff you talked about. I find it’s helpful
in consolidating your knowledge and memory of what was
discussed and provides a great reminder for all board members.

9. Monthly in years 1–2, every 6 weeks in years 2–4, bi-

monthly or quarterly thereafter — Many entrepreneurs prefer
not to have monthly board meetings because they see it as too
much overhead. But in the first year of your business it is
invaluable. Things change so quickly and investors also don’t
understand your business well enough in the beginning. Too much
changes in two months in a pure startup and you want investors
and board members there to guide you through many strategic
decisions. It is also a great discipline for you to regularly reflect on
what your issues are, what your performance is and what you want
to change going forward. The more experienced you are the less
frequently you can have the meetings.
10. Don’t accept dialers — There are always going to be times
where somebody needs to dial in to a board meeting rather than
attend in person. Every now and again this is fine. But don’t allow
it to happen frequently. If a board member always feels the need to
dial in I would talk to them about whether there is another
suitable member to join the board. The person dialing in is never
properly engaged in the meeting. It’s too hard to be. Or worse yet,
all the people who are in attendance end up catering to the needs
of the person who’s on the phone.

AND IMPORTANTLY:

11. Nothing MAJOR is ever decided at the board meeting 

— What? Isn’t that what board meetings are for? No. I’m not
talking about garden variety issues but rather the super important
issues: should we sell, should we merge, should we fire a co-
founder, should we raise money, can I increase my salary, etc.

All super important issues should be lobbied and agreed before

board meetings. You should know what each individuals view is
and make sure you can count on their vote. The most important
decisions are generally agreed before key meetings. This is true
with boards or any important meeting. I always like to tell people,
“if there’s an important discussion at today’s meeting and you’re
not ‘in on’ what the decision is you’re the sucker in the room.”
Don’t let that be you.

Why You Should Ban Laptops & iPads at

Board Meetings
I haven’t had too many board meetings lately so I want to get this
timely post out now lest somebody think I’m talking about their
company or board in particular. This is a post about ALL boards.

Back when I ran board meetings as a CEO, the biggest annoyance

was Blackberrys. You would always be able to tell what was going
on by seeing the unhealthy infatuation board members had with
staring at their crotches. Somehow they imagined you didn’t
notice that they were glancing beneath the table secretly firing off
one-line emails.

Every entrepreneur I know bitched about it and the smartest

boards banned Blackberrys.

Fast forward to today. We now have ultra-lightweight laptops

(MacBook Airs) or iPads and totally available Wi-Fi connections.
So every board meeting I’m at has laptops opened or iPads fired
up. They are just there to “be productive” and review your
material. Um, yeah. This is a mistake.

Why a Mistake?
The board meeting is the one time you have as a management
team to engage your investors. If you’ve raised money from
meaningful people then you really want to maximize every minute
of this time. That’s why I advise startups to get the board packs out
early (so board members actually read them) and to focus as little
of the board meeting as possible on “updates” and as much as
possible on “strategic discussions.”

If you want to know how I believe you could run better board
meetings you can read my 3 posts on “Running More Effective
Board Meetings,” “The Agile Board” and “How to Communicate
with Investors Between Meetings.”
But you know in your core that there is no positive gain from
investors or management having laptops open. They don’t need to
“go through your deck,” “access the financials,” “look at your
competitors products” or any of the other BS reasons to have a
laptop open. They should be engaged 100% in the meeting. And
even they would prefer this. But given the temptations when your
laptop is open that are elicited by those little popups of incoming
email it’s impossible to not “just quickly read this message and fire
off a response.”

We are all guilty. We are all human.

The reality is that over the years I’ve sat in 100’s of board meetings
and I see what people do on their laptops. They flip between your
presentation and email or the Internet. If any of us have our laptop
sopen in any meeting we can’t help it. Which is why I don’t open it.
It’s why when I go to a romantic dinner with my wife I leave my
Blackberry in the car (at least I intend to ;-)) — because given the
temptation we just can’t resist. We’re human. Even your
management team members with laptops get sucked into other
work.

The only solution to maximize your meeting — no laptops. Period.

What to Do About It?

If you have a 3-hour board meeting I recommend that you take a
20-minute email break 90 minutes in. Tell people in advance. Tell
them that you have a “no laptop” policy so that you can maximize
your time with them. Send them this post and blame it on me — I
don’t care.

But if they know in advance that they’ll have a chance to get to

email to “sign off on that important deal they’re supposed to close”
there is no excuse for not giving you undivided attention for the
time you have together.

Just Say “NO”

Ultimately it’s up to us as VCs to enforce the behavior amongst our
peer group. There needs to be collective pressure to really be
engaged in our board meetings or why have them at all. If we all
agree to leave our laptops in their bags (not even on the table
where we’ll be tempted to open them!) in exchange for an Internet
time out every 90 minutes then we can all drive better behavior.

Think of it like a smoking break for email addicts.

And … Just say “no” to laptops in board meetings. I’m taking the
pledge today.

You?

15 TIPS FOR
SUCCESSFUL BOARD
MEETINGS AFTER
RAISING VENTURE
C A P I TAL
One of the best ways to assure your investors that your company is operating effectively
is to have good governance practices in place. A well-functioning Board of
Directors having regular meetings is a great way to keep your key investors informed
and engaged, and is a critical component of sound corporate governance. Here are some
tips on how to accomplish this.

1. Hold regular meetings. Following any initial venture financing, expect to

hold six to twelve Board meetings per year depending on investor preference.
Venture capitalists are particularly sensitive to the first Board meeting after they
invest—be sure to be adequately prepared.

2. Set a meeting schedule. You will find that it is hard to find mutually
agreeable dates for all of your Board meetings. Try to schedule your meetings
well in advance before everyone’s calendars fill up at least six months in advance.
If your directors have assistants, be sure to include them on all messages around
scheduling and administrative matters. Consider having some of your meetings
away from the company’s offices, particularly if your office lacks privacy or a
large enough conference room to hold the group. Your investor or counsel likely
has appropriate conference room space.

3. Use a Board book. Send a Board “book” at least a couple of days in advance so
all the participants have a chance to read it carefully. The Board book should
include, at a minimum: a “dashboard” highlighting key financial and operational
metrics (talk with your directors to see what metrics and information they want
to see); summary financial statements including comparisons against
plan/budget; pithy operational reports (sales, business development, product
development/engineering, marketing, finance); minutes from prior meetings for
approval; listing of proposed stock option grants for approval; an up-to-
date capitalization table that includes a full listing of outstanding stock options;
and any other information or documents that will be critical to the discussion
topics. Your goal should be to spend as little of the meeting as possible rehashing
information that had been circulated in the Board book. Include a summary
agenda with the Board book, including estimated discussion times for each
agenda item (see “Manage time” below). With respect to operational reviews,
consider picking one functional area for deep focus at each meeting rather than a
shallow survey of all of them.

4. Manage time. Venture capitalists and busy executives are very sensitive to
their schedules and as a result are very appreciative when management can run
Board meetings efficiently. Board discussions can often take on a life of their
own, and while it is important to allow the Board to have meaningful discussions
on important topics, it is also important to manage towards a timeline so that
your meetings do not run far beyond the allotted time. Assigning estimated
discussion times next to each agenda item can be a helpful tool to help guide
expectations regarding anticipated discussion times and to help ensure that you
are able to reach each topic on your agenda. If a new topic clearly deserves
attention or if the Board seems to want to spend much more time on an agenda
item than has been allocated, consider moving the topic to the next meeting or
arrange an interim call so it does not disrupt your ability to cover the intended
 material and so that you and your team will have a better opportunity to prepare
for the discussion. You should also assume directors have read the Board book
carefully (and if you spend time reading each of the slides, you may end up
training them that good preparation is unnecessary). Detailed information can
be placed in appendices to the Board book for review by Board members before
or after the meeting. Most Board meetings can be concluded in a two-hour
period if people are focused on being efficient.

5. Determine meeting attendees. Determine who gets invited to attend the

meeting from the management team. Remember, this may be a political issue.
Consider inviting management team members on a rotating basis to drill down
on select topics. Empower management team members to make presentations to
the Board on their functional areas (being mindful of “Manage time”). At the
beginning or end of each Board meeting, allot time for an “executive” session”
(i.e., Board members only, no other management team members), even if there is
no set agenda. This will condition your management team to expect there to be a
closed session every meeting, which mitigates anxiety about them. Also, consider
scheduling time at the end of each meeting where the non-employee directors can
meet without any management team members, including the CEO, present.
While this might make you nervous, it is good practice. Some venture capital
investors will expect this as a matter of custom. Ask your investors what they
prefer.

6. Take minutes. Minutes are intended to be “summaries” of the meetings. Most

venture capitalists and counsel would advise you that “less is more.” These
shouldn’t be play-by-play summaries, but rather a very high level summary of
discussions and actions, and attaching any appropriate resolutions adopted. Be
careful about putting confidential information in minutes, such as the names of
individuals you are trying to recruit, prospective investors, potential buyers or
targets—remember, this will be seen later in due diligence by others and you may
not want to discuss those details later. Have counsel prepare, or at least review,
the minutes. (Learn more about best practices for documenting board
meetings in What You Need to Know About Board Meetings and Record Keeping)

7. Never surprise your Board with bad news. Keep in mind that Board
meetings are not an alternative to regular communications with Board members,
and they are a lousy forum for surprises, so be sure to keep your directors
informed between meetings, particularly about important setbacks and what you
are doing to address them. If you are going to discuss difficult or controversial
topics, call each Board member individually before the meeting so you know what
to expect and can manage the discussion. The boardroom is not a good place for
drama.

8. Adopt compensation guidelines Have the Board adopt compensation

guidelines for salary, bonus and option grants that will provide parameters to
management in between Board meetings and speed approval of compensation
matters at meetings.
9. Elect independent directors. Try to identify and elect independent directors
with relevant experience. Spend time vetting and getting to know the
independent director candidates, especially if they are recommended by your
investors. Aside from the “checks and balances” these independent directors can
provide between founders and investors, having them may be essential for review
and approval of interested party transactions, and will become important
for Audit Committee and Compensation Committee membership. Set explicit
term limit expectations for independent directors—if the person is not a fit, she
will be easier to replace if there is no expectation of a perpetual seat.

10. Create committees. At the appropriate time, create a Compensation

Committee and an AuditCommittee, each comprised of all or mostly non-
employee directors if possible. This can help allocate key tasks to the directors
most capable with respect to those tasks. If, for example, two of the members
experienced in compensation matters have carefully reviewed proposed option
grants or bonus plan parameters, the remaining Board members will have more
confidence in the decision and should be able to approve them without a lengthy
discussion, which frees up meeting time to discuss other matters.

11. 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 during the final couple of months before the end of the current fiscal year.
Allocate more time for this Board meeting to review and discuss the proposed
budget/operating plan.

12. Create process for transactions. In the context of corporate transactions,

such as future financings and M&A, the Board needs to be very careful about
demonstrating a careful and deliberate process. Showing that the Board is
informed about the transaction and alternatives is critical. It may be advisable to
create a committee of the Board, comprised of independent directors, to review
and/or approve a transaction where there is a significant “interested” component
(such as when an existing investor proposes to lead a new investment round).

13. Protect attorney-client privilege. Be sensitive to protecting the company’s

attorney-client privilege. This is different than just protecting “confidential”
information. Never discuss sensitive legal matters, especially litigation strategy
or potential liability of Board members, with observers or other non-Board
members present or without counsel present. These matters should be reserved
for the Board-only session and company counsel should be included in the
discussion. This will help you protect those discussions from discovery by
opposing counsel in the event of litigation.

14. Use your Board. Don’t view the Board as your enemy. Most directors expect
to be an active participant in the company’s activities. They often have many
helpful contacts, and new or different viewpoints on issues that help create a
constructive debate. They are trying to push you to succeed; don’t be afraid to
 share bad news with them, and don’t be defensive about their comments and
suggestions.

15. Take action to avoid dysfunction. If you sense that your Board is becoming
dysfunctional, take action. Ask your directors for feedback. Discuss your concerns
with them. It may make sense to bring in new members or swap out existing
members to change the dynamic. The situation will not likely improve on its
own.

How To Communicate with your

Investors between Board Meetings

Running the “Agile” Board

Most early stage startups having monthly board meetings. I
normally recommend 8 meetings per year. It makes no sense to
meet in August or December due to travel schedules of most
investors. You can do calls if need be. And I often recommend that
board meetings be every 5 or 6 weeks rather than 4 to give enough
elapsed time for stuff to actually happen between meetings.
Quarterly is too few for an early stage business.

But that isn’t what this post is about. This post is about what
happens BETWEEN board meetings. And most companies don’t
do enough between board meetings. Doing nothing between board
meetings to me is like running the “waterfall software
development process.” We all know that modern software
companies run on the “agile” development process by having short
release cycles and frequent communications. Boards will thrive on
this, too.

For the record, this is not a secret, coded messages to companies

for which I am on the board! A prominent startup CEO in NYC
wrote me a private message telling me that this was an issue he
was struggling with. He has high-profile board members and was
wondering what do communicate to them between meetings. This
is written for him and for anybody else grappling with the same
question.

First, let’s look at the “normal” board meeting. I ran board

meetings as a startup CEO for more than 8 years. I didn’t love
most of them. I found that too often it was an update meeting for
investors rather than a meeting for my company to get value. I’ve
written before about how to turn this equation around and run
more effective board meetings. If you want to prevent board
meetings simply becoming investor update meetings? If so, you
need to do a better job of communicating between meetings so
that they always feel well informed.

For starters, don’t assume that everything I say here is what your
investors want between meetings. I suspect many of them do but
the best rule for any communications is to agree expectations.
Make sure to ask them what they want.

VC’s Want to Help!

To understand what most VC’s want between board meetings I

think it’s useful to start with a quote from Mark Solon’s blog for
which I’m in complete agreement (along with agreeing with his
entire post, which was brave, honest and accurate)
“The overwhelming majority of VCs I’ve worked with get up in
the morning and think about how they’re going to help their
portfolio companies that day.”

That’s it. Most VC’s want to help. Most don’t immediately know
how. They mostly understand your company, your customers,
your competitors and your market but never as precisely as you
do. So help your VC’s help you. Here’s how:

Intros

So taking Mark Solon’s comments into context, this is what most

VCs want to help with most of the time. VCs know lots of people.
They network with other VC’s, other startups CEOs, larger
industry players, journalists, potential executives looking for their
next jobs, service providers such as venture debt providers, etc.

And let’s be honest, other than money and coaching most VC’s add
little value to your company strategy. I’m not trying to demean
VC’s — I think it’s just reality. And deep down they know this. Yet
they WANT to help. So the best way they can do this is by
introducing you to people who can help you succeed.

But often they don’t know the right people and therefore you often
get a string of introductions of which some are awesome and some
are unfocused. The unfocused ones add obligations to you. They
don’t do this on purpose. The best way to get the Glengarry leads is
to tell them whom you want to meet. Here’s what I recommend:

 Create a Google spreadsheet listing your top customer

prospects, biz dev prospects and other companies you would
like to meet.
 Have a column for “want to meet now, in 3 months, in 6
months, etc.”. Listing the future “meets” will help them
understand your future roadmap / thinking but will help avoid
getting dropped into an exec meeting from which you’re not
ready

 Have a column for board members / investors to put their

names against whom they know. This will help because no
investor wants to be the one without their name against
anybody. VC’s compete amongst each other to show that they
aren’t the ones not adding value (a nice double negative, but
true! ;-))

 Have a space where you say, “please add other useful intros
you feel you could make” and encourage them to add more
names

 Make sure to politely remind investors to run intro’s by you

before sending them out. We want to help. We don’t want to be
unfocused. But most VC’s are “intro machines.” Help them to
be well behaved. Help them to follow your process. If you’re
polite and persistent they will — and they’ll appreciate it.

 Make sure to send a monthly email to all board members /

investors with a link to your spreadsheet saying, “I’ve made a
few updates. I’d be grateful if you would quickly check the
spreadsheet to see how you could help.” We will not check
proactively without a reminder. We’re busy. We want to help.
But we barely get through all our email let alone log into online
spreadsheets.

 Make the spreadsheet short and focused. The longer it is the

less likely we’ll read and help. Feel free to have color coding for
each member with companies for which you think they might
be able to help with intros.
 Finally, make sure you print out the spreadsheet and quickly
walk through it toward the end of your board meeting (it’s not
part of the strategic discussion — don’t lead with it). This is
partly to help you get the intro’s you need while you’re all in the
room. It’s party to remind board members that you walk
through it each board meeting and they’ll know if their name is
never on it. It will help you to get them to remember to update
it between meetings.

 Publicly thank any board member in your board meeting for

an intro that led to something spectacular. I hate to sound
dumb, but VC’s are just like any other people and human
behavior is predictable. They work hard to help you succeed.
And the reality is that they’ll never say they want recognition
but it’s nice to be recognized when you went out of your way
and it paid off for somebody. That small recognition will help
you get a bit more out of your VC’s relative to other boards they
sit on. I know any VC reading this will be wincing and thinking
it isn’t true. It is. We’re all just grown up big kids who operate
the same way we did when we were young. Recognition is
Pavlovian.

Talking about you appropriately in the right settings

The other thing that VC’s need between board meetings is a

reminder of all of the key particulars on your company. They
mostly get what you do and whom you compete with but they can’t
keep up with the constant changes. Make sure you have a simple
elevator paragraph of what you do. It’s not a mission statement.
It’s a 3 paragraph statement of what you do. It’s the kind of thing
you’d give to your PR company if you could afford one.

Having these paragraphs in the hands of your investors will help

ensure that they position you correctly when they talk to all the
important people they see. If you’ve ever heard a VC introduce you
to somebody and describe what you do, you’ll know why you need
this.

I also think it’s a good idea to have a competitor matrix that shows
your key competitors and how you feel you stack against them +/-.
Unlike the intro Google spreadsheet for introductions, this isn’t
something they’ll edit so don’t make them log in to get it. I would
send this out quarterly. Have a column against each competitor for
“recent news” where you have a one paragraph update on your
competitors movements.

 Knowing who the competitors are will help the VC with

positioning you. It will help in your board meetings because
you shouldn’t spend tons of time talking about this in the board
meeting. You can talk about “what to do about competitor
moves” rather than reminding them who your competitors are.

 Don’t send with board pack. Sending with all the other board
materials will ensure that it is read in 30 seconds and not
properly digested.

Positioning your progress correctly with their partners

The other big thing investors want to do is know how to talk about
you with their partners. Most partnerships are exactly that — 
partnerships. We need to be sure we’re not surprising our partners
with negative news and want to share the positive stuff also. Make
sure your investors are crystal clear about the things that their
partners are going to ask them.

 Partners will ask about “recent high profile news” that might
affect the company. If Apple announces their OS4 and it affects
data gathered from the iPhone and you’re using that data — 
assume their partners will ask how it affect you. Or if you’re a
mobile ad network and they announce iAd — same thing.
 Whenever a big announcement affects you I recommend you
send your board / investors a quick email saying, “here’s the
iAd announcement and how we currently think it affects us.”
Be honest about what you know / don’t know. They will be
asked by their partners. They will appreciate your proactively
telling them. They will likely forward your email to their
partners. Make sure when you write it you assume this.
Obviously you’ll write “please keep this confidential” but don’t
assume it won’t accidentally leak just a little bit. Be prudent.

 Make sure all board members / investors are clear when you
think you’ll run out of cash. This is the single biggest thing they
shouldn’t be surprised about. Even it it’s 15 months away they
need to know when you think you run out and when you think
you’ll need to be fund raising. Constantly remind them of these
dates. They need to plan and they won’t want to surprise their
partners.

Showing up at board meetings ready to contribute

If you want your board members to show up at the board meeting

ready to contribute then you need to send out board materials 72
hours in advance. Your board will say 1 day is fine and 2 days are
plenty. They’re not. People get busy. Most of them will read your
board pack 30 minutes before the board meeting. So they have no
time to think about it, read your numbers closely, have a quick
phone call or two with you about things and generally prepare.

If you can get it done the day before why can’t you get it done 3
days before? Send it early and make sure to continually remind
people politely that you expect it to be read entirely before the
meeting. If you want to be super prepped — call each board
member for a 10 minute chat 1 day before the board meeting to
chat about anything they saw in the board pack.
I know it sounds like overkill. But if you’re not regularly talking
with your board members anyways that’s probably a problem. And
having this pre board meeting really quick chat will make the
board meeting more effective.

Update Notes — Your Board “Sprint” Process

I think the best way to keep your board members generally

updated is to have a 1-page, bullet point set of notes that you
distribute via email every 2 weeks. It should be inline in the email
rather than a document attachment. It should be MUCH shorter
than this post so your board will actually read it rather than skim
it.

 I recommend bullet points because it breaks up long text and

makes it visually easier to read

 I would break up your section into three categories: major

achievements in the past 2 weeks, plans for next 2 weeks,
things we could use help with

 Make it clear to board members that it isn’t an obligation that

they consume every one of these but that you want to produce
so people will feel a lightweight sense of what your company
has been up to

 I know it will seem like overkill. If you keep it high-level

enough it’s not. It will help you better with planning, it will
force you to make some commitments and it will help your
board feel informed.

 Think of it this way: if having your development team work

this way through sprints, why not board notes? Meeting
every 6–8 weeks with no interim communication is
like the waterfall software development process!
And Finally — work the phones!

A lot of CEO’s ask me for standing “update” phone calls. Most

CEO’s know that I hate the formality of these. If a board member
is on 6 boards imagine how much admin it gives him/ her to have
weekly update calls. But I DO love to speak to the CEO’s all the
time. Often, but impromptu. Get in the habit of calling board
members frequents for quick updates or to ask for quick advice.

Resist the temptation to talk for a long time. If you get in the habit
of calling and getting off within 10 minutes then your call will
always be welcome. Not everybody works this way. And some
people are fine with standing meetings and following a process.
Me, not so much. So make sure to ask your board members what
they want. I suspect many would say, “we don’t need to speak on
the phone all the time.” But trust me, it’s like vitamins — it’s good
for them. And you. So make it happen.

That way board meetings will be there to talk about what REALLY
matters since you’ve gotten all of the routine kibitzing out of the
way

The Agile Board

I recently wrote an article on how to respond to board members
between meetings. I basically took some time on a weekend and
just hacked out what was on my mind. Two people whom I respect
(Babak Nivi and Brad Feld) added commentary that made me
want to come back and clarify my thoughts. If I were to re-write
the original post I would have taken out the section on “how to get
better intro’s from VC’s” and made it it’s own post. It’s a long
section and related to but not the main point I had hoped to make.
Since it was a brain dump it wasn’t very MECE (mutually
exclusive, completely exhaustive).

Once I was done writing my post and had re-read it I started

thinking more abstractly about decision making. A long time ago
was a developer and we did everything as per the waterfall
method. It was best practice then. Over time at my first startup our
developers encouraged us to move to Agile development. We
shortened our release schedules, set nearer term targets, held
people accountable more through frequent communications and
we listened more to customer input. It seems to me this is the
main problem with boards.

So when I read my post it sounded to me more like a new

philosophy for “The Agile Board,” so I put that as my subtitle. Yet I
didn’t go far enough.

Nivi (from VentureHacks) said it best:

“Agile is about short feedback loops. This post is really about
getting information to the board faster.
Information is part of the feedback loop. What’s missing is
changing the board-level plan based on the new info that board
members are getting more quickly. An agile board would change
it board-level plan more quickly than a board that only adjusts
the plan at regular board meetings.”

It’s true. In the post I focused a lot on communications between

meetings rather than decision-making. I’m no fan of big, long
board meetings with too many members and held too
infrequently. Too much of the meeting is spent updating the board
members on the basics of the business. Since they haven’t focused
on things in 6–8 weeks they need some orientation.

So if we’re really going to be “agile” we need action between board

meetings and we should come together in person to reconfirm
what everybody already kind of knows we’ve already agreed. Brad
Feld started with a bias for action in his post, “Give Your VC’s
Assignments.”
“Give your venture capitalists (and board members) assignments
Mark [Suster] alludes to this in many of his suggestions but he
never comes out and says it. And, amazingly to me, many
entrepreneurs either don’t ever think of this or don’t feel
comfortable doing it. They should.”

He goes on to state that these assignments should be specific and

should play to each board member’s strengths. Generic requests
are useless. I agree with Brad. If you’re interested in this topic you
should read Brad’s post.

And I was talking recently with a no-nonsense and experienced

CEO from New York City this week about how he interacts with
the board. He said
“I view my board members as part of my extended management
team. I update them weekly, do frequent calls and ask for help on
a regular basis.”

I liked that. THAT is the “Agile Board” I was after. That’s what I’ve
had at several of my companies in the past three years. Especially
Ad.ly. I love that Sean Rad calls me all the time to ask for quick
advice or update me. If he’s reading this I’m sure he’s laughing but
it’s not uncommon for him to ring my mobile phone at 9pm for
something “urgent.” (everything’s urgent with Sean but he’s so
infectious you gotta love it ;-) ) Or he will ask whether he can
swing by early for coffee. That’s the advantage of local investors on
early-stage deals.

I always feel in sync with Sean. At any time I feel like I know what
the team’s issues are, what’s going on with biz dev, product and
customers. And Brian Norgard (a fellow board member) calls me
often, too. And then we both call Evan Rifkin, who has already
heard from Sean and is in the loop. Board meetings feel like an
extension of our ongoing discussions. It’s a chance to formally
present the plans and to get us all in the same room. But decisions
are mostly incremental.

I feel like we’ve nailed the Agile Board at Ad.ly and are close at
some of the other places I’ve invested as well.

You should think like the experienced CEO from NYC I quoted
above. He was a hard-nosed, no BS, serial entrepreneur who said,
“I can always get money. Where else can I get very connected
and powerful people to do work for me?”

Are you asking for enough help from your board members?
W H AT YOU N E E D TO K N OW AB O UT
BOARD MEETINGS AND RECORD
KEEPING

Although the executive officers (such as the Chief Executive Officer and Chief Financial
Officer) generally handle the day-to-day operations of the business, the board of
directors is ultimately responsible for the management and oversight of a corporation.
The board of directors should meet on a regular basis in order to discuss the business
and ensure that the directors are satisfying their fiduciary duty of due care. Most
venture-backed companies hold regular board meetings approximately six to eight times
per year, with additional special meetings scheduled as needed (such as to approve a
transaction or discuss a specific matter that requires the input of the board).
Notice and Quorum
It is important to follow the applicable notice procedures when calling a board meeting,
which are generally set forth in the company’s bylaws. However, notice is waived by
attendance at a meeting (unless a director is attending to object to the calling of the
meeting), which companies frequently rely on to hold special meetings at short notice.
You must also ensure that a quorum is present at a board meeting in order to transact
business, which for a Delaware corporation generally means a majority of the total
number of directors are present at the meeting (unless the certificate of incorporation or
bylaws provide otherwise). While most regular board meetings are held in person,
directors frequently participate by telephone or web conference and can still be included
in the determination of a quorum.

Agenda
There is no required agenda or format for a board meeting. However, regular board
meetings for venture-backed companies generally cover the following items:

 corporate “housekeeping,” such as the approval of the minutes of the last board meeting
and the grant of stock options;

 a business overview provided by the CEO in order to update the board regarding recent
developments, achievements, challenges and/or opportunities;

 a review of the recent financial results and cash position;

 a more detailed update regarding specific aspects of the business (such as business
development, sales, marketing and product development) provided by the executive
officers primarily responsible for such aspects; and

 an “executive session” in which the management team is not present, which many
venture capitalists and independent directors consider good practice to conduct at each
meeting (even if there are no specific concerns regarding management) to avoid sending
a negative signal if a separate discussion is desired.

Before each meeting, the management team should distribute the agenda, financial
reports and other documents for discussion so that the directors have sufficient time to
carefully review the materials before the meeting.
Minutes
A company should keep written minutes of each board meeting, which are customarily
drafted by counsel. While there is no required format, board minutes typically track the
agenda of the meeting and should include:

 the date, time and place of the meeting;

 the people in attendance;

 a statement that a quorum of directors was present;

 the general topics discussed by the board; and

 the actions taken and matters approved by the board.

It is important to keep in mind that the most likely audiences for the minutes are
potential investors and acquirers during the course of due diligence and/or litigants. As
such, the minutes should accurately memorialize the topics discussed by the board at a
high-level but should not include sensitive information that may not be appropriate or
desirable to disclose to third parties.

Required Board Approvals

As a general rule, the board of directors should approve any material action or
transaction that is outside the ordinary course of business.

Examples of matters that require board approval are:

 election of corporate officers;

 amendments to governing documents;

 issuances of equity securities, including all option grants;

 sales or other dispositions of material assets;

 corporate borrowing and lending; and

 a sale of the company or any other transaction resulting in a change of control.

Learn more about board approvals in our article What Decisions Need Approval From
Your Board of Directors?
Good recordkeeping will save you time and money
Good recordkeeping practices help to reduce the risk of potential liability due to failure
to observe corporate formalities. In addition, good recordkeeping practices facilitate a
smooth due diligence process with potential investors or acquirers. Good corporate
records inspire confidence; sloppy corporate records undermine it. Some of the records
that you will want to make sure you prepare on a timely basis and retain in the
company’s files include, among others:

 minutes of each meeting of the board of directors, each committee of the board of
directors, and stockholders;

 actions by written consent taken by the board (which must be unanimous in Delaware
and California) and by stockholders in lieu of a meeting;

 an up-to-date stock ledger, option ledger and capitalization table;

 income, sales, employment and other tax returns;

 payroll records;

 permits and governmental filings; and

 all agreements to which the company is a party, including leases, loan

agreements, intellectual propertylicenses, commercial agreements, employment
agreements, employee proprietary information agreements, stock purchase agreements,
option agreements, etc.

Many venture-backed companies now maintain company records in an electronic

dataroom. In addition to providing both management and counsel with easy access to
the documents, a dataroom is also an efficient tool to use for due diligence purposes.

HOW TO HANDLE CHANGES ON

YOUR BOARD OF DIRECTORS
Departing Directors
Board members tend to stay with companies for a relatively long time, but, like
employees, sometimes it makes sense for a board member to leave. Here is what I try
to do when a board member departs:

Clear resignation

Get a written resignation that makes clear the date of resignation and also includes a
resignation from any other roles with the company (officer, committee member, trustee
of any benefit plan, etc.)

Indemnity Agreement

Make sure you have a signed copy of the director’s indemnity agreement. This is the
agreement in which the company promises to indemnify and defend the director if he or
she is pulled into a legal claim related to any decision the director made in the course of
providing services as a director.

Vesting of Equity

Figure out any vesting applicable to the person—if the vesting is not crystal clear, it
would be appropriate as part of the resignation letter to clarify that all vesting will cease
as of that date with respect to all outstanding vesting equity. Check if there is
any acceleration of vesting that might apply to the director, or if the board wants to
accelerate any of the vesting. It is a good idea to be very clear with the person about the
number of vested shares as of immediately following termination.

Exercise of Options

Check if the director has any kind of special post-termination vesting arrangement, and
make sure he or she is aware of the need to exercise within the applicable window. If the
board wants to give the director more time to exercise than the typical 90 day window,
they need to act quickly to do that before the period would otherwise expire.

Incoming Directors
For an incoming director, here are some things that you should consider as part of your
on-boarding process:
Appointment or Election

Be sure to carefully document exactly how the director joined the board. Make sure the
board has enough authorized seats, which may require amending a voting agreement or
getting a specific preferred stockholder consent if the voting agreement or the
company’s certificate of incorporation includes any limitations on the size of the board.
Then be sure to understand whether the board has the power to appoint the new
director to fill any existing vacancy. Sometimes, the only way to get a new director on
will be to have stockholders elect the person directly. In any event, it is a good idea to
have the stockholders periodically re-elect the director slate.

Background Check?

Especially if you have dreams of being a public company someday, it may be a good idea
to ask the incoming director to provide the type of information you will need to disclose
about your directors if you ever become a public company. Your lawyer can probably get
you a sample questionnaire that fits the bill. If that disclosure could be uncomfortable or
embarrassing to your company, it is better to find that out earlier rather than later. If
you have concerns based on the information you receive, or if you have any reason to
believe you are not getting complete information, you may want to consider conducting
a background check as well.

Equity Grant

Make sure you know what the equity grant is going to be. Understand if there is going to
be any sort of acceleration on a change of control (not unusual for an outside director to
get full acceleration on a single trigger), as well as whether the person is going to be able
to “early exercise” or get an extended post-termination exercise period.

Indemnity Agreement

Have the director sign the company’s standard form of indemnity agreement. If you do
not have a standard form, get one, and make sure all of the directors sign it. It is also a
good idea to make sure the form indemnity agreement is approved by the company’s
stockholders.
Confidentiality

Directors have fiduciary duties that require them to keep company information
confidential. Some companies sign them up to advisor-type agreements, but if they are
just performing the typical tasks of a director and not also occasionally showing up to
work side-by-side with the business or technical teams, you can feel comfortable
skipping invention assignment documents for them.

Getting Up To Speed

I find that a lot of companies want to make sure that the directors get an education
about the company’s products and culture, and figure out ways to make sure that the
director gets a deep understanding of the business, either through experiencing the
products, participating in sales calls, visiting the offices or some other means. None of
that is legal, of course, but worth considering to make sure that the director has an
accurate understanding of the business.

Fiduciary Duties

Most directors have a pretty good understanding of their legal responsibilities. We

occasionally give them short memos on fiduciary obligations, and there are hundreds of
such memos easily available from a variety of sources, but that can come across as
pedantic and not particularly helpful, since the responsibilities are easy to describe but
occasionally more difficult to apply to specific circumstances in the heat of a tough
decision.

Being very clear about exactly who is on your board and when and how each person
joined or left your board is important, and mistakes in this regard can call into question
other actions and decisions of the board, so we encourage you to work with your counsel
to make sure that these transitions are handled the right way.

Why I Don’t Like Board Observers

This is part of my ongoing series Startup Advice. I wrote recently
about the role of Advisory Boards in startups, which I expected to
be a bit controversial. People love their advisers and I don’t blame
them. It’s just that many companies waste equity on advisory
boards, pick the wrong advisers or set up advisory boards with the
wrong expectations.

Since I already attacked one sacred cow, let me come right back
with my second: Board Observers. Before I get all the comments
about how valuable your Board Observer was I’ll state this — 
sometimes they’re helpful or benign. But they can be a problem. If
they’re so great, why are they not just Board Members? And what I
mostly want to do is make entrepreneurs aware that they have
nearly as much power as a real board member so you may have
more people making decisions at board meeting than you thought
you would. If you agree to have a board observer at least know
what you’re signing up for.

What exactly is a board observer? Just to baseline for newer

entrepreneurs — there are three types of people you may see
involved with a startup that have the title “board” attached to
them. The first is a “board member.” This is a person who had
legal, corporate governance rights to vote on initiatives that
require board approval. This is the real board position that
entrepreneurs should concern themselves with.

The second is an “advisory board,” which is basically a fancy way

of saying somebody who the CEO believes can help the company
through his/her knowledge or connections. I don’t know why this
person has “board” in their title because they very rarely have
anything at all to do with the board. I covered Advisory Boards in
the post which is linked to in the opening paragraph.
The third is a “board observer” who has the right to attend board
meetings but does not actually have a legal vote on any board
matters.

Why does somebody become a board observer? There are

a few reasons you find board observers. The first scenario is where
an investor puts in money but not enough for them to justify
taking a board seat. They may request a board observer seat “just
in case” they want to attend board meetings

and know what’s going on. Sometimes people use this right, other
times they have board observer rights but never attend board
meetings. Most entrepreneurs feel sheepish about telling
somebody that just gave them $500,000 that they can’t “observe”
the board. Don’t get sucked in to this logic. That’s what
“information rights” are for and you can promise the investor to
meet 1-on-1 on a quarterly basis.

The second scenario is where there are too many investors (egos?)
in a company. The larger or leading investors will sometimes offer
the other investors an observer right as a way to appease them and
solve the political problem of deciding who should be on the
board. As an entrepreneur you don’t want 5 investors on your
board because then board decisions will be more representative of
investor concerns than management concerns. As I’ll explain
below, for the most part observers = board members.

The third scenario I’ve seen is with “strategic” investors. Strategic

is often a euphemism for investors that are from the industry you
serve rather than from a purely financial investor. I’ll cover
strategic investors in another post but there are many reasons to
be cautious about the oxymoronic strategic investor. Done in the
right way they’re invaluable. Done in the wrong way and it will
torpedo your company. I’ll cover strategic investors in a different
post.

The final reason you might find board observers is where you have
an investor on your board in an early round of investment and the
later stage investors want to take the board seats. Sometimes a
compromise is made where the old investor is given, you guessed
it, observer rights.

What on Earth could be wrong with giving board

observer rights, they sound so harmless? To understand
why I’m so opposed to board observers you need to understand
the dynamics of startup boards. Most startup board meetings
consist of running through the companies past 30–60 day’s
progress (financial & operational) and then talking about the
strategic issues that company faces. These can be competitive
threats, customer adoption problems, pricing strategies, senior
hires, whatever.

But realize that almost nothing of substance EVER comes up for a

vote. Instead startup boards, rightly or wrongly, seek consensus.
They tend to drive toward unanimity or at least toward the opinion
of the loudest, most vocal, most articulate or most persuasive
board member. Sometimes smaller board members or
independent board members defer to the largest shareholder. I
even had a lawyer recently tell me, “I want to try and see every
vote on this board be unanimous because dissent on boards can be
used in the future in lawsuits or can be used by an acquirer to
raised concerns in an M&A process.” Just so you know.

So here is the rub. Let’s say you have 2 investors, 2 management

and 1 independent on your board and you agreed to have one
board observer — an investor who put in $500k into a $3 million
round. Because nothing ever comes up for a vote the board
observer has nearly as much influence as actual voting members of
the board. If they’re louder or more persuasive then they can have
even more influence. I’ve seen it. Heck, I’ve DONE it.

So is it really true that nothing comes up for a vote in a

startup? Mostly yes. It’s true that you do actually take votes on
things like whether to raise more money, whether to sell the
business, whether to raise debt, etc. And it’s true that very
occasionally there will be a split vote because a smaller investor
might disagree with a larger investor on the need to raise a $10
million round of capital. But these types of decisions tend to be
few and far between and even then the observer has undue
influence in the discussion. But your board will spend way more
times talking about garden-variety strategic issues, followed by
compromises and consensus building amongst board members
and observers alike.

There is one scenario where I feel board observers are OK. VC

partners will often ask to have an associate attend board meetings
along with them. I don’t see any problem with this for
entrepreneurs. I’ve never seen a junior VC person speak out and
try to drive the conversation with the partner also in attendance.
They’re there to become more knowledgeable about your business
since they may end up doing analysis down the road and also to
get a bit of experience.

What to do if you need to have a board observer? It’s clear

there are times where yielding to a board observer ends up to be
the most expedient solution and the person observing is a person
management or investors already know. I have myself accepted
observers in this scenario.

In these cases I recommend that you make the position time

bound, as in the person can be a board observer for 12 months or
18 months at which point the observer rights automatically cease.
That saves you from the awkward conversation down the line
when you want a smaller board. And if the person is truly adding
value then you can always extend it later.

I know other people seem to have less angst on this topic than I
do. Mine comes from the experience of watching discussions get
totally skewed or torpedoed by observers. Obviously this also
happens from board members but at least they should be entitled
to skew the debate.

Rethinking Board Observers  —   T he Role

of the “Silent Observer”
It has always surprised me that founders were so quick to fight
over how many board members there were and so quick to agree
to have as many board observers as people wanted.

I have always been vehemently against board observers and wrote

some of the reasons in this previous post. But over the past couple
of years I’ve slightly modified my views, which I’d like to explain:

The Case Against Board Observers

Unless your company is really struggling or there is something
very controversial going on at the company (i.e. removing the
CEO, selling the company without consensus) then NOTHING
ever comes up for a formal vote. Almost all decisions at private,
startup, VC-backed tech companies is consensus driven.

The reality of a board meeting is that the most influential and

most persuasive voices normally shape the decisions. But the
time spent on discussing issues can be really lengthy and get way
off target when you have board members who aren’t disciplined or
structured.

Even though you might not be voting on anything in a given board

meeting you might end up burning 45 minutes of a 3 hour meeting
responding to comments that are on inconsequential topics from
the “over talker.” And the people driving your meeting off course
are as likely to be your board observer as it is to be your legal
board member.

So if you have 5 board members and 3 board observers you really

have an 8-person board in every way other than formal votes. In
my entire career on boards I have only seen hardcore split
decisions in voting a handful of times in the years I’ve been doing
this. And never has a split vote been in a harmonious situation.

The Case for a Silent Observer

I’ve softened my stance about board observers a little bit in the
past couple of years.

I’ve come to realize that it can be very helpful when VCs bring
associates to meetings. The associate can be very productive with
the company after the meeting and likely has more capacity to
help with followup than the typical busy partner.

So my new rule is, “bring your observer, by all means, as long as

he/she stays silent.” And by silent I mean it literally. If the person
is there to understand the context and help with follow up then
they should be able to get full value from the meeting just by being
there. I don’t really need to the conversation skewed by extra
participants.
And if management values the opinions of the associates (and
often they should!) they can get full value out of calls after board
meetings and all of the followup associate with it.

Some Exceptions
I should note that I have had two exceptions to my thinking:

 There are some increasing number of early-stage, smaller

funds that prefer observer roles over board roles where they act
like “normal” board members but they have slightly less
administrative responsibilities than a full-fledged board
member. I’ve been totally fine with this provided that it is
understood by the board they they are observers in name only.
They function like every other board member other than
procedurally

 There are some small investment firms where every 4th or

5th meeting a second partner attends the meeting. These are
often people I’ve known for years, where I value their input and
trust them to respect the fact that they have an extra seat at the
table on that given day. I often welcome participants like these.
But it is often not a formal right to an observer role and instead
is handled on an ah-hoc basis.

 There are times where you want two partners from a fund to
be involved and you give one an observer role. Just know that
two partners talking = 2x the board influence.

 Some “strategic investors” have rules that they can’t sit on

board seats. Board observer roles are a graceful way around
this. But remember that they’ll have just as much influence as a
legal board member.
The summary lesson for entrepreneurs is — know what you are
signing up for in observers when you grant them legal rights to
attend board meetings.

If they have full legal rights to an observer role and no restrictions

(i.e. must be silent) then accept them under the premise that you
are actually taking on a full-fledged board member other than
legal voting, which is unlikely to happen except in extreme
circumstance.

And if you don’t want that but don’t want to bar them entirely,
consider making the observer seat restricted to being a silent
observer. You’ll thank me for it one day.

Should Your Startup Have an

Advisory Board?

This is part of my ongoing series Startup Advice. Many startup

companies hire advisory boards. It’s very tempting. It’s mostly
done by first-time entrepreneurs who want to persuade (bribe?)
prominent industry luminaries to be closely associated with the
company. It’s done partly in hopes of gaining their wisdom but it’s
also done to portray the company in a positive light through
association.

So do advisory boards really add value? And if you decide to have

one how do you best implement it?

In my experience most advisory boards under deliver relative to

expectations. The CEO picks prominent people who are busy in
their own right with their own companies. They are usually offered
around 0.25% of the companies equity in exchange for their role
and I’ve seen many companies hand out a total of 2% to advisers.

If you plan to set one up — no problem. But know what your
expectations are and make them realistic. My main advice to you if
you’re considering it is don’t waste much equity on it.

Advisory Board Problems: There are several problems that I

have encountered myself and in my many discussions with CEO’s
who have set up advisory boards.

1. Not enough time. Most of the people you want to ask are
busy. When they’re first approached it sounds exciting to be
involved with a startup and if they’re offered free shares — why
not? If you are Mint.com (e.g. come out of the gate strong and
never let up) then you might get some attention. If it takes you a
while to get going don’t be surprised if you don’t get the attention
you want despite their best intentions. Frankly, they don’t have
enough skin in the game to warrant the time & energy.

2. Not enough wisdom. When you do get time the advisers are
often too removed from the details of the company to help. Let’s
face it, to help a company you really need to understand the
details. But if you have approached a senior member of your
industry and if they’re on 4 advisory boards, have done 3 angel
investments and probably have a full time gig themselves — it is
hard to really get into the details of your company. At a minimum
their angel investments will likely take precedence.

3. Too much effort. You’ve gotten 5 people to sign up as

advisers. You’ve given out 1.5% in total and you’re determined to
get value out of the group. So you set up advisory meetings. They
are difficult to schedule because your advisers are busy people.
Too bad you’re a startup and don’t have an assistant to deal with
all of the administration / coordination of scheduling. The week
before your meeting 2 people need to cancel due to travel conflicts.

You prepare materials for them the remaining advisers to read

through. Your advisers read it — an hour before your meeting — if
you’re lucky. Even then they only skimmed it to not be
embarrassed. They’re smart people so you have an interesting
discussion on the day. Too bad it was a bit superficial, though. Ok,
next advisory board meeting in 60–90 days. Time to start thinking
about how to make it more productive. The day comes with similar
results. You had thought this time would have been different. 3rd
meeting … um … maybe we’ll postpone it a few months.

4. Expensive. So after realizing that you’re not getting the

strategic insight you had hoped for you fall back to asking for
introductions. After all, most people are good for a few
introductory emails. But I would argue that you can develop
relationships with many advisers, mentors and VCs that will help
with introductions for no equity. People like to help. So in the end
advisory boards are an expensive equity proposition for merely
introductions.

My view on how to best implement advisory boards:

If you do decide to set up an advisory board, here are my tips for

how to do it the right way.

1. Ask for small investments — Get some skin in the game. I

know it sounds crazy that you’re approaching industry luminaries
that you would die to work with and you’re asking them for, gulp,
money! But if you approach them with a very fair valuation and
ask for a small check (say $10k, which should be nothing to
someone in this position) I believe you’ll have a reasonable shot at
it provided that you actually have an interesting company.
At a $2 million valuation this is 0.5% of the company — about
right. You can go as high as 1% because they’re going to get diluted
when you bring in VC. If your valuation is already too high then
seek approval to let them invest at a price lower than the current
value. Even getting $10,000 out of someone who’s already a
millionaire and super successful gets you emotional buy in and
therefore you’re more likely to get value.

2. Run semi-annual advisory dinners — Don’t try to solve the

world’s problems with your advisers. One of the things that should
attract advisers to your company is the thought that they’ll get to
spend time with other luminaries that they respect. So one of your
sales pitches to them to join is the other people you have on board
(or are approaching). Promise them that you aren’t going to ask
for tons of time and the main participation is just 2 dinners / year.
Use these occasions to get them bought into your strategy and
strengthen your relationship so that when you do need help you’re
more likely to get it. Using this approach you may be able to get a
few key advisers with no equity at all. Under this scenario I’m all
for advisers. Have 8 of them!

3. Don’t overplay in your VC pitches — Final bit of advice — 

don’t overplay the advisers in your VC pitch. You’d be surprised
how many CEO’s go into painstaking detail on the background of
the advisers when they pitch the company to VCs. We all know
advisers are mostly bullshit so it’s painful to hear you pretend like
they’re really a big deal to the company. It’s OK to have the advisor
slide where you glance quickly over the names. Just don’t lay it on
thick.
 ADVICE ON ADVISOR
OPTION GRANTS
We often are asked by clients about common terms for stock or option grants for
advisors. Advisors are typically business or technical people that lend their time and
expertise to a company in exchange for equity. Here are some things to consider:

1. Vesting. Vesting for advisor grants is typically monthly without any cliff. I advise
clients to determine a certain number of monthly basis points that you think someone is
worth, then grant them 12-24 months worth of options at this rate that would vest
monthly over that same period. A 24 month option would normally cover between .15%
and .75% of the Company’s fully diluted stock, depending on (1) how active the advisor
will be, (2) how critical the advisor is to the success of the Company and (3) how mature
the Company is. Make sure to consider whether the grant is made based on fully diluted
stock or only the stock that is then issued and outstanding (see my other Cooley GO
post Option Grants: Fully Diluted or Issued and Outstanding).

It is technically OK to vest someone over a longer period (36 or 48 months, for

example), so long as you keep the same monthly rate and make a larger up-front grant.
However, I don’t typically advise this for a couple reasons. First, most advisors seem to
have a shelf life of less than 2 years. I think this is because advisors tend to be helpful for
advising a company that is at a certain stage (either from a business or technical
standpoint) and once the company moves past this stage, the company tends to rely less
on the advisor. If the advisor continues to vest after they’re providing good value, you’d
need to terminate them in order to stop vesting, something that people don’t like to do
with friends and mentors. Also, some advisors do request acceleration in the event the
company is acquired. It would be reasonable to agree to this, particularly if you believe
the advisor will be a valuable addition to the Company. It would be better to have 24
months worth of options accelerate instead of 36 or 48 months.

2. Exercise Period. Many advisors don’t realize that most startup option plans require
that vested options be exercised within 3 months of termination of the advisor
agreement or else they expire. This is a requirement of Incentive Stock Options (ISOs)
and not of Non-qualified stock options (NSOs), but most plans apply the 3-month
exercise requirement to both types of options. (I won’t get into the difference between
ISOs and NSOs here.) Advisors will receive NSOs (because they are not employees) and
therefore can negotiate to have the 3-month exercise period extended for some longer
period. This is very helpful to the advisor who might not want to (or have the ability to)
come up with the exercise price to exercise the option, and is faced with losing his or her
vested shares. In addition, there is potentially a tax bill due at the time of exercise for
an NSO, which can be another unwelcome surprise for the advisor. So giving the advisor
the ability to delay this day of reckoning until there is a liquidity event on the horizon is
a great benefit, albeit not one that many companies are willing to offer.

“But wait,” you might ask, “isn’t it better for the other shareholders if an advisor’s grants
terminate? That leaves more equity for me and everyone else.” This is true — and
certainly a valid position that many companies take. However, in my experience the
advisor relationship is typically beneficial (or at least neutral) for the company and the
company usually wants to play nice with the advisor. If the advisor relationship was
beneficial but the advisor is terminated because they are no longer very involved, the
exercise period becomes a ticking time bomb that companies want to address, usually in
a mad scramble. And often the advisor and the company simply gloss over the exercise
period, the options expire and you have a disappointed (or worse – angry) friend and
mentor.

To help avoid this potential relationship snafu, after the advisor agreement terminates
the company might consider sending the advisor a note that includes the effective
termination date of the agreement and a brief explanation that the advisor has 3 months
from that date to exercise his or her options. While there is no obligation to do this
under many option plans, some companies do this as a matter of good corporate
housekeeping. This also creates a record that will help in the event that the advisor and
company disagree on the effective date that the relationship terminated (if, for example,
the advisor is still listed on the company’s website or AngelList profile as an active
advisor). This also may be required by the termination provisions of the advisor
agreement that the company is using, so be sure to review that or discuss with counsel.

3. Consistency. It is inevitable that one advisor will find out what you paid another
advisor. Try to be consistent and fair with all of your advisors that are brought on at
similar stages so one doesn’t become disillusioned. This is not a rule of course, just one
consideration.
 ADDRESSING ADVISORS’
CONCERNS ABOUT ASSIGNING
THEIR INTELLECTUAL PROPERTY

Many startup companies rely in their early stages on advisors to assist with strategy,
fundraising, introductions, technology and other areas. Generally, advisors in startup
companies receive their compensation in the form of equity (stock options) rather than
cash. Where an advisor is providing real services for compensation, companies should
memorialize their relationship with the advisor in the form of a written agreement.

The agreement between a company and its advisor generally includes an assignment by
the advisor of all intellectual property rights in any inventions or works that the advisor
conceives of, creates or develops in the course of providing services under the advisor
agreement or that are based on the company’s confidential information (the
“Inventions”). A prospective advisor may be skittish about signing such an
agreement. She may be concerned that this obligation might be inconsistent with her
obligations to her employer, her university or to one or more of the other startups that
she advises.

Suggestions and feedback can lead to “joint inventor” or “co-inventor” status

Although the prospective advisor’s concerns are reasonable, the company also has
legitimate reasons for including an assignment of ownership provision in its advisor
agreements. The company wants to ensure that it has an unrestricted right to use any
products that are derived in any way from the services provided by the advisor. Those
services might include obvious contributions to intellectual property like code or
software architecture, but they might also include less obvious contributions in the form
of suggestions or feedback regarding the company’s business, technologies and
products. This can be of particular importance if any of the advisor’s suggestions or
other contributions may later be determined to have made her a co-inventor of an
invention for which the company seeks a patent. Without an assignment of ownership
or other agreement addressing the issue, if she is deemed to be a co-inventor
or joint inventor of a patented invention, she may be entitled to block use of the
invention or derive income from its licensing. Not an ideal situation for the company.
Three ways to address Advisor concerns

If a potential advisor has concerns about signing up to a more standard inventions

assignment provision that we typically would include in our form advisor agreements,
below are a few ways to address the advisor’s concerns. However, it’s important to note
that these should not be viewed as common approaches, and in most cases the company
should own all key intellectual property outright.

1. The company may retain ownership of the Inventions, but grant the
advisor a perpetual, irrevocable, nonexclusive, worldwide and fully paid
license to use the Inventions she creates. This approach ensures that the
company has the unrestricted right to use the Inventions and owns any patentable
Inventions, but grants the advisor a license to use the Inventions (excluding any
company confidential information included in such Inventions). The company can
protect itself from the advisor’s (or its sublicensees’) use of the Inventions in competitive
products by excluding such products from the license granted to the advisor.

2. The advisor may retain ownership of the Inventions (excluding any

company confidential information included in such Inventions), but grant
the company a perpetual, irrevocable, nonexclusive, worldwide and fully
paid license to use the Inventions. This approach still ensures that the company
has the unrestricted right to use the Inventions. The company can protect itself from the
advisor’s use of the Invention in competitive products by negotiating an exclusive license
to use the Inventions in a field of use that covers the company’s products.

3. The company may wish to propose a simpler feedback provision. The

“feedback” provision would state that the company would own any ideas, suggestions or
other feedback that the advisor provides to the company with respect to its business,
products and/or services or based on the company’s confidential information, and that
the advisor would assign all right, title and interest to such feedback to the company.
This covers the essence of what most advisors are likely to contribute to the company,
and allows the company to explain the issue with simpler language that does not scream
“I need to run this by my lawyer”.

http://www.k9ventures.com/blog/2014/02/10/watch-out-for-the-board-observer-request/
Watch out for the Board Observer request

Ah, I love it when someone cancels a meeting with me at the last minute. It’s
like found time. So liberating to have an unscheduled hour that I can use for
whatever I like. Anyways…

I wanted to use some of this time to briefly make a point that I’ve made very
often to K9 Founders: “Watch out for the Board Observer request!” On the
surface the request by a minor investor, or sometimes even from a lead
investor to have another person participate in the board meeting as an
observer, can feel fairly inane and an easy give. However, adding a Board
Observer to your board in not a decision to be taken lightly.

If the Board Observer position was truly an observer — someone who could
come and listen, observe, but not participate in the discussion, then it would be
fine. However, in practice a board observer is almost equivalent
to a board member. This is because when someone comes to a board
meeting, they are not just listening and observing, but they are invariably
participating in the discussion as if they were a board member.
In early stage companies, most board decisions are typically unanimous. If you
ever need to actually take a vote on something (other than administrative stuff
like issuing options), then your board is probably already messed up.

Since the board observer is an active participant in the discussion, his/her

opinion matters. It matters because once voice the opinion will be heard by
others in the room and it will impact their thinking. In most cases it may not be
sufficient impact to sway a decision, but in some cases it can (and that can be
good and bad)

I have been a board observer in many of my early investments through K9

ventures. And I certainly don’t keep my opinion to myself. So I too am guilty of
being a board observer who isn’t only observing. Ever since I’ve realized this,
I’ve taken to telling founders upfront that if I become an observer on their
board they they should expect me to be an active participant in the board
discussions and that that will have an influence on other members of the board.
There are cases when having a board observer make a lot of sense. So to be
clear, I’m not arguing against board observer seats in general, but just making
the point that it’s not to be taken lightly. My advice to founders is that
don’t accept anyone as an observer that you wouldn’t
accept as a board member, i.e. don’t treat the board observer position
as a freebie or a easy give away to appease your investors.
Sometimes you may want someone to be an observer because you genuinely
value their input. In other cases someone you would really like to have on your
board, may not want to take on an actual board role as it comes with a fiduciary
duty and potential liability. In such a situation, having that person join as an
observer can provide all the benefits of having the person’s opinion and insight
counted, while not saddling them with the responsibility and the liability that
comes with being on a board.

Either way, when you’re faced with the request for a board observer seat, just
think it through to make sure you assess the impact it would have on your
board dynamics. If this post causes you to think about it for even a minute
longer, then it’s done its job.

How to Present at Big Meetings

without Going Down a Rat Hole

I’m writing this post as part of my series with Advice on Raising

Venture Capital but will file it under Sales Tips as well since it
applies equally to both scenarios.

Congratulations. You’ve found a VC partner or principal who has

invited you to the Monday partners’ meeting. Or on a sales
campaign you’ve finally gotten your project sponsor to take you to
the “executive committee” where decisions are made and budgets
are agreed.
So you arrive at the meeting in the comfort that somebody has
championed you to this point. Every 1:1 meeting you’ve had to date
has been collegiate and productive. What could go wrong? A lot,
actually. Here are some tips to keep in mind for the big day.

1. Information Asymmetry — The biggest problem that

presenters face in large (5+ people) is information asymmetry.
You come into a meeting where your sponsor (the person who
invited you to present to the partners) knows a lot about you and
the rest of the room may have varying degrees of knowledge.

This is true whether your at a sales meeting or at a VC firm.

Sometimes a company presents at a partners’ meeting that has
been well vetted and thoroughly discussed prior to the meeting so
all partners know a great deal about the presenting company.
Other times the partner wants to test whether there is support
before sinking in tons of due diligence time.

Either way, don’t assume that the entire room is up to speed on

your company. Also, you might be presenting your telecom
company to a 6-person team where 3 people are telecom experts
and the other 3 have only superficial knowledge. These kinds of
meetings present challenges as some people want to go deep and
others are at 50,000 feet.

Make sure you discuss this expectation with your sponsor before
the meeting. Understand how knowledgeable the room will be
around your industry and your product and importantly — agree
a plan with your sponsor on how to play the
meeting. Getting his / her buy-in to your approach is important
as they can help you steward the meeting in the right direction.

I would normally recommend you address the issue early in the

meeting with the group to set expectations. I would try a line like,
“I know that some of you might be social media experts and others
may be less deep on this particular area. My plan would be to start
the presentation at the 50,000 foot view and then dive down to a
more granular level once we’re all base-lined. Does that sound
ok?”

This last question is important. You need to let the energy of the
room guide you. If people want to go straight to details then
staying too high level will also irritate people. But … watch out. If
one vocal person blurts out, “just give us the details, we all know
social networking” don’t assume that person speaks for the entire
room. It’s a delicate situation but I recommend saying something
like, “OK, that sounds great. Happy to do that. Just to check — does
everybody feel comfortable going straight to details or does
anybody want 2 minutes on the basics before our deep dive?”

I’m surprised in sales situations (and believe me, raising money is

a sales process) how often the presenter takes direction from the
most vocal person who usually speaks first. They don’t always
speak for the group.

Regarding information asymmetry — take me as an example. I’m

no dummy on businesses that are in the financial services sector,
but my 3 partners have been investing in the space for 20 years so
I’m clearly on a different level. 30% of our last fund went into
deals in this sector. My partner, Brian McLoughlin, attends almost
all Financial Services conference, makes a number of investments
in the space and has relationships across the sector. His
immediate focus when these companies present is an order of
magnitude more detailed and knowledgeable than mine. In our
current portfolio 3 or his 4 investments are in the Fin Svcs space.
But when you present to both of us you still need to keep me in the
dialog. Vice versa is it’s a SaaS platform company where I spent
nearly 10 years running companies.
2. Scoring an “own goal” — The most common mistake is one
I’d call scoring an “own goal.” It is when you’re in a meeting and
somebody throws out a question that is a slight “red herring.” They
were thinking of the question as you were speaking and they
blurted it out. This happens often is sales meetings or VC
meetings. Some presenters take that as a challenge to inform the
person who asks the question about everything the presenter
knows on that topic. What started out as an innocuous question
asked purely out of interest can become a total time waster if it’s
not pertinent to your storyline that you’re trying to convey.

I saw this happen recently with a VERY polished presenter (and

somebody we’ve decided to take to the next stage so it obviously
didn’t kill him) but he felt compelled to answer every question
asked at great length even when not that important to the overall
picture and it was quite distracting to the flow of the meeting.

Use the lesson I was taught many years ago: A, B, C (answer,

bridge, communicate). Answer the question, bridge back to what
you wanted to originally talk about and then get back to
communicating your messages. Warning: you need to determine
whether questions are really “red herrings” or truly something that
the group wants to explore. If it’s the latter — you can’t move on. 2
quick tactics:

- it is acceptable to say, “did I answer the question thoroughly

enough for you?”

- if you’re pretty sure it’s a Red Herring then simply say, “that’s a
great question. Do you mind if I answer that a little later in the
presentation? I have a few slides later that address that.”
(obviously if you say that you need to come back to the question
either later or after the meeting. tip: write it down when asked /
parked)
3. The “Detail Merchant” — The third thing you need to worry
about in a group presentation is the “detail merchant.” This is the
person who wants to ask you the most detailed questions about
every aspect of your business — sometimes details that aren’t
relevant to the group getting a good picture of your market
opportunity, your team, your competitive positioning, etc.
Sometimes they do this out of interest, sometimes it is to show the
group how smart they are and sometimes it’s just because they’re
a nudnik. I’ve experienced this in many sales meetings I’ve made
and unfortunately in many VC pitches I made.

These are the bane of many sales meetings but there always seems
to be one — even when well intentioned. The problem with letting
the detail merchant take over a big meeting is that they’re driving
the meeting toward their agenda and not yours. More importantly,
they’re often driving the meeting to an objective that doesn’t meet
the needs of the other participants in the room.

It happens to all of us at VCs — usually in a mild, benign form.

Sometimes I find myself really interested in the technical details of
a companies product and after a few questions on the topic I look
around and find my partners disinterested in this line of
questions. Other times I find them wanting to know the details of
one component of a business before I have understood the market
landscape and I’m screaming inside my head that I want to
understand the overall concept before the deep dive. It’s different
than a “Red Herring” in that it’s not an irrelevant question it’s just
that you’re getting too detailed before the group as a whole
understands the complete high-level picture.

Whatever the reasons you need to be conscious of this. Here’s how

to deal with it:
- first, you must always answer and acknowledge the question. Do
this be repeating it and writing it down. “You want to know about
the terms of the deal we signed with CBS and the reaction of their
new VP. Let me write that down.”

- If you can answer at the highest level you should. “The new VP is
very supportive of us — we’ve met him three times.”

- As with the Red Herring question you must “bridge” back on the
main storyline of your presentation. You say, “It’s an important
topic. If it’s OK with you I’d love to answer it in just a couple of
minutes after the next few slides. I think the context may be easier.
Is that OK with you?”

- That last question is key. If they say, “no, I’d prefer you cover it
now” then you must. You can allow a detail merchant to drive you
down 1 or 2 rat holes because you need to meet their needs. But
you need to be sure that you’re not meeting their needs at the
expense of everyone else. You need to have a relationship with
your sponsor that after 2 rat holes you’ve agreed with him / her
that he’ll help you bring the meeting back to a level that’s
appropriate for everybody.

- If the detail merchant is really persistent you might try the line,
“If you have a few minutes after our presentation or later today I’d
love to come back and give you all the details you’d like. I have
tons of information I’d be happy to share 1-on-1 with you.”
Sometimes that works.

Allowing one partner or one executive in a sales pitch take you

down a rat hole might ruin the overall flow of the presentation for
the group it it’s entirety. As both an entrepreneur (in VC and sales
meetings) and as a VC I’ve seen this happen many times.
4. The “Naysayer” — Another difficult situation you can run into
is the naysayer. It’s the person who is always flinging out the
skeptical question at you like, “Google could easily do this,” “how
can you ever get mass adoption on a tool like this” or “not another
social network — just what the world needs.”

Naysayers are difficult to handle because they set a negative tone

for the room. I talked about a situation where this happened to
me when I was raising money in Silicon Valley for my second
startup.

I find with naysayers is to acknowledge the issue they’re negative

but to not discuss it in depth. “I understand your concern about
Google. It’s obviously something we’ve spent a lot of time thinking
about as well. The short answer is, ‘we believe that our niche focus
on backing up documents in the financial services sector will mean
that their more generic approach of being a platform won’t be a
competitive threat for the segment of the market we hope to serve’
but I’m very happy to have a much more detailed dialog with you
at the end of the meeting or one-on-one afterward if you’d like.”

Please don’t get me wrong — some questions you will be asked that

are challenging your business are totally legitimate and need to be
discussed. I’m mostly talking about when you get what is clearly in
your perception questions asked in a hostile tone or that sound
negative / dismissive — especially if they persist from one single
person. Judgment from you on the day as to which scenario it is
will be very important.

If they persist the room will be aware of it and will start to

discount the person as long as you handle it professionally.
Unfortunately if you “take the bait” and seem defensive it normally
just makes both of you look bad. The other great thing about the
“cover it later” approach is that it gives you an excuse to all on this
person later one-on-one afterward and build a relationship. Why
not follow up after the meeting and ask whether you can come see
him directly to show him some data you have. Any excuse to build
a relationship with the naysayer and turn a negative into a neutral.

But the overall advice is similar to the detail merchant — you can’t

let the naysayer take your agenda off course or everybody else — 
including you — loses.

5. The “Silent Partner” — The final mistake that I see many

people make is not engaging the “silent partner.” Just because
somebody doesn’t speak up and challenge you in your meetings
doesn’t mean that they won’t be against your company / idea when
the internal discussion happens.

As a sales person it’s your job to flush everybody out and find out
what their thoughts / feelings are. In a positive way, of course. The
best tool for engagement is the question. If you notice a partner
that hasn’t spoken or seems to not be paying attention (hopefully
not on a Blackberry!)? Get them involved!

Find a way to ask them a pertinent question and ask for their
point-of-view. “Bob, if I’m not mistaken you have some experience
in social games through your involvement with EA. I know that
mobile is slightly different but how do you see this space playing
out?”

Work the room, folks. Whether in sales or in raising VC these are

often group decisions. You need everybody engaged, everybody
knowledgeable about what you’re doing and you need to get all
issues / risks in people’s minds out on the table and in the open.
This will only happen through your asking questions, listening to
what each person is saying, writing down key notes and testing
with the group whether you have understood all of their concerns.
I was recently in a meeting with a company that had met 2 of my
partners twice before our meeting so my partners’ knowledge was
already much deeper than mine. I didn’t ask any questions in the
meeting because they were already going too deep relative to my
knowledge. After the meeting the CEO came into my office and
asked if I had 5 minutes. We spent 30 minutes together. He got all
my issues on the table. I thought, “brilliant.” He gets it.

Information asymmetry, detail merchants, naysayers and silent

partners are all potential landmines. You’ve got to learn how to
deal with group dynamics to avoid presentation rat holes. All that
said the next step is the most important.

6. Pre-Meeting Prep — So much of your performance in the big

meeting is tied to the preparation you put in before hand. It’s so
important that it’s going to be the topic of an entirely separate
post. But for the sake of completeness in this post — before you
arrive at a big meeting you need to know in advance: who will be
there, what their views are, how they normally act in meetings,
what the relationship is between individuals and whether they’re
knowledgeable about your space. Just winging it on the day is a
much lower probability outcome.

You can only do this if you have a “champion” on the inside. Make
sure you’ve spent enough time with your sponsor in advance of the
partners’ meeting that you feel confident they’ll advocate for you
on the day. One sign of whether they’re truly supportive is how
well they help you prepare for the big meeting.
Deal with Your Elephant in
the Room
There’s an old saying that if I’m talking with you and I start the
conversation by saying, “whatever you do, DO NOT think about
Elephants” then you can’t help but thinking about elephants while
we’re speaking. There’s a lot of truth in this adage. It’s sometimes
called “The Elephant in the Room” because even when you don’t
mention not to think about an Elephant there are certain issues
that you just can’t stop thinking about whether they are brought up
or not.

Many businesses that pitch to me have Elephant issues and I’d like
to tell you how to deal with these when you’re raising venture
capital. Elephant issues are those things that the VC would
automatically be thinking about when you’re speaking but he/she
may not immediately ask you about either for legal reasons or out
of courtesy.

But the VC is thinking about the issue whether you address it or

not. I’d like to separate these from “skeletons in your closet” which
are issues that the VC would have no idea about when you’re
meeting but might discover later during due diligence. I talk about
how to deal with skeletons in my next post, which is linked to
above. Today’s post only covers issues that the VC will for sure be
thinking in your first meeting.

Let me give you some (real) examples:

- You were an EIR at a VC firm who isn’t funding your current

company
- You have a “strategic investor” who wants to invest in your B
round as long as a financial investor will lead. Your A round
investors are not stepping up

- You raised $1.5 million for a social networking site 18 months

ago. Today you have 2,000 users.

- You haven’t been able to resolve who’s going to run the company
so you’re raising money as “co-CEO’s”

- The person who founded the company is no longer working for

the company

- Google has announced that they are planning to compete with

you

- You’re raising money but the CEO is not in the room (e.g. you’re
the ex CEO, VP Biz Dev or some other title)

Each of these scenarios are real-life situations I’ve seen where no

matter what the person across the table from me is saying that
thought — that Elephant — is hard to completely get out of my
mind. I’m not saying that they can’t be overcome — but avoid them
at your peril.

There is only one way to deal with your Elephants — head on. Don’t
pretend it isn’t in the room. Know in advance what you’re going to
say and don’t wait for the VC to bring it up. When VC’s bring up
Elephants they feel like they’re “catching you out” and you’ve lost
the high ground. When you bring them up you take the issue off
the table. I can’t say that they’ll get over the issue, but they won’t
hold it against you for not bringing it up.
Small story. I used to work in the UK. It was 2003 and I was
training for a marathon so I was in great shape (yes, I know this
was YEARS ago but I did complete it in 3:57). I was looking for a
person to head up my UK sales team. I hired an executive recruiter
and had 7 finalist candidates that I interviewed.

One of the people who came to see me was named Nick. I don’t
know exactly how much he weighed but it had to be at least 350+
pounds — maybe more (I’m a bad judge). Anyone who knows me
well knows that not only am I not “weight-ist” (or whatever the
right term would be) but also that I will quickly reprimand people
who talk in a derogatory way about people who are overweight.

In this scenario, there was NO WAY I could sit across from this
individual without noticing that he was larger than even a
normally overweight person.

Within the first 5 minutes of the meeting we had discussed that I

was training for a marathon. He made several jokes about how he
wasn’t running a marathon any time soon. But he also used to
opportunity to emphasize that he is full of stamina, works late and
hard and had always performed well in his previous sales
leadership roles for which he’s be happy to provide pay slips as
proof.

He took the issue off the table. He disarmed me. He got his talking
points in. And in the end I hired him. I would like to think that this
would have been the outcome regardless. I’ll never know. But as a
sales person you have to be able to build rapport.

I recently met with a firm that raised $4 million in an angel round

(some friends & family this guy had!). But they didn’t have any
revenue or enough traction to show for it. Instead of BS’ing me he
said, “we spent 18 months building out our product and a set of
graphic editing tools when we realized we had developed in the
wrong platform. We rebuilt everything in Flash and now have a
better product. So we know that our valuation will be lower than
others who would have already raised $4 million.” He then went
on to describe a phenomenal set of biz dev partnerships that they
had signed and showed me a very cool product. Issue off the table.
Elephant out of the room.

Elephants also exist in normal everyday business. If you’re in front

of a customer and you had some very public bad press that week
don’t pretend it didn’t exist. Many people Google you before
meetings. If you’re going to see a client and somebody else in their
organization is having big customer service issues, don’t sweep in
under the rug. Deal with your Elephants.

From the VC perspective, before you go out to raise money think

about whether you have Elephants. If you do, make sure you write
them out and think about what you’re answers will be. Make sure
everyone on your team who will attend the meeting knows the
script. When you’re dealing with Elephants you can’t waiver.

Also remember, Elephants are things that would (or could) easily
be known about your company. Issues that couldn’t possibly be
known without “discovery” I call “skeletons in your clost” and I’ll
deal with those in the next post. The rules above don’t apply.

How to Deal with Skeletons in

your Closet
I recently wrote a post on how to Deal with your Elephants in the
Roomduring your VC meetings. Elephants being big issues that
the VC will be thinking whether you bring it to his/her attention or
not. My advice with Elephants was that you need to take them
head on in your first VC meeting because the VC is already
thinking about the issue whether you bring it up or not.

But what about issues that might have a slightly negative

connotation that the VC couldn’t know in advance? Skeletons in
the Closet are these types of issues. They are issues, though, that
your VC would certainly find out during due diligence or at a
minimum you’d be ethically obliged to tell them.

Some examples:

 A large company has told you that you need to change your
brand name or they’ll sue you for trademark infringement (this
is a real world, recent example)

 A company has just filed suit against you for product patent
infringement (obviously more serious)

 Your CTO and leading technology visionary has just

announced he’s quitting

 You’re not happy with your existing investors

 Your largest customer just cancelled its order

 Large parts of your tech system are going to need to be

rearchitected

 You have a prior record as a felon (yes, this has happened)

These are all things that you know you’ll eventually need to tell
your VC and ethically you must tell them before they fund you. But
when in the process should you tell them?

I’ve had this debate several times with VCs — sometimes they agree
with me and sometimes they violently disagree. In this particular
case — I’m right. Here’s my advice: Don’t reveal your “skeletons” in
the first meeting but you need to tell your sponsoring partner
before the full partner meeting.

Why shouldn’t you tell them up front? Is it displaying a lack of

ethics to avoid some of these facts? I don’t think so. I have often
said that fund raising (like any sales process) can be related back
to human instincts and therefore explained via dating analogies.
All prospective partners say that they don’t like to “play games” yet
it is human instinct to do so.

Some VCs would tell you that you need to lead with all of your
dirty laundry — but in reality this way they won’t fund you
(whether they admit it to themselves or not). So here’s my
analogy:

Let’s say you’re in your late 20’s and you’re in a bar trying to meet
your prospective future partner. You wouldn’t reveal the first night
you meet girl / boy of your dreams that you snore like a bear,
would you? I guarantee the night would stop there. It is important
that he/she sees your positive attributes first. She loves a man with
a great sense of humor. That smile! He’s so kind to people. He
likes kids! Did you hear that he was an entrepreneur?

So eventually it will be known that you snore. By then she has at

least seen your good points for what they are rather than being
biased by some smaller issue that she eventually would realize
isn’t that big of a deal. Or if it’s a big deal to her, she’ll abort just as
a VC would.

BUT (and there’s always a but) … you need to reveal your snoring
habits to your sponsoring partner before the full partner meeting.
Why? Because that individual is your champion within the VC firm
and is going to bat for you with his/her partners telling them how
great you are. You can’t send them into battle without the full
details or you’ll lose a supporter.

It’s ok to not admit to snoring on the first meeting but it’s not okay
to ask somebody to champion you without complete information.
If they back you in the full partner meeting and then later have to
reveal your secrets to his/her partners you’ll not only lose the deal
but you’ll lose a friend and contact (along with your reputation).

UPDATE: @BSierakowski wrote to me on Twitter and pointed out

that I didn’t really deal with how to begin to reveal your Skeletons
in the Closet. This is a tough one because every VC process will go
differently depending on how hot your deal is perceived to be,
what the general market conditions are and whether that partner
has other deals in his pipelines.

But let’s assume a standard pace. Let’s say it takes you 3–4 weeks
to get from your first meeting with a single partner to get to the
full partner meeting. Let’s assume that you have 2–3 one-on-one
meetings with the partner and several phone calls. My suggestion
is that you get through the first 2–3 meetings and feel out whether
the partner is comfortable at some point putting you in front of
his/her partnership. If the answer is “yes” then before the full
partner meeting is scheduled I suggest the following process:
 Call the partner to say you want to sit down to go through
some final details before the full partner meeting is scheduled
to be sure you’re all on the same page

 Ask that this meeting be 1-on-1 (e.g. no principals, associates

or analysts) because you have some sensitive stuff you’d like to
go through before the partners’ meeting

 ALWAYS have this discussion in person — even if it means

jumping on a plane and flying 5 hours

 Sit down and have a 1-on-1 discussion. Lead with the

information early in that meeting. Make it clear that you
wanted to reveal the information before asking that partner to
sponsor you in front of his other partners

 Make sure you walk the partner through the details of how
and why you believe you’ll be able to overcome this issue

 If the partner grills you on why you didn’t tell him sooner you
can answer in two ways. A) you can explain that you felt it was
important that people judge your business for its positive
attributes that you are passionate about and your commited to
making sure your Elephant won’t harm the company — OR — B)
tell them you read this post and followed my advice and you
won’t let that happen again ;-)

The Best VC Meetings are

Discussions not Sales

This is part of my blog series “Pitching a VC.”

I’ve sat through a lot of VC pitches and having been CEO of an
enterprise software firm for many years I’ve also sat through many
customer meetings with sales teams.

There is one classic mistake that I see across both types of

meetings — “the tell & sell” presentation. This involves a person
who leads a PowerPoint presentation in which the presenter feels
more comfortable racing through pre-practiced slides and rattling
off charts & bullet points than having a discussion.

The presenter comes out of the meeting proud at having gotten

through all 30 slides (and maybe even a demo) with a bunch of
smiling faces and nodding heads and no discussion. After the sales
meetings I would ask the exec afterward, “how do you think it
went?” and always be surprised when they’d say, “great, I think
they really liked it. They seemed to agree with everything I said.”

In our internal sales training sessions I would always teach our

young sales execs that this seemingly good meeting was probably
not as good as they thought. People are much more likely to buy
into you as a person and us as a firm when they’ve been involved
in a discussion with you about their problems, your solutions, who
else has been using your product, etc. They might even like to
challenge some of your assumptions.

The advice I gave to my sales execs is the same advice I would give
to you: smiling, nodding heads are normally not a great sign. In
the best case they might prefer to ask you questions but you didn’t
prompt them and they’re being polite (although this is less likely
in VC who are not known for being wallflowers!).

The VC might have tried a few times to prompt a discussion and

you didn’t take the cue but instead reverted back to slides. This
happens often and I bet most presenters never realize it. Most
worryingly, many times it means that they have decided that they
are not interested in your product (or investing in your company)
so why bother having a debate / discussion with you.

It is easier for them to finish up 45 minutes, politely shake your

hand and say, “we’ll get back to you” once they’ve had a chance to
“noodle on it.” Ever heard that? Far better that you noodle with
them. I believe that the best meetings are debates. The following
are some tips for the discussion style VC meeting

UPDATE: My initial post talked more about a debate than a

discussion. David commmented here that the problem with my
phrasing it as a debate is that I don’t want to encourage any
entrepreneurs to think that they should try to “win” the discussion
by proving they are right (as you might do in a debate). So I’m
softening my message to “discussion.” See note at the end of the
post for a funny story on this.

Tips in a discussion led VC Meeting

1. Tee up your slides to prompt questions — The best way to

avoid racing through your slides in a tell & sell style is to tee up
your slides to prompt questions. We used to do this in our sales
slides. After walking through the “problem statement” slide, the
build on the bottom of the slide would always say, “Have you
experienced similar issues in your company?”

It was just a way to remind the sales rep to create a dialogue. If you
get nervous in meetings or have a hard time remembering to stop
you can simply build the prompt into your slides.

2. Stop often and seek feedback on direction — In addition

to asking questions to prompt a debate you should always check
for feedback from the VC. Examples are “would you like me to go
into more details about how we calculated the market size?”,
“would you like me to tell you more about the team members who
aren’t here,” or “would you like me to jump into a product demo
now or tell you more about our market first?” Be careful not to
jump into a long-winded discussion on any topic without seeking
cues from your audience on whether they’d like to go deeper on
the topic or move on. I think this is one of the single biggest
mistakes that presenters make.

3. Be careful about the way you ask questions — I’ve sat

through many meetings with groups of people where the presenter
would say something like, “Do you know what REST is?” or “You
know the company Constant Contact, right?” Questions like this in
a crowd often elicit “yes” answers even when people haven’t heard
of the technology or company. Most people in general don’t want
to admit in front of peers that they haven’t heard of something
that they think they should know. If your presentation requires an
explanation of RSS vs. ATOM always best to say, “let me quickly
state how RSS and ATOM are different. I know you might be
aware of the differences but let me quickly cover it and if you want
me to go deeper I’d be happy to.” If the VC knows the difference
TRUST ME they’ll tell you.

4. Don’t be defensive — Don’t view any question by a VC as an

affront to you. I know that they could have worded it more politely
and in a less condescended tone, but view the question as an
opportunity to have a great discussion. View the question as
engagement! Remember that a VC doesn’t always care that you
have “the right” answer provided that you have a high quality
thought process.

Having a discussion is a great way to build rapport with the person

asking the question. It’s OK to say things like, “I could see why you
might think that Google would go into our market. It’s a valid
concern and we worry about it, too. Here’s why I think Google
won’t initially be a threat to us and how we would respond if they
entered our market …”. So the next time you get a zinger from a
VC — be thankful.

5. Answering with a question — Another suggestion is the

“answer a question with a question” technique. First, you must
actually answer the question that was asked with you before you
ask a question back. It’s really annoying in any meeting when you
answer a question directly with a question. But it’s OK at the end
of your statement and it’s a great way to get people talking.

Example:

VC, “Do you really think that customers will pay $5,000 / month
for your product when there are free versions of X,Y,Z on the
market?”

You, “We’re not too worried about the free products because they
target a lower-end segment than we’re targeting. We tested the
$5k price point with a handful of customers and they didn’t seem
price sensitive … From your experience do you think $5k price
point will likely be an issue for us?”

6. Don’t be afraid to say “I don’t know” — I don’t think any

VC is looking for the entrepreneur who knows everything. In a way
I think most VC’s want to see that you’re mentally flexible,
sufficiently humble and not afraid to admit when you’re wrong or
don’t know something. For many difficult or unknowable
questions don’t be afraid to say “I don’t know.” Some obvious
things that are not acceptable for the don’t know answers: “how
will you spend the $2 million once you raise it?”, “Who are your
competitors” or “Who do you need to hire first after fund raising.”
You’d be surprised how many people don’t answer these questions
confidently.

7. Get back with an answer — There are two great things about

saying you don’t know the answer to a difficult question. The first
is that you have a chance to ask, “do you have any views on the
topic?” and thus hit the goal of getting the VC talking. Even more
importantly you have the ability to say, “that’s a great question.
I’m not actually sure what the answer is. I’ll look into it and get
back to you.” It gives you an opportunity to email the VC after the
meeting with more information and the potential to continue the
dialog.

UPDATE: We once had a company present to us in a full partner

meeting. The presenting team had a partner champion at GRP that
was advocating the deal so we were positively predisposed to
seeing the pitch. It mid 2008 and one of my partners asked what
they were going to do about costs given the recession. The COO of
the company said that he had read some economic council’s
forecasts and technically we weren’t in a recession. My partner
shot back with data of his own. A real debate ensued. It wasn’t
pretty. I kept wondering, “why would this guy want to have a
debate over a topic like this that had no relevance to proving
whether his business idea was sound?” In the end we didn’t invest.
A large determinant was this gentleman’s lack of EQ in this
situation.

A Tale of Two Pitches

This is part of my ongoing series, “Pitching a VC.”
I recently wrote a blog post here in which I argued that the best VC
meetings are discussions and not sales pitches. Many people
agreed and added that even the best sales meetings are also
discussions and not pitches.

A few weeks ago I sat through two very contrasting presentations

and wrote this blog post right afterward. I’m just getting around to
posting now. Both presenters are anonymized. I hope that when
you’re presenting to a VC this will give you some sense of what
might be going on in our minds.

A Tale of Two Pitches

Last week I had two very contrasting presentations from

entrepreneurs that gave me the idea for this post.

Pitch 1:

I had an awesome young entrepreneur come in this week to talk

about his seed stage business. It was a 1-on-1 meeting between the
two of us. He wasn’t really ready to raise VC but wanted to meet
me early in his process and wanted some help thinking through
potential angel or seed stage investors. He was introduced by a
senior technology executive that I really respect in the LA area and
a close friend of mine told me separately that he would like to
invest if they did a friends & family round. Needless to say I was
positively predisposed to this individual before the meeting
started.

I highly recommend to all entrepreneurs to take the time to find

the best sources of an introduction because it really does make a
difference. It is worth any amount of extra effort if you are really
interested in the VC you are approaching. If you haven’t already
read the post on how to approach a VC it’s here.
How you got to the VC is important, but once you’re in the
meeting it’s obviously up to you to make the most of it. We started
by talking about this person’s background. He had spent many
years at Yahoo! during the better days and we had lots of
discussions / debates about Yahoo!’s strategy and missteps. But
we talked much more broadly about Google, Twitter and
Facebook. We talked about browsers, desktop widgets and
interactive television. We talked about measurable marketing. We
talked about online video and the need to build & track audiences
online.

I found myself so engaged in the discussion that after 90 minutes I

realized we hadn’t even broken out his PowerPoint presentation
and I had a hard stop. So we scheduled our second meeting for
next week where he could actually tell me more about his
company. In the meantime I signed up for his product and began
playing around with it to get a sense myself for how it works before
our next encounter.

Importantly he did have a presentation ready to go. On any given

day I could have been really pressed for time and asked to get
straight to the presentation — you can never predict how the
meeting will go so you must be prepared to show a deck, do a
demo or just have a conversation.

This meeting was a 10/10 for me. Who knows whether I will find
his company interesting when I see the details at our next meeting.
But so much of my decision on investing is based on the
individual(s) that getting a chance for a true connection with
somebody where you understand how they think about life,
technology, management, etc. is important.

Pitch 2:
This entrepreneur had a full house. He was from out-of-town so
even though he hadn’t been properly vetted by an individual
partner before the meeting, we had all of our available investment
staff sit in on the meeting. He was introduced to one of my
partners by a very trusted source so we were ready for big things.

He started by showing a 5-minute video describing why the

market that he was in was such a great opportunity. It had the
graphics of a highly produced Hollywood-like video with the voice-
over of the cheesiest television commercial presenter you could
imagine. Let me state me bias — there is NEVER a scenario where
you should lead with a 5-minute video. Even worse when all it is
doing is explaining your high-level market concept.

I kept thinking 2 things during the video: 1) this is cheesy and

painful and 2) why is he giving up the opportunity to build rapport
with us by telling us this stuff directly?

After 2 minutes of torture I suggested that we stop the video. He

seemed uncomfortable doing that so he let it keep running. After 4
minutes I instructed him to stop it. He reluctantly did. We asked
the individual to tell us what he actually did. The video was so high
level and was explaining how advertising was all becoming
measurable (duh) but we had no sense what his company’s role in
this process was. We all know that television broadcast
commercials are not targeted. We all know that many companies
have tried to deliver targeted advertising on the web. Sir, what do
you actually do???

What struck me is that he was never able to get into a discussion

about the past of targeted advertising technologies — what had
worked and what hadn’t. We weren’t able to have a discussion
about who his target customer base was, why they would use his
products and why advertisers would pay for that. We didn’t get a
chance to adequately discuss the chicken-and-egg problem of
getting users signed up and advertisers signed up simultaneously
for which his business was dependent on.

Basically, the fundamental problem that I saw with the whole

painful hour was that he was in “sales mode” the entire time. He
was so concerned with getting across his points that he failed to
have a dialogue and engage us. A VC is never looking for you to
have all of the right answers and the best VC’s know that we don’t
either. We just want to hear how you think about your business,
your industry, your competitors. We want to hear that you’ve
thought about the risks. We want to hear your mental flexibility on
issues and how you debate them.

I guess there are some similarities with the infamous “case”

interviews that strategy consultancies give. It’s not always the
actual answer we’re after but the quality of your thought process
and how you arrived at the answer. Through this discussion you
establish rapport and we build a relationship.

It wasn’t going to happen with this individual. He ended the

meeting by telling us that he wasn’t really even raising money. If
he had been raising money he would have been prepared to
discuss all of these issues. He was defensive and seemed affronted
that we wanted to discuss the complexities of building his
business. I believe in seeing VC’s before you’re ready to fund raise
(see my post here), but if you’re not prepared to have a discussion
or debate about your company or industry then don’t bother.

I am left wondering if he really had no interest in ever raising

money from us — why was he there? Why would he waste his time
and ours? Sheesh.
Today’s post is a subtle one about positioning yourself in a
presentation. This might be a VC meeting but also might just be a
sales or biz dev meeting. It’s any meeting where you are in a small
room and are being called on to present on some form of overhead
slides

1. Sit closest to the projection screen — Many times a week I

have entrepreneurs who do presentations for me and often I’m
with some or all of my colleagues. From witnessing all of these
presentations I can tell you that there is a right place and a wrong
place to sit.

If you look at Diagram A above you’ll see that the presenters are
sitting at the opposite end of the table from where the screen is.
When I lay it out this way I’m sure it would be obvious to you that
this isn’t the optimal place to sit but I’d say a good portion of
presenters make this mistake. The problem is that the people your
presenting to are forced to choose between looking at you and
looking at the screen. When they choose the latter they are totally
tuned out to what you’re saying.
If you look at Diagram B you’ll see that the people you’re
presenting to can look you in the eyes and glance up at the screen.
You’ll hold their attention much better. Your laptop will be
synchronized with the screen so resist the temptation to turn
around. Your goal is to work the room, look people in the eyes,
judge people’s responses to your presentation and engage. You
can’t do that if you keep turning around and looking at the screen.

2. Avoid a home team & away team (unless you’re in

Japan) — Another thing I often try to avoid is the “home team”
and “away team” format if I can. If you show up early to set up
then it’s easy to stake out the right seats (Diagram B). First, sitting
across the table from your teammates puts you in the right
position near the screen but also it creates an environment that is
not “across the table” and therefore easier to make things informal
and build rapport.
I personally wouldn’t worry about it if it the team coming to see
your presentation seems a bit surprised and says, “oh, we normally
all sit on the same side.” Just smile and say, “Oh, sorry. We didn’t
realize.” If you can get away with it, go for it. Sitting by the screen
is the best excuse.

I’ve lately been attending meetings with our shareholders (called

LPs or limited partners). I’ve learned that LPs don’t expect
presentations to be done on a screen so I need to travel around
with paper. That’s not really me but I’ll stick to convention. I’ve
found it more difficult to break out of the home team / away team
this way.

One warning: I was taught that culturally in Japan there is an

expectation that you sit in the home team / away team format so
you need to follow this convention. The away team (that’s you) sits
with their backs to the door. I’m told that this comes from ancient
times when you would always want to be able to see the door to
know whether an enemy was coming so if you were hosting you
always chose the side across from the door.

3. Work the entire room, don’t fixate — When you’re

presenting to another team make sure to spread your eye contact
evenly across the team to whom you’re presenting. Often in a
meeting there is one or more talkers in the group of people you’re
meeting and I’ve found that some people end up giving them all of
the eye contact. I’ve also seen some presenters give all of the eye
contact to the most senior team members.

Both of the scenarios make me REALLY uncomfortable when I’m

in the room because I always notice. I can’t stop thinking inside
my head, “What is the person who’s not getting no attention
thinking? Are they offended?” Honestly, this is a very common
occurrence and is a mistake. Don’t make it. Show respect to
everybody you’re meeting.

4. Don’t have hand outs — If you’re doing a printed

presentation (as I have been lately) you have no choice. But for all
other presentations don’t hand out any printed materials in the
meeting. Your goal in the meeting is to build rapport and to
command the complete attention of the people to whom you’re
presenting. Even the best behaved of recipients can’t help
themselves but to flip ahead to see what’s coming. The worst
behaved will literally never be on the slide you’re presenting. Yes,
it’s rude. But you enabled them. If you really want to hand out
notes do so at the end of the meeting as a “take away.”

5. Never present “eye charts” — One line that I hate hearing is,

“I know you can’t read what’s on this slide, but …” or “I know this
is a bit of an ‘eye chart’ but …” Listen, if I can’t read it then why the
eff would you bother putting it up on the screen? In slides, less is
almost always more. Bigger fonts, more visuals, less text should be
your guideline. For any situation that requires a complex diagram
then you must do a “build.” That means that you only show one
section of the screen at a time and then hit the mouse to show the
rest. No fancy builds (i.e. spinning, complex fade ins) — if you must
use it keep it subtle.
6. If you have detailed slides you can hand them out in
real time — There are times where teams want to go through
detailed information in a meeting. One example would be detailed
financial statements. In this instance I recommend coming with
printouts of those pages, hold them in your folder and hand out
when you hit that section of the meeting. Some great CEOs I know
do this for board meetings.

So, there you have it. Tactical advice for meetings. It’s not going to
make a bad company, good. But trust me when I say that if you get
the tactical meeting dynamics right the rest of the meeting has a
better chance of going more smoothly.