Posts from Board of directors

Board or No Board?

Matt Blumberg, founder and CEO of our portfolio company Return Path makes a compelling argument for getting a Board of Directors together for your company regardless of whether you take outside capital (and thus are required to do so). Matt says:

Boards create an atmosphere of accountability for an organization, which drives performance (and many other positive qualities) from the top down in a business.  Budgeting and planning, reporting on performance, organizing and articulating thoughts and strategy – all these things are crisper when there’s someone to whom a CEO is answering.

I agree with Matt with two big "ifs." The first is if the Board is made up of strong individuals who understand that a Board's role is oversight, not day to day management. There is nothing worse than a Board which meddles. Matt's Board, which I have had the pleasure of serving on for a decade now, is among the best I've ever served on. And so Matt's perspective is based on that assumption.

The second "if" relates to who controls the company. If you control the company and cannot be fired, then your Board doesn't have the thing that ultimately creates the accountability that Matt talks about. Boards that are just rubber stamps are worthless. And there are many out there. I won't serve on one and I would not recommend having one.



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Does Price Matter?

Most people assume that price is what matters most in a financial transaction. When you are raising money, you want to get the money at the highest price (least dilution). When you are selling, you want to get the highest price for your company. But that is not always the case.

Price matters, but my experience says that it often does not matter the most. In many of the venture deals we have done in the past few years, our transaction valuation was not the highest price offered to the entrepreneur. But the entrepreneur chose us as their partners anyway.

In the majority of the sale transactions that have happened in our portfolio, there were higher bidders for the company than the chosen acquirer.

You can get away with this behavior if you have a closely held business. If you have a public company, then you cannot. The Board has a fiduciary responsibility to get the best deal for the shareholders. And if you are a public company, that effectively means the highest price. That is one of many reasons I don't like being on public boards and operating as a public company.

Let's say you are one of two or three investors in a closely held startup company. Let's say that between the investors and the founders, the group owns ~90% of the company. And let's say that there are two purchasers. One is willing to pay $250mm in a clean transaction and the Board thinks they will be good owners of the business, will do everything possible to keep the team intact and the service vibrant. The other is willing to pay $300mm in a complex transaction, has a reputation for blowing up teams, and has been known to mess up the services they acquire. That would be a no brainer. The board should take the lower offer in a heartbeat, assuming they really want to sell the business.

When you are doing an important financial transaction that brings a new influential owner into the company, price matters but is not the most important issue. The most important issue is the chemistry between the existing owners and the new investor/owner and the reputation of the new investor/owner. You want to use the market to surface the right valuation band and you should do the transaction in that band. But once you have done that, you should optimize for chemistry and fit. And let price fall somewhere in the "market band."

If you cannot find an investor/owner who is a good fit in the "market band" then you should kill the process and not do a transaction unless you need to transaction to stay in business. If you are doing a transaction to stay in business, you have screwed up and put yourself in a bad position. And you should be prepared to be in a worse position soon. But that's the subject of another post.

So price matters but don't optimize for it. Not in a financing transaction. And not in a sale transaction. If you do, you will often regret it.

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The Executive Session

Every board meeting should end with an executive session. The term executive session is an oxymoron because it is a meeting of all the board members other than the executives of the company.

The first time most CEOs hear of this idea, they hate it. The words "we want to meet without you" strike fear in the hearts of most CEOs. And understandably so.

But it is a critically important part of the Board's job to manage the CEO and to some extent the CEO's senior management team. The Board is required to regularly discuss the performance of the CEO and the senior team, to address their compensation, and to work to make sure the CEO and senior team are working together as well as they can.

You can't do that job with the executives of the company sitting in the meeting. And yet, you want the executives of the company in the Board meeting. The more the better in my opinion, at least for most of the meeting.

So "best practices" says that you should end every Board meeting with an executive session. Some executive sessions last 5 minutes or less. There is simply very little to discuss. Some executive sessions last hours. That's generally not a good thing. Most last 20 to 30 minutes.

I've been sitting on Boards since 1990 and have probably participated in over a thousand Board meetings. To be honest most of them did not end with an executive session. In addition to the CEO's discomfort, there is also the issue of timing. Most Board meetings end in a rush. It is seldom that the CEO's agenda fits into the set time slot. And Board members have schedules to keep. So it is the executive session that often gets skipped.

So I don't totally practice what I preach. But after having participated in a particularly excellent executive session recently, I am recommitting myself to executive sessions. I will need all of your help. Entrepreneurs and CEOs should embrace them and make sure they happen. And fellow VCs should do the same. They are incredibly important and we have a fiduciary duty to do them.

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