Board Management Guideline for all new CEOs

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A few weeks ago, our most recent portfolio company Mekonos held their first board meeting. With detailed agenda sent weeks in advance, the meeting went well and was productive for all. While being very impressed by how well first time CEO Steven Banerjee ran the board meeting, we at Good AI Capital also realized that it would be valuable to share insights and best practices we have learned from the meeting. We want to make this information available not only to our portfolio teams, but also to all new CEOs.

We sought out advice from our advisor Elaine Heron, who serves on the board of BioMarin Pharmaceutical Inc, a public biopharmaceutical company specializing in orphan diseases.

Elaine Heron, Purdue alumna, gives back through success, art

Incidentally, she, together with some of her esteemed colleagues — Michael Finney and Anne DeGheest — had already been developing guidelines for new CEOs. Based on their many years of board experiences, both as a board member and as CEOs, Elaine and others have provided great insights ranging from how to prepare for the board meetings to strategies in managing the board dynamics. Keen on making board meetings much more productive and less painful for all, Elaine has granted us approval to share their battle-tested experiences.

The following guideline, which is in its original version, is the first of our blog post series for board management. Working with our partners — investors, advisors, portfolio startups — we aim to use this forum to advance startup culture as well as leadership. To us, these are the core values that contribute towards the success of all companies. If you share the same passion for these values, we would love to hear from you


1. Avoid surprises

The CEO should introduce any important question at the board meeting before it must be approved. This is sometimes known as the “two bounce rule.” If there is not enough time during the board meeting, introduce the question by phone or by email significantly in advance. For phone calls, do not expect board members to answer those questions decisively during the call. Allow them to confer with other board members or do background research. It is best for the CEO to approach individual board members offline and explore the pros and cons in order to vet the problem, ultimately leading to an acceptable plan.

2. Repeat those numbers and details

Board members don’t live the company day‐to‐day as you do. To help them to be more engaged during the board meeting, you should not shun from repeating any board information — potential competitors, partners, essential facts about the companies, etc.

Additionally,

Don’t overuse abbreviations or acronyms.
Remind the members who the particular people are as they are being mentioned.
Remind the members, as appropriate, of the number of outstanding shares and the post‐money of the last round. While this information is quite salient to you, some board members have been through tens or hundreds of funding rounds, and will not remember the details with the clarity you do.

3. Leverage your board for advice

The board is not just a governing body. It is also a great resource for knowledge, relevant experiences and connections that could help with strategic or personnel decisions. Leverage these resources to accelerate your company. Through the advisory sessions, it is also a great opportunity for the CEO to establish a lasting relationship with the board members.

4. Send your board package in advance

Your board members have many commitments you don’t know about; and they may even have back to back board meetings during board meeting “seasons” (Jan, April, July, Oct). Therefore, you will help them to be more prepared by sending out the board package at a minimum of three and preferably five days or more ahead. The board package does not need to be 100% complete; however, it should at least include the minutes of the last meeting and any other materials that need to be approved.

5. Schedule your board meetings ahead

Schedule board meetings well ahead (recommended 1 year) so that board members can work their schedules around the meetings. With such advanced planning, there will not be a lot of scurrying around to find dates at the last minute. For your board members, they will respect the schedule and should strive not to change a meeting date less than 3‐4 weeks beforehand. The final dates may still need to be revised from time to time, but it is important to have a starting point. Every board package should have a list of all the scheduled future meetings.

6. Attorney’s presence in the board meeting

Your attorney should be present at the board meeting to take minutes. Most will do this for free for startups. They can also answer questions that arise about stock and other legal matters. Often times, the attorneys can also share about ideas and best practices from the industries. For example, they will have good reference for information regarding stock packages for directors or hiring and licensing.

7. Encourage interactions between board members and non-board executive teams

Everyone benefits if board members know as much as possible about the business. To help the board, you should encourage and facilitate board/staff meetings outside of the regular board meetings. You can also consider having your team present for portions of the board meetings.

8. Develop compensation guidelines for employees

Work with your board and develop a compensation guideline for employees at all levels. Include both stock option packages and salaries as part of this guideline. And get the board to buy off on it. With such agreement in place, offers can be extended quickly without a lengthy board approval process.

9. Don’t fret about the “executive” session

Don’t worry if the outside (not company employees) board members want to have an “executive” session where your absence is requested. This is good governance and they may need to discuss your compensation or other matters which are more appropriately discussed among the outside directors only.

10. Focus on three key issues

You should focus on 3 key issues that will move the needle. Provide information and collect issues with the proposal beforehand. Don’t waste board meeting reporting data and looking at uneventful financials. Focus on strategy discussion.

11. Build the board human dynamics

A dysfunctional board is the last thing you want for any company. And having great human dynamics among the board members is the key to a successful board. One way to build the dynamics is to have meals (lunch or dinner) around the board meetings where board members can get to know each other. If you have the opportunity to select outside board members, look for people who have previously served on boards and are able to help you build a consensus.

Compensation Committee

Set up a compensation committee with independent board members. Typically there will be three members who represent investors and are not part of management. They review and approve compensation (salary, bonus and stock option) for the CEO and senior executives. They will also make a board recommendation that needs to be approved by the non‐conflicted board members. If they are changing the CEO compensation, you cannot vote on it. It is best to have these meetings set up prior to the board meeting for approval.

Do not surprise the committee with last minute approval request. Email them management recommendation with supporting market comparables from compensation experts one week ahead of time. Consider developing a salary/stock metric with these HR experts. And armed with such information, you will have the authority to hire and offer stock options for non‐senior executives.

Board Observers

It is common for large venture firms to have a junior member as a board observer and for large corporate venture firms to take a board observer seat instead of board seat to avoid conflict of interest.

Elements of a good board package: (as one pdf document)

(Adobe Acrobat Pro includes the ability to combine several pdf documents into one file. This is better than having many separate documents. The minutes can be a separate Word document so that people can easily suggest changes.)

Page 1 with date, place and time, and call‐in details if necessary.

Page 2 with all future scheduled meetings

Page 3 agenda, starting with approval of the minutes of the last meeting

Financial

Last quarterly income statement and balance sheet in a fairly condensed form
Cash on hand and cash flow statement (and out of cash time if applicable). Use a waterfall chart to show when you expect to run out of money based on your expected spending.
Comparison to the budget and/or expected spending — call out any unusual or unexpected items and provide full explanations. Don’t hide things or make board members ask.
An overview of the budget for the appropriate long‐term horizon (a year, or until a milestone, or until cash‐out for instance) and a detailed look at the budget for the period until the next board meeting. Call out and explain large, unusual expenses or things that have changed since the last meeting.

Human Resources

Summary of number of employees and expected hires for the next quarter. Include resignations etc.
Stock options to be issued‐‐include type, number of shares, terms (vesting and cliff) and start vesting date

Technical update (don’t overdo this‐‐good to ask if you have provided enough detail)

Progress since the last meeting — compare to goals from previous meeting
Goals for the next quarter
Manufacturing progress
Intellectual property update, if something has changed

Sales and Marketing

Sales numbers, agreements, marketing activities, etc. For early stage companies these are preliminary contacts and interviews, alpha and beta test customers, and any learnings therefrom.

Landscape for partnering, M&A, and competition.

There should be a table or spreadsheet that gets updated for each meeting with the current status, contact name and history, etc. for each player.

Explicit time reserved for executive session near the end of the meeting.

Executive session means that all company employees leave the room, even if they are board members. There should be time at the very end for the employee board members to return further any discussions started in the executive session.

Occasional

Agreements, Financing plans, Strategy discussion.

As appropriate. This will obviously vary. Provide ample time for strategic discussions.

Budget approval.

Once a year is common, sometimes with a revision being adopted in the middle of the year. Once a budget is approved, the CEO is free to spend to that budget, but it is wise to get specific ad‐hoc approvals for large and unusual expenses.

Audit

If you have an audit, share the results with the board. It should be shared with the audit committee (if there is one) before it is signed by the auditor. If there is no audit committee, the whole board should review it before it is signed.

409A Valuation (Private companies only)

Your attorney or board members may suggest that you have an outside firm perform a valuation of the market value of your common stock. This is for the protection of the people who are issued options to ensure that their options are issued at the real market value and can help avoid tax issues for those individuals.

Documents you should have:

(You can often get these from the attorney or other companies)

NDA‐‐one way and two way

Consulting agreement

Expense report form

Material transfer agreement

Application for employment

Offer letter

Forms for new employees such as IRS and state forms, confidentiality and assignment of inventions, etc.

Payroll forms