Start-up Board Management and Best Practices

Founders of early-stage startups organize themselves and their businesses out of the chaos of start-up primordial soup.  If things go well, over time, an increasing amount of order and organization is applied to that chaos.

Arguably, the most significant point at which a start-up must mature their processes and procedures comes with the decision to use other people’s money to run and grow the business.  In particular, outside investment generally requires the creation of a board of directors and scheduling of regular board meetings.

It shouldn’t be lost on anyone that while employees of the startup report to the CEO, the CEO reports to the board of directors.  Therefore, one of the most important jobs of the CEO is to manage investors and the. For first-time CEOs, this will be the first time that they have to organize and run a board meeting.

The good news is that boards and board meetings have existed for decades and best practices exist to help create a framework for efficient, well-run meetings.  The bad news is that it’s not that obvious what those best practices are and how and when to apply them… especially in startups that are just starting to apply order to their chaos.

So that’s the point of this post:  to create a bit of context for running good board meetings and to sketch out some fundamental best practices for early-stage startups.  I have a feeling this post will grow and be edited over time.

I’ll update the board meeting presentation template for 2013 this month as well; this will be a companion piece to that post.

A Few Key Areas for Best Practices

Disclaimer:  I’m not a real-deal expert in board governance and there are tons of resources out there across all dimensions of organizing and running a great board of directors.  What I can tell you is that I’ve personally run a bunch of public and private boards in tech companies and I sit on the board of a bunch of early-stage boards today.  I have opinions that are in line with best practices but every startup is different and the requirements for boards evolve and grow as the startup itself evolves and grows.  These best practices are heavily influenced by my biases and experience.

Perhaps the easiest way to talk about best practices is to break up the discussion into three main areas and one chunk of history:

  1. Board structure and structural timing

  2. Board management by the CEO

  3. Board meeting processes and associated language

  4. History of all this board stuff
  5. (last) a set of questions I plan on answering soon, in an updated version of this post

Board Structure

While it is very uncommon for strategic disagreements or major decisions to be decided by a board vote in a startup, it’s a best practice to have an odd number of seats on the board to ensure that votes never end in a tie.

When a VC like Silverton makes an investment in an early-stage startup, it is common to create a three-person board with one “seat” that represents the preferred shareholders (the VC), one seat that represents the common shareholder (the founders; this is usually the CEO), and one seat that is an outside, independent director (a relevant, neutral third party).  During subsequent financings, two more seats would typically be added: one for the new investor and an additional independent seat.

Each board “seat” may represent a class of stock and therefore a particular shareholder group.  Typically, one of the VCs from the investing firm will occupy the “preferred seat,” a founder or CEO will occupy the “common seat” and a relatively neutral or unaffiliated individual (but typically an industry expert) will occupy the “independent seat.”  And while each seat is responsible for making decisions in the best interest of the company, the common and preferred seats have the added responsibility of representing the interests of that class of shareholders.

In my opinion, it’s not required that the independent seat be filled right away.  In fact, having an open seat on the board can be a very powerful tool for the startup CEO to engage partners and advisors, as potential independent directors, who might be able to help the business in any number of ways.

The CEO & Board Management

I really can’t overstate the importance of the CEO’s proper care and feeding of the board of directors.  To be as simple as possible, the best way to manage a board well is to have consistent, proactive communication from the CEO to each board member individually or as a group.  That’s it.

A CEO that manages the board “well” tends to show and do the following:

  • The CEO has awareness of what’s important within the business and larger industry as well as a desire to keep the board informed so that they may have the best context for the business and be maximally beneficial.

Board meetings should not be simple quarterly read-out and reporting events.  They should focus on business-relevant discussions and challenges that the board can help the company with.  This is easier said than done but it starts with the CEO ensuring that the board is properly informed ahead of board meetings.  The board has a responsibility to stay informed as well but the CEO should not count on the board to be as close to the business, the industry and associated nuances as the operators who live it every day.

  • The CEO recognizes that the worst thing that can happen between and board and the CEO are “surprises” regarding significant occurrences in the business.

Eliminating or minimizing surprises means a bunch of communication to board members ahead of the actual board meeting. For big business problems or important strategic votes, setting expectations and knowing how votes will be cast in advance of the board meeting will give the CEO an opportunity to understand concerns, answer questions, provide perspective and set / re-set expectations proactively. This is very time-consuming for a busy CEO, but it’s critical.

Surprises at the board level, especially bad ones, suggest that the company is out of the CEO’s control.  Because why else would the board not be informed proactively as described above?

  • The CEO has both discipline and respect for the board.

Sounds simple but board members have either invested in your company or have agreed to help you grow your business because you asked them to help.  Lack of respect is the fastest way to create a divisive board…especially members of larger boards that will likely exist as the company grows.

When I ran companies, I would very rarely delegate board interactivity into my organization even though I completely trusted my co-founders and executives.   That may sound like a bit of control freak behavior but the reality is that I wanted to be sure that I knew what was communicated to board members, what was communicated from board members and exactly how it was communicated.  Yes, that creates more work for the CEO but remember that the CEO reports to the board.

  •  The CEO delivers board materials to directors at least 2-3 days ahead of time.

Blocking and Tackling language

before we dive into the details, here’s an easy board “language” tip:  as the CEO or presenting CxO or VP:  try not to use phrases such as “to tell the truth,” or “truthfully” … your board expects everything to be truthful without any such disclaimer…saying sounds odd.

starting and adjourning the board meeting

CEO:   “I’d like to entertain a motion to approve the minutes of the previous board meeting.”

Board member 1:  “I move to approve the minutes.”

CEO:  “Is there a second?”

Board member 2:  “I second.”

CEO: “I have a motion and second, is there any discussion?”

CEO: (DISCUSSION OR NOT)  “All in favor?”



NOTE: Unanimous votes are made easier by the fact that the substance of Board deliberations is not recorded in the minutes, only actions.  Well-drafted minutes gloss over detail and simply state that certain subjects were discussed.

Language / process for other motions such as option approvals, new board members and other board business.

CEO: “I would like a motion to approve the option grants just discussed [or other topic].”

Board member 1: “so moved.”

CEO: “Do I hear a second?” or just  “second?”

Board Member 2: “I second.”

CEO:  “Motion has been seconded; any discussion?”  (this step can be skipped)

CEO: “All in favor?”

board: “aye” or say nothing

CEO: “All opposed” or “any opposed”

board: typically silent

CEO: “Motion is approved” or “Motion is unanimously approved”

  • The larger the company, the more work gets done at the committee level (often the Audit Committee) rather than by the full Board. For highly sensitive matters like the Hurd affair, it would be customary to appoint a special committee of the Board consisting of independent outside directors to oversee an investigation, conducted by an independent outside law firm. The committee would then report back to the full Board with results and recommendations.

  • For something this sensitive and controversial, I’d expect a lot of back-channel communication occurred among directors, the special committee and its independent counsel, resulting in a “pre-vote” of sorts in which the Board members reached a consensus first, then convened a meeting that was carefully planned to allow the committee to formally report its findings, allow each Board member to state his or her views on the subject formally for the record, and then take a vote. Because litigation is virtually certain in this kind of situation, everything would be carefully controlled and documented. Again, no surprises at the meeting. No drama.

  • For more ordinary (but still important) matters, the committee chairperson or senior executive usually reports to the full Board, the directors then spend as much time as they need discussing or debating the decision to be made, and an informal straw poll is often taken first, and a consensus arrived at, before the Chairman actually calls for a vote. Among other things, this is a courtesy that allows the whole Board to discern which way the wind is blowing, so to speak, and gives every director the opportunity to cast his or her vote with the “winning team.” Again, unanimity and consensus are highly valued. The only exceptions I’ve ever seen are when a company is falling apart and the Board degenerates into warring factions (for example, founders vs. VCs or early vs. late-stage investors).

History: Board Processes & Robert’s Rules of Order

For the history buffs out there, I’m pretty sure that most of the formal board processes that are used today have been derived from Robert’s Rules of Order.  From Wikipedia:

The first edition of the book, whose full title was Pocket Manual of Rules of Order for Deliberative Assemblies, was published in February 1876 by then U.S. Army Colonel Henry Martyn Robert(1837–1923) with the short title Robert’s Rules of Order placed on its cover. The procedures prescribed by the book were loosely modeled after those used in the United States House of Representatives, with such adaptations as Robert saw fit for use in ordinary societies. The author’s interest in parliamentary procedure began in 1863 when he was chosen to preside over a church meeting and, although he accepted the task, felt that he did not have the necessary knowledge of proper procedure. In his later work as an active member of several organizations, he discovered that members from different areas of the country had very different views regarding what the proper parliamentary rules were, and these conflicting views hampered the organizations in their work. He eventually became convinced of the need for a new manual on the subject, one which would enable many organizations to adopt the same set of rules.

The first thing that a CEO should realize is that, unless you are explicitly NOT the chairman of the board, the board meeting is YOUR meeting.  The CEO runs the board meeting and is responsible for implementing due process and protocol at an appropriate level.

What is an appropriate level?  That’s a subjective assessment that must be made as the company matures, but having some process and applying some level of protocol is appropriate for boards at any maturity level.

Other questions I’ll try to answer in an future version of this post:

  1. When is formal too formal?
  2. what’s the list of things that must be approved by the board?
  3. role / responsibility of officers of the company in a board meeting?
  4. common fear:  does a board inherently mean you have less control and/or are more likely hood of being fired ? + other mis conceptions about board power

  5. what role does the chairman / lead director play; who is it? (typically CEO for early stage companies)

  6. role and timing of board committes: audit, compensation, executive

  7. role and timing of a secretary / role of “board minutes”

  8. when to have or not have other execs in the meeting; exec session vs board business and how to handle board business (when in the board meeting; who attends); the substance of Board deliberations is not recorded in the minutes, only actions.

One way to think about start-up compensation for founders and execs

Article written by Kip McClanahan and Morgan Flager of Silverton Partners. This article originally appeared in the Austin Business Journal.


Compensation is a multi-dimensional challenge for founders and the first few executives in early-stage startups.moneymoney

The most important principles to remember as issues present themselves are fairness — including the perception of fairness — and strong alignment between the key stakeholders in the company.

A startup management team, taken to a bit of an extreme, is like a special operations unit. There isn’t a ton of redundancy built into the system, the tolerance for failure is low and the cost of failure is high. To succeed, everyone has to be on point and everyone has to depend on the next person to do their job or the mission fails. If people don’t feel like they’re treated fairly, they aren’t going to be motivated and they won’t perform at the level required. The result will be that everyone fails. The perception of fairness is, simply, mission critical.

Another important factor to consider when coming up with pay is alignment — alignment between the founder and the rest of the early executives and employees, and alignment between the management and investors. As it relates to compensation, the healthiest organization is one where the CEO, founders and management team and equity investors are all aligned and focused on maximizing equity value instead of collecting current cash income or pursuing some other agenda.

What should you pay yourself?

One of the biggest questions relates to the startup’s founder and CEO: How much should he or she pay themselves?

Several successful investors have said that one of the most important things they look at before investing in a startup is how much the CEO or founder is getting paid. The assumption is, the lower the CEO salary, the more likely the company is to succeed. Whether that statement is correct is beyond the scope of this discussion, but the logic behind it is worth examining.

The salary of the CEO sets several important precedents.

First, it sets the tone for the rest of company, in terms of how much people are paid and how expenses are managed. If the culture is such that everyone is well-paid, new employees have no real incentive to take less now and play for a bigger equity event down the road — and that takes away a primary driver of innovation and a crucial element of why startups succeed against incumbents.

Second, in a more subtle way, the CEO’s salary is a strong signal behind the true motivation of the founding/executive team. In an organization where the CEO, founders and management team are aligned with its equity investors, everyone is focused on creating equity value and not collecting their monthly allowance. At the most basic level, a high salary sends the signal that the team isn’t “all in” on the equity opportunity. All dollars spent on the CEO’s salary are additional dollars of dilution that has to be endured, and smart investors know to pay close attention to how CEOs place their bets because it is one of the truest indicators of what they really believe. Do they hedge and take more current compensation, or do they believe in the long-term opportunity for the company?

So, does that mean CEOs should pay themselves nothing, live in a cardboard box and eat Ramen every night for as long as the company is around? Not by a long shot. The best advice I’ve heard is to pay yourself as little as you can where you can still live your life, do the things you need — not want — to do and enjoy yourself. In other words, enough to pay the bills. There is no universal, black and white answer because salary needs can vary widely. A 23-year old founder with a modest background and no mortgage and kids will have different cash needs than the 50-year-old with two kids in college.

Over time, as the company develops and hopefully succeeds, it is a fine practice for the CEO and the rest of the early executives to move closer to “market” salaries if they chose to. For example, after a company raises a Series A round, it’s typically to see seed-stage salaries adjusted upward a bit. Other adjustments typically come with later stage financings or, preferably, as the business reaches a break-even point. In all these cases, employees that wish to remain at a lower salary level should be rewarded with additional equity.

How to compensate the core team

Early, non-founder executives should be subject to the same compensation scrutiny as founders. In fact, one of the easiest ways to tell that an executive candidate may not be right for an early-stage startup is if they have a high cash requirement in their compensation package. While employees must earn enough to cover their living expenses, executives from larger, more mature companies may not easily make the transition to the scrappy, cash-is-king startup environment.

A good way to test how an executive is thinking is to offer them a choice between two different packages. For example, COO candidates might be offered a choice between a $100,000 base salary with 3 percent equity in the company or a $150,000 salary with 1 percent equity in the company. In most cases, you’d want to see the executive choose the lower cash, higher equity option. That’s in line with the company’s needs — minimizing cash burn and pumping up shareholder expectations.

Much like the CEO’s salary setting the tone for the rest of the company, the salary of the first non-founding executive sets the compensation context for the next set of executives. This is one reason to work especially hard to recruit early executives that believe in the long-term opportunity of the company and clearly value equity compensation above cash.

As companies mature further, the process of setting salaries becomes more formal — some would say institutionalized — and tends to gravitate more toward what are perceived to be market packages based on the position and the candidates’ experience.

Remember, with startups, prizes are not handed out at the beginning of the race. The time will come when you prove you’re a winner, and that’s determined by how you finish.

INFOGRAPHIC: Self-Storage Explodes!

SpareFoot is one of the companies in Silverton Partner’s portfolio.  They’re the world’s largest marketplace for self-storage — a $20 billion-dollar market. Sparefoot also provides leading web marketing solutions for storage operators. Sparefoot was founded in 2008 by then-UCLA students Chuck Gordon and Mario Feghali (aka Chario), SpareFoot originated as a person-to-person storage website (“airBnB for storage”) that helped people rent extra space for storage in private residences. Then we realized there was a larger opportunity for this platform in the traditional self-storage industry.

The following post was originally written by SpareFoot.

The $22 billion self-storage industry is a hidden giant among us. You probably drive past at least one storage facility on your daily commute, with or without realizing it. They’re everywhere, but you don’t notice because self-storage is boring— a boring goldmine, that is. It’s one of the fastest-growing sectors of commercial real estate, with the amount of storage space in the U.S. doubling to 2 billion square feet in a mere five years from 2000-2005.

Americans have a lot of stuff, and no where to put it. This is clear from the popularity of self-storage here as compared to other countries. We’re responsible for around 86% of the entire global self-storage market, with 50,100 storage facilities in the continental U.S. as of last year.

You might think big brands like Public Storage and U-Haul dominate the market. But only 9.6% of all facilities are owned by the five biggest companies. This is testament to how small business entrepreneurs have come out in droves to meet storage demand. Power to the mom-and-pops! We’re proud to be part of such a robust, successful and growing industry dominated by small business owners like us. And if we learned anything in the past four years, it’s a lot less boring than you might guess.




























































LinkedIn Financial Services Summit: Key Themes and Trends

Social media use is exploding for financial services firms, just as it is for enterprises across other industries. Despite compliance-oriented hurdles, more and more financial companies are showing a broad-based commitment to adopting social media in ways that produce real business impact.  This post was originally written by Tim Walker at Socialware. 

Consumers are using social media at a breakneck pace, but the financial services community has not yet caught up with these new social habits. That was a key theme that emerged from today’s LinkedIn Financial Services Summit in New York. Many speakers emphasized that financial services firms need to do a better job of using social technologies to provide the engagement that socially enabled clients now demand.

Throughout the day, industry experts explained how firms are addressing the challenges of social media and seizing the opportunities that it creates. Speakers included LinkedIn executives Mike Gamson and David Hahn, social media pioneerFrank Eliason of Citigroup, and Socialware’s own CEO, Chad Bockius.

5 Social Media Trends that Cannot Be Ignored

One presenter after another emphasized how firms need to understand the dynamics of social media, grasp their impacts on marketing and customer interactions, and then integrate these insights into their business practices.

1. The social revolution is driven by clients. Consumers — especially influential younger ones in the emerging affluent segment — cannot imagine a world that isn’t digital, and they won’t make important financial decisions without doing research on social networks. In this context, the old command-and-control model of marketing, in which firms push out their messages and consumers passively accept them, is no longer viable.

2. Firms must engage in different ways. In his panel comments, Eliason was particularly eloquent on this point, describing most financial firms as “lousy” at having a conversation. Social media, by contrast, is about having a human dialogue, and this forces firms to be more open and to engage in different ways to build trust. Firms can get much closer to customers, he said, by asking what is important to them, and then evolving in response. All of this, he emphasized, can be done in the right way by partnering with regulators — who are still figuring out social media as well.

3. Consumers are making decisions in new ways. Financial services clients no longer rely on single sources for information; now they aggregate information by researching and sharing relevant content among their friends and connections. LinkedIn has enabled this process in several important ways, for instance by making it easy for firms to share content through Company Pages. They have also acquired a trove of business content (more than 9 million pieces of it) through last week’s acquisition of Slideshare.

4. Pervasively mobile, ready or not. LinkedIn has also made a major splash with its recently released iPad app. As Hahn pointed out, LinkedIn has had more downloads for that app than the entire circulation of The Economist. By looking at usage patterns, they are also finding out that LinkedIn members use iPads and desktops for different purposes. It’s clear that firms are paying attention to this, too: several senior marketers talked about how mobile usage is central to their social strategies.

5. “It is not about social business, it is about business.” That was a key point that Bockius made on the panel pictured above, “Affluent Investors:  Online and Looking for Guidance.” He was joined by executives from Charles SchwabBlackRock, and OppenheimerFunds. The four of them talked about how social media improves firms’ abilities to engage clients — affluent ones, especially. All three of the financial firms represented are using social media to listen to even the most sophisticated investors and connect with them using highly relevant content, including video.

The Social Revolution in Financial Services Is Just Beginning

In his panel comments, Bockius encouraged his listeners to avoid the temptation to define their solution for social business before actually defining their social strategy. He emphasized that the entire industry is still in the early going when it comes to social media, and there is still much to learn about how brands, advisors, and other employees can best build relationships in this new environment.

For more information on how financial firms and their advisors are using LinkedIn and other social media, see our post summarizing LinkedIn’s latest research.

Startup, Get Down: How To Throw A Profitable SXSWi Party

While Austin’s SxSW has been over for a few months, one of our portfolio companies uncovered a very interesting way to throw a brand-name building, link-generating party and actually have it make money.  This is the story of how they did it; this post was originally written by Rachel Greenfield of SpareFoot (rachel [at] sparefoot [dot] com or @SpareFoot).

It’s already time to start planning your startup’s SXSW 2013 party. Really. Interactive is a big opportunity to put your name on the hip map in the tech world, and let your internal spirit of debauchery go public before the company does. SpareFoot felt ready to do it big in 2012 for the sakes of PR (read: SEO link building) and developer recruitment. We never expected to actually make money in the process. I’ll enlighten you on how to achieve this profitability by sharing our own experience.

We’re not event planners.
Our System Administrator, Andrew, was a party promotor for raves in the 90s. Our Marketing Analyst, me, was naturally responsible for winning marketing bang for the buck at SXSW. Andrew and I randomly share an appreciation for non-rave electronic music – hip-hop, breakbeat, dance hall, Baltimore club – and the skilled DJ work that brings it to life.

Spare Beats was born about five months premature of SXSW. We rode a choppy wave on our enthusiasm for the concept— a free eight-hour monster that would move from relaxed day party to evening rager. I literally had no idea what I was getting into, having no experience booking talent or planning and coordinating events. We brought in my friend Gerald, a professional all-of-the-above and local DJ, as unofficial consultant. Together the three of us fought the good fight against an impossibly tiny budget, chaotic to-do list, and each other.

We managed to: Choose a date, book a venue, secure six local DJs and two nationally known DJs, book flights and lodging for national talent, get dinner and drinks and ground transportation for national talent, bring on six sponsors to cover costs, deliver on service trades with sponsors, coordinate with advertising partners, order and distribute two runs of fliers and posters, order banners, set up a VIP list with drink tickets and wristbands, bring in a third-party sound system, order swag (T-shirts and mini SpareFoot tape measure keychains), blast email campaigns, process payments for everyone and everything, claim 42 PR mentions with links, 261 Twitter mentions, 46 Facebook mentions and 9,290 RSVPs.

…And that doesn’t cover the logistical nightmares. But the actual event went off pretty successfully. We exceeded our minimum bar sales amount set by the venue, earning 20% back on drink sales. In fact, our party set a record high on bar sales for the venue. The date we nailed was prime timing on the first Saturday of Interactive. We snagged the domain for our party  and redirected it to run through our main website for maximum SEO value. Jeffrey, our in-house designer/developer, created perfect visual branding and threw our website and promotional materials together on tight deadlines.

And we made money through sponsorships— not tons, but enough to come out above the budget. So we’re going to do it again next year, recycling the concept but executing an updated, streamlined approach that will return more profit and more media mentions and links over this year.

Where we messed up. 
Most painfully, Spare Beats stole Andrew and me from our core roles. We’re both still catching up after losing roughly 150 work hours to the event, and have a medium-length list of things we easily could have done differently. If only we had felt less like recently decapitated chickens running a race.

Basically—  we should have gotten started a full year in advance instead of five months out. We should have chosen a venue closer to the city center of downtown, because between the distance and the chilly rain that surprised us the morning-of, I think we lost a lot of potential attendees (it was still packed). Of course, a weather preparedness plan could have been in place to prevent our last-minute scramble for a roof-top tent. We lost revenue by providing unlimited drink wristbands to employees, their +1s, and a list of VIPs. Civilians were asking folks with wristbands to grab them drinks, and it’s hard to say “no.” Multiply that by all the wristbands we had out in the crowd, and you’ve got a serious bar tab.

Because none of the people involved in planning Spare Beats 2012 were actual event planners or designated as lead project manager, the effort was chaotic and lacked reliable structure. We felt too busy to set one up, as one thing came right up after the other. Thankfully, we’ve since hired our first formal office manager, Geni, who will handle event coordination moving forward. She’s already taking a front seat in organizing Spare Beats 2013.

Now do it yourself, only better.
Let’s talk about you, and how you’re going to pull this off like a champ the first time. The big takeaways:

1. Profit alert: Tap relationships with local businesses and tech companies to bring on sponsors. Develop different levels of packages based on trading services for party cash, and reach out to every connection anyone on your team has. Service trades can include branding and SEO favors like building links to sponsors in tandem with your own web marketing, and splashing sponsor logos on dedicated screens and banners at the event. Contract sponsors with a term requiring them to link back to the event from their own sites. Cast the net wide, but aim for a few big-ticket sponsors.

2. Designate an event planner who will project manage this from conception through execution. He or she should get started as early as possible, setting up a task list/calendar and communicating about who is responsible for what.

3. Consider hiring a consultant who does this stuff regularly. Ask around your favorite bar and club owners, even tap employees for connections they may have in the nightlife scene. Nail a contract with terms listing their specific responsibilities in advance, to determine a fair rate and avoid role confusion later.

4. Commit to keeping the event planning logistics on the project manager’s plate, and off your marketers’. Let marketers focus on reaching a wide scope of influential bloggers as far in advance as they can, applying a dedicated PR focus.

5. Get traffic by hosting the event page on your domain. Run the RSVP platform there instead of on a third-party like Facebook— bloggers covering your event will just link to wherever the RSVP capture lives. And if your party is free, add a hoop to jump through, like requiring people to “Like” your Facebook page upon RSVP.

6. Get other teams involved, particularly SEO— interns can add the event to user-curated directories and capture lower-influence guest blogging links.

7. Beyond the standard fliers and posters, get creative with your street team approach. We had a great experience with iWearYourShirt, scoring us extra social mentions. For 2013, we have a crazier, top secret plan in store.

8. Negotiate a low bar minimum and high return on drink sales with the venue, for a fun cash bonus after the party.

9. Put a maximum spend limit on your company bar tab, and distribute a set amount of drink tickets per VIP and employee. Keep your VIP list in alphabetical order by first name for the door guys’ sake. They’ll hand out the strips of drink tickets, which you should pre-stamp with your company logo to avoid foul play with generic tickets.