Berkonomics – Business Insights from Dave Berkus

               As you follow these insights from ignition to liquidity event, you’ll detect a continuing theme, emphasizing the need for deep and wide relationships that the CEO and senior staff can call upon for advice and guidance.  This is the time to elevate those insights to the level of highest value for the corporation, one that cannot be listed on a balance sheet nor included in an appraisal of corporate worth. 

                And yet, such relationships properly used and never overused, can quickly and precisely help a CEO cut through delays in government agencies, speed the process of product planning and ultimate release, aid in positioning in the market and help the CEO avoid a myriad of mistakes that could prove costly in time and money.

Often, I am asked by young CEOs how much time should be devoted to various types of tasks by a good CEO in a small, growing enterprise.  Of course the response depends upon lots of variables, including whether the company is in a fund-raising mode (in which case the CEO may be spending up to 80% of his or her time on this alone).  I am chairman of the Technology Division of the ABL Organization, a roundtable organization with multiple CEO roundtables of about twelve members each, meeting monthly.  Each CEO is asked to make a deep presentation once a year in which he or she starts with personal and business goals for the coming year followed by concerns as to how to reach these goals.

            Much of the rest of the presentation is devoted to explaining to the group the causes for the concerns and offering information for the group to use in the feedback session to help the CEO seek solutions and to provide resources to the CEO for that purpose.  The format also calls for the CEO to examine his calendar over a period of time and report classes of activities by percentage of total time spent, so that the group may add comments about use of CEO time to the critique.  It is from over a thousand of these CEO presentations over the years that I attempt to make these generalities.

[Email readers continue here...] A good CEO spends at least 30% of his or her time dealing with customers, including meeting directly with customers and being involved in closing the largest deals, maintaining CEO relationships, and “sniffing” the attitudes of customers toward the company as well as exploring the needs of the customer that might be satisfied by new product development.  15% typically is spent on direct management issues such as supervision of next level subordinates.  15% might be spent networking with those in the CEO’s relationship circle, including the roundtable organizations.  10% is typically spent networking with board members, usually with frequent phone calls, and preparing for board meetings.  10% is typical in exploring strategic concepts, reading about new developments in the industry and just spending quiet time contemplating opportunities. 

            There are many other classes a typical CEO will list for that remaining 20%, some concentrating upon time spent in meetings of all kinds, lumped together as if all meetings are of some equal value. The group often pays close attention when this happens, since it is a sign that the CEO considers meetings of all kinds a drain upon available time, and few meetings of special importance.  Whatever, the spread of percentages to make 100% of a CEO’s time, the CEO is asked to estimate the average number of hours spent each week at or on work.  Most respond with between 60 and 80 hours a week, emphasizing what you already know, that CEO’s are not often 40 hour workers.  But then again, in this new world of always-on communications, who is?

This insight addresses the establishment and maintenance of an advisory board, a formal group with no legal responsibilities, but one able to be called upon to act as business, industry and scientific advisors to the CEO.  Usually, such an advisory board is formed carefully by the CEO to fill in the critical areas of need not evidenced in the board of directors or within the company itself.  University professors, industry gurus, lawyers familiar with patent law and former executives of competitor companies are typical recruits to an advisory board. Sometimes, celebrities will agree to sit on an advisory board as a gift to the CEO, providing a bit of glamour for the company at small expense.

There is no limit to the number of individuals for such a board, but there is a practical limit to the amount of cash and / or stock to be allocated to these outside advisors.  The rule of thumb for an advisory board member is to expect a full day each year on site, typically in a strategic planning meeting with numerous members of the staff, and a number of phone calls from senior members of management during the year.  Included in the “package” is the expectation that the advisor’s name will be freely used in the company’s marketing, a bio listed on the website, and occasional calls will come as references to the advisor from potential investors and others looking for deeper insight into the secret sauce of the company or state of the industry than can be provided by many on the inside.

[Email readers continue here...] For this, an advisory board member for a small to medium sized company should expect to receive options equal to ¼% of the fully diluted stock of the company, vesting over two years, and subsequent grants of the same size if renewed in subsequent two year intervals.  Alternatively, some companies pay an advisor a fee of $1,000 per meeting day and optionally much smaller stock grants, if any.  Additional commitments of time by an advisory board member should be compensated as would any consultant, at half and full day rates agreed upon in advance between the CEO and the advisor. There is no rule as to uniformity of pay, as some advisors may be willing to serve at no cost while others are industry consultants used to receiving fair payment for services rendered.

I sit on a board of a company with potentially valuable patents that it is exploiting aggressively. The board has hired an attorney firm to pursue protection of these patents in the courts, but the members of the board felt that it would be wise to add a member to the advisory board who is also a patent attorney to watch over the process and advise the board at its meetings of issues that may not have been covered by the paid attorney or by other member of the board itself.  In this case, payment for the attorney advisory board member was agreed to in the form of common stock options more generous than the average advisory board grant, as the attorney was invited to sit in on all meetings of the corporate board and agreed to do so.  There are many variants of the rule for payment, and many reasons why advisors may be willing to serve. In this instance, the attorney realizes that the potential value of the stock options in the event of major wins in patent litigation would far outweigh any fees which he might have charged.

Advisors fill blind spots in the corporate knowledge base and guide the CEO in areas that the CEO feels are personal weaknesses.  There is usually a formal agreement between the company and the advisor, carefully calling out the time expectation, the forms and amounts of payment, and the indemnifications from liability granted by the company to the advisor in return for confidentiality and non-disclosure of company trade secrets by the advisor.

A particularly strong advisor, especially if well known, may be named chairman of the advisory board, often just a honorary title, since the CEO is usually tasked with the planning of the full day meeting of advisors annually, setting the agenda to match the needs of the member of the corporate board and senior management.

               Business coaches come in all sizes and shapes.  You’ll have a relative willing to devote time, a school friend with business experience, professionals who charge for the service, investors with a reason to promote your success and more.

                But by far the best coaches are those that have lived through the process you’re going through and built successful enterprises in your same industry.  Especially if they have sold their companies and live comfortably upon the proceeds, these people are often the most willing to help and the most patient through the process.

                One great source for coaches is among fellow members of a CEO roundtable organization, Young Presidents Organization or similar association where you are comfortable with the coach candidate and know something about his or her style.  Another is through industry associations or civic groups such as Rotary or Lions Club.   Some larger communities have organizations of corporate directors, composed of a combination of service providers and professional corporate directors. I’ve personally been involved with the ABL Organization for well over twenty years and share problems and solutions with a monthly roundtable of smart CEOs from companies of all sizes. 

              If you take smart money from a good angel or venture organization, the lead investor usually becomes your board member and has a vested interest in your success.  If you are lucky enough to create competition among investors for your company, you can select the investor or group with an individual who has experience in your niche and identifies with your vision.

[Email readers continue here...] How do you pay a coach?  If the coach is also a significantly large investor such as a VC fund, the board member-coach will offer a limited amount of time outside of board work at no extra cost, all for the good of the investment.  Professional advisors, consultants, are typically paid by the half day or full day, charging anywhere from $400 per half day at the low end up to $3,000 or more at the high end for a full day of work.  Some charge by the hour, making themsef available much as an attorney, keeping track of hours spent on phone calls and emails with you. And some will willingly work for stock options, an amount to be negotiated based upon time spent and stage of corporate development.  Years ago, I co-wrote my first book, profiling just such a person, trading his time and experience in exchange for equity – and managing to become wealthy in the process by picking and aiding great young companies that grew large and were ultimately sold at a tremendous profit.  We had no term for such work in those days, and created the phrase “resource capitalist” to describe the person and process.  He brought resources to the table from personal experience to a great contact base, and was able to help speed the time to market while introducing the company to great potential buyers at the right time in the process.  His average percentage of a company was 5% in return for spending a day a week as I recall. 

            Jokingly, I used to tell people that I worked for food, with so many free lunches being offered from all sides. But alas, there is no free lunch.  And over the years I have vastly curtailed the practice. However, there surely are experienced executives out there who’ll work for a meal. It is worth asking.

            There must be many more creative ways to pay a coach, especially for early stage businesses.  The one warning: avoid those looking to become partners, asking for larger portions of equity than, say, 5% when they contribute no cash to the enterprise.  There may be times when such a person can truly be a founding partner in a young business and devote enough time and resources to warrant more, but this is taking on a partner in every sense of the word, and should be done carefully and only after spending time with a number of the person’s references and becoming comfortable with the person, ready for the long run.