Ever receive worthless advice?

Ever get bad advice? Sure. We all have in our past. Ever take that advice without question because the person giving it was an investor, a superior in rank, the chairperson of your board?  I’ll bet you have at least one story of bad advice taken and being bitten as a result.

Reaching back for an important lesson

As one illustration among many I can recall, let me tell you the story of the first investment made by a newly organized formal group of angel investors. Some of you can guess that name of the group. It was thrilling for these angels to find a young entrepreneur with an idea for a business that seemed so destined for greatness that the angels invested over $1 million on the condition that the group receive two board seats and one observer seat on the start-up’s board.  The young, eager entrepreneur immediately agreed, and the business was launched, well- funded and anticipating great profits.

Good intentions sometimes lead to…

As the business expanded into a second city and then planned expansion into a third, there was a rift that became evident between these angel board members, played out in front of the CEO.  The angels argued about whether the expansion was too quick, requiring additional money, or should be slower and bootstrapped with profits from the first city’s success.  Finally agreeing upon expansion at speed, the angels raised more money and encouraged the CEO to accelerate the expansion, which the CEO did with enthusiasm.  It did not take long for the company to again run out of money, and for the board to split over the next moves (since the first city continued to be profitable).

The consequences of not thinking ahead:

[Email readers, continue here…]    The angel investors could not raise the next, larger round to finance the shortfall and further expansion, putting the fragile young company at risk for following the advice of its board.  In the end, the company had to turn to a wealthy individual investor who took control of the corporation as his price for saving the company.  Look ahead only a short time, and the new major shareholder ran into trouble overleveraged with his real estate investments and defaulted on his funding promises.  But I digress.  Painfully.

What went wrong?

Had the angel board members been able to agree upon a financeable strategy for growth, the company might have been immensely successful.   To put an ending to this story, the entrepreneur followed the suggestions of the new investor just as he had followed the angels, and accelerated quickly into more cities, again running out of cash.  And now you know that the wealthy investor in the meantime, could not make good on his promise to further fund the company, which found itself unable to meet its obligations and ultimately was shut down, causing a complete loss for all.  Bad advice taken by an enthusiastic and compliant young CEO was the root of the cause, compounded by circumstance.

And the result for the entrepreneur for taking this advice?

By not putting up any argument and being completely compliant, the CEO ceded control of the company to outsiders who gave bad advice.

The lesson for any CEO or for any of us for that matter is to filter all advice through the strainer of good reason, taking that which seems reasonable and rejecting that which is wrong for ourselves or for the immediate time.  And, as I have learned from experience, if you perceive advice to be in error or against better judgement, form your arguments after a little thought and make your case with information to back it up if necessary.  Most of the time, the person on the other side of the table will see your side, feel your passion, and either agree or withdraw any objection.  Remember, passion and reason almost always win the day in these cases, even when facing a superior in the food chain.

Now you can tell your story…

Images for this block created using DALL-e, Microsoft Designer, with prompt: A group of diverse standing adults surrounding a single young businessman, all casually dressed, with all staking at once. Photo-realistic image with ragged edges and transparent background.

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Should you find a business coach?

Does this resonate with you?

The CEO position can be a lonely place, especially when you find yourself in a position of not being able to bring an issue directly to the board and not wanting to explore solutions with associates within the company.

Sign of weakness?

This sometimes happens when a person is unwilling to admit a weakness in an area that is critical, such as analysis of financial statements, or when unhappy with the actions of your board or with pay offers by the board’s compensation committee that cannot be resolved amicably.  Having an experienced coach, usually acting informally and not for any kind of pay, is a safety valve that cannot be understated when in times of great stress.

Some possible coaches in your present sphere…

[Email readers, continue here…]     Sometimes that coach is a member of the board willing to listen and make suggestions off the record.  And often that is good enough.  In my experience, there are times when a CEO needs a completely neutral third party or a roundtable of fellow CEO’s to help guide him through a difficult maze.

Here’s a suggestion:

Develop relationships with fellow CEO’s in non-competing businesses for a start. Perhaps even formalize the relationship with regular lunch meetings or meetings in groups of CEO’s to discuss personal issues without fear of the discussion leaking outside closed doors.

Image created with Microsoft Designer (OpenAI) using prompt: A photorealistic image of a male CEO sitting at an office desk, looking lonely and alone. Image should have soft edges. Desk should be loaded high with papers in the inbox tray.
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I’ve been sued as a board member.

I’ve been sued as a board member too many times over the past twenty-five years of board service.  Five times. Does that shock you?  It does me.

What’s the exposure?

Here are some examples: Entrepreneurs blaming their board for failures of a fragile, early-stage company.  Shareholders unhappy over the same loss, reaching out to sue every name available. Employees reaching out to anyone above to redress grievances.  In one case, an aggressive lawyer found all the members of an LLC, and sued every member found.  Whew!

So, what’s the chance this could happen?

Whenever there are outside shareholders or noteholders, or unhappy employees, and when there is a product in release, there is a chance, no matter how slight, of a lawsuit against members of the board as well as against the corporation itself.  Even if such a suit is completely without merit, the cost of defense and the risk of a negative outcome both hang over the company and the director.

What is D&O insurance?

[Email readers, continue here…]   Directors and Officers insurance (D&O) is meant to reduce that risk and provide for the legal defense of any such suit at the expense of the insurance company.  In that regard, even the lowest amount of D&O insurance available, $1 million, provides for legal defense costs to be covered.  The usual cost for such insurance is $4 to $6 thousand a year, with an extra $2 thousand for an additional million dollars of coverage.

Consider completing the package.

Recently, insurance companies have added employee practice liability insurance (EPLI) to the package to address specifically the risk of employees suing for redress.  Given the increasing number of suits for sexual, racial, gender and other discrimination, this now seems logical and necessary.  So, add another $3 to $4 thousand to the policy cost.  Ouch!

Is the required?

More important than the cost is the provision of investment documents from sophisticated investors like VC’s and sophisticated angels requiring D&O insurance for the company at the time of funding.

I am one of those.

Over the many years of board service, before insisting upon this insurance requirement before service, I had been sued as a director several times, in no case covered under the umbrella of a D&O policy.

Although I won all but one of these rather spurious suits (and settled that one outlier to keep my unaffiliated wife out of this swamp), the cost of defense in some of the cases was not reimbursed, and the time spent in helping the attorney prepare for the defense and in one case through to a several-day adjudication event, was not small.  As a result, I now insist upon D&O insurance for every board upon which I sit.  The backgrounds of these suits make for good stories – but for another time.

Images created using DALL-e, prompt: A realistic image of a man serving papers representing a lawsuit upon another younger man and his board of directors, all in business attire without neckties. Use clear background and ragged edges to picture.

Posted in Protecting the business, Surrounding yourself with talent | 2 Comments

Are you expecting too much from your board?

Expect a board member to give a meeting a month, emails and phone calls between.  Urgent issues require more of all.

Of course this is a tricky question. You might expect the answer to be “as much as necessary” or “more during emergencies” or “usually just at scheduled meetings.”

But board members are usually busy people, often running other companies or serving on multiple boards.  Early-stage boards usually meet once a month for two to a maximum of four hours, enough to ruin the rest of a day for those who travel even short distances.  In addition, most board members freely receive phone calls and emails from the CEO during the month, all considered part of board service.  And with the advent of Teams and Zoom, board members travel far less frequently to meetings.

Special circumstances often appear by surprise.

There are times when board members are called upon to give extraordinary time to the corporation, such as interviewing candidates, strategic planning, recovery from a cash flow crisis or other urgent issues.  Most often these are freely given by board members.

Crossing that line…

[Email readers, continue here…]   CEOs: You will probably cross a line if you ask a member of the board to consult to the company, spending considerable time with other employees regarding issues that might be handled by others than from a board.  Depending upon the board member, it is appropriate for you to offer a consulting fee for this time spent above the call of board duty.  Any such informal contracting of service should always be preceded with an agreement between the CEO and board member as to the amount to charge and estimate of time to be spent before further agreement is necessary.

Do you expect your board members to be more involved that this? 

Have you discussed this during a board meeting?  And would you want more from your chairperson?   How about asking a board member to spend time with one of your VP’s or directors?  All of these are great questions to clarify with your board.

So, now we’ve discussed the expectations that are the norms.  It’s your turn to make expectations clear and be sure there is agreement about these expectations.  Good luck!

Images created with DALL-e from prompts for this blog post.

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How do you pay an early-stage board?

Give one percent equity to each outside board member vesting over two to four years of service.

Many early-stage CEOs and board members have asked for some guidance regarding pay and time commitments for board members.  Here is my best advice, based upon many boards and many years.  Pay early-stage board members of companies that are not lifestyle businesses one percent of the fully diluted equity in the form of an option that vests over two to four years of service.  You do not pay professional investors who are serving on behalf of an investment company or VC and paid by that company.

How do you set the option price?

The option price should be set by appraisal under IRS rule 409a, and certainly should be low enough to recognize that common stock options are not worth as much as preferred stock, given the many preferences of the latter.  If you have only one class of stock, the price is the same as the last investment price per share if no 409a appraisal.

Special clauses for board members and senior executives?

Further, the option should contain a special clause for board members and those executives who may not be brought forward to an acquiring company – that accelerates vesting to 100% upon a change of control in the corporation, which aligns the board member with the best interests of the corporation itself. Otherwise, you might picture an event in which the sale of a company to be consummated a few months before full vesting could cause a board member to find ways to vote for delays or even against a sale of the company, awaiting full vesting of his or her options.

How about companies without intent to sell or IPO in future?

[Email readers, continue here…]   For lifestyle companies or later stage companies, board members should be paid on a per-meeting basis in cash. Typically, this payment amounts to $1,000 per meeting of the board, adjusted upward for public corporations to $3,000 per meeting on average, with special pay for committee chairs and special meetings.  These payments recognize that board members are not working for equity but for the equivalent of consulting fees plus the attendant risks of board membership.

Clarifying who receives options

To be clear, venture investors with investments from their funds are not typically ever offered pay for board service, which is expected as part of the investment.  Inside board members, CEO and any other paid employees are not paid for board service in either stock options or cash.

Expenses for travel are often reimbursed by the corporation. 

VC board members sometimes request this, other times do not. It should not be offered to the VC members unless requested.

Next week, we’ll cover what should be expected of a board member in the way of time allocated to the company.

Images produced with Midjourney: Prompt for first: “Four diverse adults sitting around a conference table examining a document for each.  Realistic human images. “

Posted in Surrounding yourself with talent | 1 Comment

No surprises! Good advice for all of us.

First, keep your manager or board informed regularly.

Most all leaders new to their position underestimate this time requirement.  It is good for the company when you share concerns, threats and opportunities with your superiors or your board.  The rule of “no surprises” works well for your longevity.  But there are always surprises. The rule is: communicate with individuals or a committee of the whole as soon as possible when important issues or threats to the corporation arise.

Safety, protection, and transparency.

You might be late with a project, sense a possible safety issue, see something or someone breaking the law, or just uncomfortable with a condition or trend. Think of the whistleblowers at Boeing and other very visible corporations.  In the name of safety, they took the chance to step forward.

Involving the board or investors

And sometimes you or your CEO want to obtain concurrence from investors or the board for issues of urgency or importance.  It is not bad form to lobby individual members in the form of a briefing of the issue and give time for the investors or board to debate the issue, sometimes requesting an “executive session” of just the outside directors.

For your senior management or board, this could be time-consuming. 

[ Email readers, continue here…]   Gathering facts may take time but certainly be worth the effort to make the case and reinforce the sense of urgency. The CEO is also responsible for preparing information for investors and for the board, the board briefing package before regular board meetings.  It’s a time-consuming task if done correctly.

What happens to urgent issues when brought to the board?

Especially when there are urgent issues such as surprises to reveal and dissect, the board meeting package should contain the issues to be discussed with backup materials for the board to understand the issues.

Limiting the discussion to those important issues and decisions.

Operating statistics in detail and individual departmental issues that do not rise to the level of board discussion should be included only in an appendix for board and investor meetings for deeper reading, but not discussion.  The CEO should discuss the agenda and board package contents with the chairman (if the chair is a different person) since the chair is tasked with setting the agenda and controlling the meeting.

The time you take to prepare for these urgent discussions is well worth the effort.  But if there is a time bomb to reveal, such as a safety issue, then urgency trumps detailed preparation. You have a responsibility, and in many cases, the authority to step up and make issues noticed, sometimes public, and often easily resolved.

Images created with DALL-E AI using the following prompt: “Casually dressed executive informing group of serious issue at the company with five people listening, some with surprise, some with pensive thought. Realistic human images.”


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Take this test to predict your success:

Your success must be based upon data that is solid and sometimes flexible enough to pass several critical tests if it is to guide a business enterprise to greatness.  Here in brief are ten tests for your successful vision.  Try these on for size, and test yourself for attractiveness to the marketplace, to investors and to history.

Ten tests for your business success:

  1. Is your market identifiable and accessible? Test yourself as to whether you can identify the size of your market niche, and whether you can overcome the many barriers to access customers within your niche.
  2. Where in industry life cycle? If your vision is for a product or service that fills a need in a mature industry, you may be flying against the prevailing winds as a market shrinks over time, taking your business with it.  Conversely, a fast-growing industry lifts most all good participants, making excellent companies excel even more and grow even faster, like a small plane flying at 150 knots with a 75-knot tailwind.
  3. How large is your total market? If the total market for your niche is under $100 million per year, it is going to be difficult to build a $50 million business, even if not impossible. If the market is ten times that size, there is probably room for competitors to fight for dominance and still succeed if you are not number one.
  4. Can you dominate that market? The dominant player in any niche controls pricing for all those under it, and often sets the risk profile for new entrants into the niche if the dominant player’s products or services fill the needs of customers at reasonable prices and quality.
  5. [ Email readers, continue here…]   Have you created high barriers to entry? If your business is a “me too” entrant into any market niche, even the smallest success will soon attract competitors that will sap some degree of your potential growth. What can you prove as a barrier to entry for competitors?  Is it the advantage of time – years of development ahead of any competitor? A core patent or “thicket” of patents protecting your offering?  A strategic relationship with one or more of the largest customers?
  6. Are margins high enough? Some great ideas just can’t make money and ultimately die for lack of profit potential.  Profit margins are higher for unique products or services early in the life of an industry niche, or for products protected by patents that prevent others from undercutting you simply by releasing a cheaper product.  High profit margins are a sign of high barriers to entry and attract investors and ultimately good buyers for your business.
  7. Can this business grow to above $20MM to $50MM in annual revenues? This is a basic test for investors, separating your business from those with smaller visions.  There is nothing wrong with a vision for a smaller enterprise if not in need of professional investors to make it a reality.
  8. Do you have a world-class management team? The best way to protect against failure is to attract a team with members who have experienced success and failure and can recognize the ways to manage toward success and avoid the pitfalls previously experienced from past failures.  From a professional investor’s perspective, the team should be able to be flexible, coachable and experienced enough to get a business through breakeven and beyond the next level of outside investment, greatly reducing execution risk.
  9. Can you translate an idea into a compelling product? Some great ideas just cannot be made into a product at a reasonable enough price to attract customers.  And some attract early adopters but cannot pass into the mass market.  Sometimes, an idea is just too early for the available technology to make it attractive.  Early cell phones were large bricks that required a large carrying case and cost up to a dollar a minute to use.  As technology caught up, allowing miniaturization and light weight, mass adoption drove the price down and allowed the building of infrastructures everywhere to support the use of inexpensive minutes.  Do anything you can to develop compelling products or early prototypes as proof of ability to reduce your technology risk.
  10. Is there an exit strategy for the investor(s) over time? There are many professional services businesses that make fine lifestyle opportunities for architects, doctors and dentists.   But these types of businesses are not attractive to potential buyers willing to pay a premium for businesses that are worth millions more than their asset value.  Building a great business to create wealth for the entrepreneur at exit, means thinking of the exit strategies from the beginning.  Who or what type of buyer would be attracted to this business if successful?   Great wealth is made from selling great businesses at immense profit for the entrepreneurs and investors who took the journey.

Note: All images created for this blog by Dave using AI prompts with Microsoft Designer (DALL-E).

Posted in Finding your ideal niche, Positioning | 1 Comment

To directors and advisors: “Noses in; fingers OUT!”

Many of us have someone who reports directly to us and who supervises others in return.  Well, this one is for you. And it is one of the most important lessons you can learn as a manager, board member, or advisor of a company or even a non-profit enterprise.

Where did this statement come from?

I first heard this in a governance seminar for a non-profit higher educational board upon which I sit, over 25 years ago.  It made an impact and stuck with me through the years.  I have repeated it often to boards deliberating action and to individual board members seeking to get their hands dirty inside the corporation by giving advice and helping at levels beneath the CEO.  (And it is interesting to hear it returned from various unrelated sources, even quoted as “Noses in; hands out.”)

The problem cannot be overstated.

Once a board member reaches beyond the CEO into the corporation, especially without the approval of the CEO, incurable damage has been done to the CEO’s ability to govern.  Even if not the intent, there is an instant change in dynamic once this line has been crossed.

There is even a gray area that illustrates this effectively.

As chairman of a company in an industry where I have extensive experience, I elected to attend a regular meeting of the management team with its middle managers on a Monday morning, a practice I had not done in the past.  The meeting was tame to say the least. The CEO spoke, shared metrics, spoke of issues to be addressed during the coming week, and did a fine job of pointing the assembled troops in the right direction. I could not have been more pleased.

My lesson learned about this mantra:

[Email readers, continue here…]   After returning to my office, I received a call from the CEO. ‘Would I please (oh, don’t take this wrong, Dave) not attend these meetings anymore?’  What I took for unusual silence was a complete disruption of the normal give and take of the management group because of my presence.  The chairmanship carries unstated power even if not overtly demonstrated, since the CEO reports to and is accountable to the board, and of course its chair.  I learned from this that there are times when members of the board are appropriately brought into an operating group, and certainly times when the board should hear from vice presidents presenting their issues in a board meeting.  But the position of CEO is absolutely to be reinforced at all costs, never to be undermined by any member or by the board as an entity.

So, what is the proper behavior?

Therefore, it is appropriate to ask tough questions, request help in understanding issues, seek permission from the CEO to interview others.  But a board member or advisor should never react to statements heard by issuing directions or hints of action in return.  It is appropriate to state that the advisor or board member understands much more after the briefing and will be able to address the problem with the board and CEO.  It is not appropriate particularly for a board member to promise any action to anyone beneath the level of CEO.  Noses in; fingers OUT.

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Are your board members as valuable as you?

Perhaps this is the natural conclusion from the several insights previously explored.

While the CEO and management offer the vision, strategies, and tactics as well as the proposed budget, it is the board that controls with its votes the execution of strategy, the expenditure of cash, the taking on of debt or new equity, the very direction of the company as well as its ultimate health. Surprised?

Then who is most important?

The most important person in a corporation usually is and should be the CEO. This person, often the founder in early-stage companies and beyond, is the originator and keeper of the vision, leading all others below and the board above as willing believers in the vision advanced.  But the board is responsible for providing resources to fulfill that vision, which may include new cash infusion or assumption of new debt.  

Does this ever happen?

Yes, but… In extreme situations, it is the board that must step up and replace the CEO, assuming the responsibility for finding and integrating a new leader quickly and efficiently.  Sometimes this means having a board member step in for a short time as CEO for continuity.

A true story…

[Email readers, continue here…]    One of the CEOs in a round-table who had been active and vibrant for years in both his company and the round-table, died suddenly of a heart attack.  His board met in emergency session and managed a smooth transition to a new leader within a month, during the most traumatic of times for all employees and the board itself.

Remember the most important duties of a board member?

For non-profit boards, the two most important duties under the duty of loyalty and care are the oversight and eventual replacement of the CEO, and maintenance of the entity over its infinitely long lifetime.  I have been a member and even chair of presidential search committees and can attest that board members (and other designated stakeholders) spend hundreds of hours in the recruiting process, all without pay.

It’s all about continuity of the organization.

It is because the continuity provided by the board is the one thing shareholders must count on above all else to protect investment, that the board rises in importance to at least equal stature as the executive cohort.

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Should board members be elected “for life?”

No board member should be grandfathered, guaranteed a board seat forever.

Practically speaking, this is an impossible goal.  We have investigated the restrictions imposed by investment documents and the obvious need to keep continuity on the board with the retention of the CEO position at the very least.  But it would be the best of form to require in the bylaws of a corporation that all seats are re-elected annually.

How about loss of institutional knowledge?

Well, here’s a problem that needs a bit of thought.  If you elect your board members annually and for some reason aggressively change members, you will experience the steep learning curve required to get the newest board members up to speed to contribute with deep knowledge of the company and of your management style.  And that’s not good.  Re-electing board members again and again is not a problem – if those re-elected members contribute effectively as they fill their seats.  But annual re-elections signal to all that a board seat is not permanent or even long-term.

How about non-profit boards?

There are three types of members on non-profit boards, and the balance is critical.  There are those with money to give or get, necessary for all non-profits.  There are those with great community and industry contacts for finding honorees for events or bringing onto the board.  And there are those with deep knowledge of the non-profit itself, always able to help when members without that experience make suggestions that may be impractical or tried before.

How about staggered four-year terms?

[Email readers, continue here…]   That’s appropriate for non-profits for the reasons listed above. But I’d revert to the annual re-election habit for all but non-profit boards.

Why the difference?

For non-profits, this allows for the creation of a board development committee to find and recruit outstanding new board members and find ways to unseat those who are no longer contributing or even attending board meetings.  Such a policy further reinforces the duty of care for the corporation by its board.  Unseated board members with longevity and a history of participation can be invited to become “emeriti” members of the board with observation rights but no vote.

The annual shareholder meeting:

Although not required by all corporate bylaws, all companies should hold and document an annual shareholder meeting in which the shareholders are notified at least 10 days in advance and given the right to submit a proxy vote for their choice of officers and for any other issues that will come to a vote, including expansion of the stock option plan to include more available shares.

The bottom line is that good corporate governance calls for a skill set within the board that is not often present, but for the protection of members and the corporation itself, necessary.

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