I wrote the following article for The Kauffman Foundation’s Entreworld web site some time in the late 1990’s. Someone reminded me of it the other day and I looked it up. It’s especially relevant today after all the major public company scandals of the past few years, the passage of Sarbanes-Oxley, and the renewed attempts at activism by boards of directors. A few of the comments – such as the one on D&O insurance – are dated (D&O insurance for private companies is economical, although not often that useful). I’ve sat on plenty of boards and when I reflect on them am sad to say that they are spread equally between the first two categories I list below (I’ve been on lame duck boards, but have resigned quickly after realizing that’s what they were). I wish I could say they have all been (and are all) working boards, but I can’t. I guess it’s up to me to continue to be vigilant about changing that in the future.
Every large public company has a board of directors. The news is filled with stories about prominent people joining boards, about boards kicking out presidents and founders, and about personal liability of members of the boards. In a large public company, the board plays an incredibly important, and often controversial role in the governance and development of a company.
Given this, should a startup or small entrepreneurial company have a board of directors? I say, emphatically, YES!
By definition, every corporation has a board of directors. The minimum legal size of the board varies by state. In some states, the minimum size is three people (typically a president, secretary, and treasurer–also referred to as the officers of the company). In other states, the minimum size is linked to the number of shareholders–if there is only one equity holder in the corporation, there only needs to be one board member. Of course, there are several different types of companies, such as partnerships or sole proprietorships that do not require a formal board.
For many companies, the board of directors ends up being the founders of the company. However, I believe there is huge value in expanding the board to include “outside” directors–those that do not work for the company, but offer their time and advice to help shape and guide the company. These outside directors serve a similar function to those of a public company, but often with a much different approach.
It is important not to get a board of directors confused with a board of advisors or a strategic advisory board. These other boards are incredibly valuable tools for a company, but they serve a dramatically different purpose which I will discuss in a separate article.
I have been a member of many boards of directors and I have come to classify each board as one of three different types:
The only type of board that I believe is useful for a small, entrepreneurial company is a working board. The pressures in an entrepreneurial company are great enough that the founders and the management team need everyone involved doing everything they can to make the company successful. This does not mean that everyone agrees on everything, or the members of the board are not critical of the management team. But, it does mean that there is an active, open commitment to work with the founders and management team to make the company succeed wildly.
Board members come in many shapes and sizes. In my experience, a good size of a board is five to seven people, including the insiders. If there are only one or two insiders on the board, a total board size of five is plenty. If there are more than two insiders on the board, seven board members is more appropriate. I recommend that several of the outside board members be highly experienced entrepreneurs in the market that the company is going after. The rest of the board members should be experienced entrepreneurs in other business segments, but with a particular interest in something about the company.
The chairman of the board is often one of the insiders, such as the president or CEO. However, in many cases, you may want the chairman to be one of the outsiders, especially in a situation where one of the outsiders helped start the company by putting up some of the initial seed capital. The role of the chairman varies dramatically, but it often raises the level of commitment of the individual board member that is the chairman and the overall board in general.
Significant outside investors, especially venture capitalists, will want board seats. I recommend you limit the number of outside investors on your board, unless they fit the criteria listed above. A venture investor only needs one board seat – if you have a syndicate of venture investors (several different venture capitalists that invested together in the round), consider offering one board seat and extending observer rights (e.g. the right to attend any board meeting) to the other investors. These rights should be negotiated as part of the investment.
In addition to functioning as a regular sounding board for the management team, board members can contribute substantially to the business, both as a group and individually. Board members can be incredibly useful during financings, merger and acquisition activity, general corporate strategy, and executive recruiting. Do not overlook the experiences and skills of each of the individual board members–they can often play high value, short term consulting roles as needed.
Board members should be compensated for their efforts. At the minimum, their travel expenses should be paid. Most entrepreneurial companies should set up an option package for the board members – depending on the level of effort requested of the board, this could be as little as 0.25 percent of the company or as much as 2 percent of the company vesting over four years. In addition, many board members are interested and willing to invest in the company. I always believe that it is in the best interest of a company to have the board members have a meaningful equity stake in the company.
In some cases, the directors that you recruit will have a substantial personal net worth. In these cases, they might ask if the company has “Director and Officers Insurance” (D&O Insurance). This is insurance that protects the director from having personal liability in case the company gets sued. Small companies cannot afford D&O insurance (in fact, most private companies cannot afford this), while most public companies must have this as a requirement of the underwriters in an initial public offering. So, when confronted with the question, the best solution is to make sure that the articles of incorporation of the company provide the directors with the highest limitation on liability afforded by the state the company is incorporated in. Don’t waste your time investigating D&O pricing – it won’t be economical.
Finally, take good care of your board members. These are busy folks that are making a substantial time and energy commitment to you. They share in the rewards if you are successful, but their time and energy is at risk since their primary form of compensation is equity in your company. Feed them. Make them comfortable. Have fun together! You’ll be pleasantly surprised how much faster the relationships evolve and how much more valuable they become when everyone is working hard, but having a good time together. Don’t ever let your board get bored.
This article can be found on the Kauffman Foundation’s Entreworld web site at the following link.
I was in the middle of responding to an email and I used Visicalc as an example to make a point (remember Visicalc?). I couldn’t remember how to spell Bob Frankston’s last name (I’ve been friends with Dan Bricklin, the co-investor of Visicalc since I lived in Boston – but I’ve never met or talked to Bob) so I did a quick Google search on Visicalc.
I hit the jackpot. Dan has a copy of Visicalc that you can run on a PC. I downloaded it and three minutes later I was staring at the Visicalc screen from my childhood (the first time I ran Visicalc was when I was 13). The MS-DOS version is 27,520 BYTES. That’s 27k. Not 27MB. 27k. Smaller than most GIFs and JPEGs.
Amy (my wife – who still pines away for the days of Lotus Agenda) just walked in and – after seeing Visicalc up on my screen – said “What was wrong with DOS anyway – wasn’t it good enough – at least I could find all of my files.”
Dan / Bob (who I still don’t know, but feel a special character-based and forward slash bond to) – thanks for the memory. / S Q Y.
Every now and then, a VC runs across an entrepreneur that has enormous vision, the mental agility to tune his idea to the market reality, and the chutzpah to pull it off. Randy Adams from AuctionDrop is one such guy.
I met Randy for the first time when he came in one Monday to our partners meeting to pitch us on the idea for AuctionDrop. At the time he had a average looking powerpoint presentation that pitched a big idea – a national chain of drop off centers for eBay. The premise was that it’s a pain in the ass for the average Joe to sell something on eBay, that people would pay to have someone else do all the work for them, and that eBay would embrace this as one of their continued growth constraints is “supply of goods”.
We bit on the premise and my partner Heidi Roizen led a seed investment. Heidi had known Randy for a long time and had worked with him several times in the past. “If anyone can figure out how to pull this off, it’ll be Randy,” said Heidi.
That was over a year ago. After a few months, AuctionDrop had several company-owned stores up and running in the bay area and was doing a meaningful number of auctions each week. Within a year of being founded, AuctionDrop had five stores and had run over 14,000 auctions. AuctionDrop had focused obsessively on pleasing its customers – which is one of the keys to success on eBay – and had a superb rating. This has enabled it to be the first (and currently only) eBay Drop Off Center to receive Titanium PowerSeller status.
This wasn’t nearly enough for Randy. We all agreed that this was working and wanted to go national. Randy wanted to go national. eBay wanted us to go national. We wanted to swing for the fence with this investment and go national. Randy had two approaches – build out a national footprint ourselves or create a franchise model. For a variety of reasons, neither of these were compelling – building a national footprint was incredibly expensive (“That’s a scary as shit amount of money required,” said one of my partners) and would take too much time; a franchise model seemed marginal from a financial perspective and lacking from a quality control perspective (which we continue to believe is key to success on eBay).
About four months ago, I got an email from Heidi saying “Randy is talking to UPS about doing a deal where all UPS stores will be AuctionDrop enabled. We’d be national overnight and it’d be a huge deal for UPS since they want to continue to expand services through the stores.” This is the essence of the kind of thinking a VC wants. Goal = be national. Overcome all barriers – figure it out – then do it.
A month later Randy had a signed deal with UPS. Today the deal was announced (although it was covered in depth last week after the WSJ broke the story on it – an article even showed up in The Denver Post, one of my local papers.).
AuctionDrop is now live with UPS. If you’ve never sold anything on eBay, grab last years digital camera (you know – the one you replaced with this years model), find the nearest UPS store, and give it a try.
I’m an MIT grad. We are all geeks at heart. After I graduated, I was involved in a number of things around entrepreneurship at MIT. One of the guys who was in the middle of everything was Joost Bonson. Joost was one of the co-founders of what has become the MIT $50K Entrepreneurship Competition. If you take a look at Joost’s website you’ll see confirmation that he’s been involved in – well – most everything around entrepreneurship at MIT.
I was reading Technology Review – MIT’s magazine – and came across How-To Howtoons Appeals to Kids. This is Joost’s newest project (along with Saul Griffith) and is “a cartoon that provides one-page, easy-to-follow, story instructions on how to build enineering and science projects from readily available materials.”
Awesome idea – and lots of fun. Check out Howtoons.
I was reading through my new feeds this morning and ran across Marc Orchant’s The Office Weblog post on Buzz Bruggeman / ActiveWords. I’ve been looking for a macro recorder that I like (they all suck) and ActiveWords sounded interesting. So – I went to the site and downloaded a trial (30 days). I played around with the trial for 30 minutes and couldn’t figure out how to do what I wanted to do (although it had some neat functionality). I finished up reading my feeds and started grinding through email.
Ten minutes later I get an email from Buzz Bruggeman that says:
From: Buzz Bruggeman [mailto:email@example.com]
Sent: Saturday, June 05, 2004 9:20 AM
To: Brad Feld
Just saw your download. Would love to show you our stuff.
I am also happy to unlock a copy for you. Below is the canned E-Mail that will do it. I would suggest that you beat on ActiveWords for a few days, and then let me walk you through some ideas. I use www.gotomeeting.com , which works well, and will cut your learning curve way back. I would like to believe that ActiveWords would not only benefit everyone on your team, but perhaps would benefit products from your portfolio companies.
So – Buzz has gotten my download info, looked me up, figured out I’m a venture capitalist, and decided to make sure I’m happy with his stuff. I respond:
From: Brad Feld
Sent: Saturday, June 05, 2004 9:31 AM
To: ‘Buzz Bruggeman’
Subject: RE: ActiveWords
Buzz – I played around with it for 30 minutes – it’s cool, but it wasn’t obvious how to do what I’m looking for. I’m mostly interested in a “super macro recorder” that can do things interactively with web sites (e.g. bring up page, click on specific field, click on another field, close window). It looks like ActiveWords can do most of this, but it wasn’t at all obvious how to do the “click on specific field” or how to do the equivalent of “record a macro”.
Give me a clue.
From: Buzz Bruggeman [mailto:firstname.lastname@example.org]
Sent: Saturday, June 05, 2004 9:47 AM
To: Brad Feld
Subject: RE: ActiveWords
I am about to be interviewed . Where are you going to be in say 20 minutes…
It’s a Saturday morning. Now – I get the irony that I’m sitting here with no life catching up on work (my excuse is that Amy is sitting near me at her desk catching up on stuff also). Buzz is all over me.
We hooked up 15 minutes later and spent 30 minutes with Gotomypc going through a demo of what I wanted to do. Buzz helped me configure a few other advanced features, and was geniunely effusive about how his product could help me with my life.
His committment to me and passion for his product convinced me to give it a serious try for a week or so (something that wouldn’t have happened if he hadn’t gotten all over me – I would have likely punted after fiddling around with it one more time).
Buzz is doing this the right way – he loves his product – believes in it – and is willing to be shamelessly aggressive about getting folks to try it. Our call was great – he wasn’t pushy in any inappropriate or off putting way – he really wanted to help. He recognized that I’m an influencer and wants me to be a user, get excited about ActiveWords, and help him spread the word.
Nice start Buzz. CEO’s – pay attention!
I was in an upbeat board meeting yesterday for one of my growing companies that is having a good year. While our business is in good shape, one of the older product lines from one of our partners is struggling. So far our partner’s product line’s sales are down 25% year over year. We have some market intelligence on some of our competitors and their sales for this product line are also down over 20% yoy. In comparison, our sales for this product line are only down 10%.
“We suck less” gleefully chanted one of the executives in the meeting.
I smiled. It’s always pleasant when your stories make the rounds and lives to be a teenager.
In 1992, it was 7:30 AM and I was already having a shitty day. It was a typical early winter morning in Boston – cold, dank, dark rain. I was still drying out from my ride in to my office on the T trying to warm up with a cup of stale coffee wondering why I still lived in Boston. The web wasn’t around yet, so I was reading the Wall Street Journal (which was coming off on my fingers) waiting for my first meeting to start when my phone rang (we had recently installed direct dial at my business).
I picked up. The person calling said, in a not so happy, 7:30 AM cold, dank, dark, Bostonian voice “Can I talk to Mr. Feld?” (I’d made the mistake of naming my first company Feld Technologies – since we had installed direct dial, I had gotten a sudden spate of unwanted phone calls.
“This is he – what can I do for you”, I said in as optimistic a voice as I could muster.
“You guys suck. I’ve been her since 6 AM trying to reindex my files. I’m pissed off, things aren’t working, they never work, and I’m not paying your bill.”
“Um – who’s this”? I asked.
“Mr. Angry,” said the person on the other line. “You’re the fourth computer consulting firm we’ve hired in the last six months and no one can get our stuff to work. I’m sick of paying for this. Computers suck, you suck, your systems suck, and your bills suck.”
Mr. Angry and I were off to a good start. i’d been here plenty of times before (although I preferred to have finished my first cup of coffee before diving into the intellectual stimulation of trying to solve this type of problem.) An hour later, I’d gotten Mr. Angry’s files reindexed, his system running, and his temper cooled. He had gotten to know me well enough to call me Brad, although I was not quite ready to call him Mr. Happy.
“Wow – thanks Brad. That was really helpful. I’ve got to run because people start showing up here at 9 and I’ve got to go put paper in the printers, change all the toner cartridges, and hide the floppy disks so people have to come find me if they need one. Go ahead and send me the bill – I’ll pay it.” (Excellent, another $125 successfully earned…)
I got up and wandered down the hall. Most of the folks in my company had trickled in and were settling into their morning routine. I stretched, let out a big groan, and chortled loudly “Now that sucked!” I paused, smiled, and realized that while it had sucked, we had actually sucked less than the three companies that had messed things up before us.
Inspired – I called a 9 AM company meeting and announced our new motto – “We Suck Less.” I explained to my bewildered team that computer consulting (well – actualy – anything having to do with computers) is difficult, most people suck at it, and we can succeed simply by sucking less than everyone else. This was a lot more palatable, interesting, and achievable then some idealistic and corny mission like “We’ll be the best computer consulting firm on planet earth.” (C’mon – there is no such thing.) Over the next few years, we often set our prospects back on their heals when we told them “Our goal in working with you is to suck less than the last guy that was here” – but after we explained it, had a collective laugh, and re-affirmed that we intended to do our best for them, we often won their business while setting a much more achievable goal and tone.
12 years later it still applies.
The trailer for the new Pixar movie The Incredibles is out. While we have to wait until Nov 5, 1994 for the movie, you can get a peak of it on the Pixar (and Disney , and other) sites. Check out the teaser also for an overweight (“maybe just a salad and some rice cakes”) and somewhat frustrated Mr. Incredible.
It was such a brilliant move when Steve Jobs bought Pixar from George Lucas for $10 million in 1986. Now that’s guts.
During the Internet bubble, it was easy to forget how most companies are created. I remember endless presentations where the punch line from two guys and a powerpoint presentation was “all we need is a seed round of $10m and we’ll be able to get going.”
I occassionally get a chance to tell the story of how my first real company – Feld Technologies – was funded by me and my co-founder Dave Jilk with $10 (yes – 10 one dollar bills) of equity (we had 10 shares of stock – $1 / share – that’s all the money we ever raised). There was an interesting constraint – at the time – it was basically all the money we had and it never occurred to us to go try to raise money from venture capitalists (we did eventually get a $10,000 bank line that my dad personally guaranteed with us).
Since many of the companies I fund are raw startups, I often think about the best way to get from an idea to a business. I keep coming back to the value of sweat – which has been perverted in the sweat equity cliche – which is fundametally different than sweat (you know, the stuff that rolls down your back on a hot summer day – or the stuff coming out of your pits when you are about to pick up the phone for that critical call.)
Mark Cuban has a great rant going on his blog (Success and Motivation Part 1, S&M almost p2, S&M p2, S&M p3) about starting up his first company – MicroSolutions. Some of you may know Mark as the owner of the Dallas Mavericks or the founder of Broadcast.com which had a huge IPO and then was bought for over $5 billion by Yahoo!. I remember Mark’s articles in CRN in the early 90’s when I was running Feld Technologies thinking “man – this guy has his shit together.” Perspective is everything – he had it together because he was obsessed with succeeding. Now – I’m sure Mark doesn’t remember me – but the one time we met, I sat in a big red chair in the middle of his Audionet (Broadcast.com’s early name) office – which was just an old warehouse on the edge of downtown Dallas with a bunch of tables, computers, and whiteboards everywhere and listened to him tell me about how amazing Audionet was going to be. I was just starting to work with Softbank at the time (I think I was described as a “Softbank Affiliate” or something silly like that) and since I grew up in Dallas, I stopped by when I was visiting my parents for Thanksgiving. Mark was raising a round and wanted the outrageous valuation of $80m pre for his business (ok – that would have only been a 50x on an investment at the Yahoo price). Charley Lax was at Softbank and was the guy I was working with most closely at that time and when we talked about it on the phone, he completely gacked on the valuation so it was a short exploration. I remember leaving thinking “This Cuban guy has balls”. Duh.
One of my new companies – Newmerix – is sweating it out the right way. I’m incredibly proud of the founders of this company – Niel Robertson and Ed Roberto – for starting this business up the right way. There was a nice article about them in the Boulder Daily Camera yesterday. Niel and Ed embody everything I love in entrepreneurs – they sweat every day, all day, never relent, and are determined to succeed no matter what.