Brad Feld

Category: Entrepreneurship


Jun 12, 2005

I’ve been thinking about “Innovation” a lot lately.  A big part of the NCWIT theme is that having women in computer science is critical to the innovation process.  I recently read my doctoral advisor Eric von Hippel’s new book Democratizing Innovation and re-engaged with Eric around the research he’s doing about user-driven innovation, especially in software around open source communities.  This morning, I finished reviewing proposals for the MIT Deshpande Center’s next grant cycle. 

Now – I know that reading grant proposals on a Saturday afternoon and Sunday morning is a particularly nerdy thing to do.  I did manage to tear myself away from the computer and go see Mr. and Mrs. Smith with Amy which had little to do with innovation, but was fun.  However, the proposals I reviewed (a subset of the overall proposal set) included:

  • Handheld Ultrasound Imaging Device
  • Laser cutting for faster, cheaper, better fiber optic connectors
  • Invisibly Modulated White LEDs for Economical and Embellished Lighting
  • Continuous Cycle Novel Dessert Freezing Process
  • Substrate Noise Analysis Program for Mixed-Signal Verification
  • Ultra-low-power Wireless Medical Tags

While this isn’t stuff that I’d fund (I’m a software guy after all), it stimulates an important part of my brain.  The depth and intensity of the early stages of the innovation process are similar across any domain set and it’s powerful, fascinating, and inspiring to think about.  It’s also very enlightening to take a step back and think about the core R&D process and subsequent evolution from innovation to commercialization, using MIT-based research as a starting point.  I continue to be really impressed with how the Deshpande Center is approaching this.

I recently got a question from a local entrepreneur about “current board comp for an outside director” for an early stage company.  My friend is considering joining the board of a startup, and his guidance to me in answering the question was “the company is obviously pre-revenue, so cash protection is key at this phase.  Presumably options are the main tool.”

I encounter this regularly, as we often ask experienced entrepreneurs and/or executives to join the board of our early stage companies as outside directors.  In addition, when I was an angel investor, I often joined the board of companies and was on the receiving end of these option grants.

Following is my response with my guidelines. 

  • Allow any board member to buy into the last VC round.
  • Option grant vesting annually over four years that is equivalent to what a director/VP (not SVP/COO) level employee would get. This is typically 0.5% – 1% depending on the stage of the company (so 0.125% to 0.25% per year).
  • Full acceleration on change of control (single trigger) – FYI – this is the ONLY time I’ll give single trigger (except in certain founder cases).
  • 90 day exercise period if you leave the board. Sometimes I’ll extend this to a year, but I like this to be the same that employees get.
  • No cash renumeration.
  • Travel expenses covered.

Obviously situations vary, but I think these are good rules of thumb.  FYI – as a VC investor, I never ask (nor will I support giving) another VC investor a similar option package for serving on a board – we’ve already got our ownership stake and being a board member is part of our responsibility to the company.

Heidi Roizen – one of my partners at Mobius Venture Capital and my close friend – just did her first podcast titled Heidi Roizen on Venture Capital: Silicon Valley is Back.  Heidi never disappoints – enjoy!

This week’s Sunday New York Times was a treasure trove.  In addition to having an incredible NY Times Magazine this week (Money 2005), Ben Stein had a phenomenal essay titled “Lessons in Gratitude, at the Basement Sink.”  In contrast to the articles in the Magazine (money, money, money), Stein asserts that “Gratitude … is the only totally reliable get-rich-quick scheme.”  He finishes with a lesson his dad taught him: “The zen of dishwashing.  The zen of gratitude.  The zen of riches.” 

Everyone should read this – and be grateful for whatever you have today.

Last week we were one of four VC firms recognized by the Women’s Technology Cluster for our significant investments in women-led companies.  The other firms recognized were NEA, Vanguard Associates, and Versant Ventures. 

While we are flattered to be acknowledged like this, my partner Heidi Roizen said it well when she was quoted as saying “But make no mistake about it, we don’t fund women out of some sort of ‘diversity cause.’  It is just the opposite.  We funded these women because they are great entrepreneurs and it made smart business sense to do so.  Any VC not being open to women entrepreneurs is missing out of half the population, a lot of smart, talented people, and a lot of opportunities to generate great returns.”

As chairman of the National Center for Women & Information Technology, I look forward to the day sometime in the future when awards like this are obsolete because there isn’t any discernible reason to call out either male or female entrepreneurs based on gender.  Lucy Sanders – the CEO of NCWIT – is fond of saying that her goal is to have NCWIT be out of business 20 years from now because it has accomplished its mission and is no longer relevant.

I attended the MIT $50K Competition Final Awards Ceremony last night.  The MIT $50K competition is one of the oldest entrepreneurship competitions in the country – it was started in 1990 well before the term “entrepreneurship” was mainstream.  I was involved early on as a judge (from 1993 to 1998).  Looking at the Alumni company list, it’s clear that 1995 was the year I was doing angel deals, as I became an investor in (and chairman of) NetGenesis and Thinkfish and fondly remember Firefly (Softbank ended up investing) and Silicon Spice (damn – that was a huge success).  Webline was a big winner in 1996 (a Highland deal that Cisco acquired).  1998 saw two big companies emerge – Akamai (NASDAQ: AKAM) and Direct Hit (acquired by Ask Jeeves for $500m+).

The event last night was awesome.  The MIT $50K has always been a student run event, which makes it both endearing as well as more powerful, as the MIT superstructure is part of the background as the students take center stage.  The quality of the finalist teams (seven of them) was remarkable – much better then I remember from the mid-1990s.  Interestingly, five of the finalists were life science deals (Balico, HealRight, Perviva, Tissue Vision, and Renal Diagnostics), one was a power technology deal (Nanocell Power), and one was a mech-e deal (Vacuum Excavation Technologies – it really sucked).  I was really surprised to see ZERO-none-nada IT / software / Internet finalists (although there were plenty of IT-related companies in the field of 84 entries.)

The winner (and recipient of $30,000) was Balico – a medical device that helped people “balance” – their description from the web site is “Balico will develop and commercialize a wearable vibrotactile balance aid that accurately senses and displays body tilt in order to help prevent falls.”  So – basically – if you have trouble balancing (you are old or have a balance disorder) wear the Balico “belt” and automatically stand upright.  Very cool.  The two runners up were Nanocell Power and Vacuum Excavation Technology – both recipients of the $10,000 award.

The two keynote speakers were past $50K entrants (but neither were winners).  Tom Leighton – a co-founder of Akamai and a CSAIL professor of Applied Mathematics at MIT – spoke about how Akamai’s original business plan was fatally flawed, they lost the $50K competition (he speculated that they came in last), but then spent the summer working with Battery Ventures to figure out what a real business might look like (which of course – went on to a huge IPO, then crashed, and finally emerged as a sustainable, profitable business – $58m of revenue and $14.5m of net income in Q105 with a $1.5 billion market cap.)  David Edwards – a co-founder of AIR and a Professor of Biomedical Engineering at Harvard, talked about starting up AIR, getting it funded by Polaris, and selling it to Alkermes for $114m in 18 months.  Both were predictably inspiring but also very humble about their businesses origins (and set a great example for the opportunity that could come out of a raw startup.)

Entrepreneurship, especially in the life sciences (maybe that’s a nod to the new MIT President Susan Hockfield) continues to be alive and well at MIT.

Jason Calacanis just forwarded me a fun post he just put up titled Sparring with VCs & Associates to sharpen your skills.  While not all VCs are as clueless as the dmf that it appears Jason talked to, I’ve had plenty of conversations that resemble this one (where I’m on the receiving end – substitute “Brad” for “Me”) during “due diligence” calls with other VCs that are interested in companies I’m either looking at or already an investor in.

Someone (I can’t remember who – maybe my dad?) told me a long time ago that “the question is much more important than the answer.”  While this probably fits in “the journey is the reward” cliche category, Jason’s dialogue points this out in spades.

I received a number of requests for copies of The Buffett Letters as a result of my recent post.  I now have emailable copies of them – if you’d like them, simply send me an email request.  The email I have came with the following request:

“Now, the important part. These letters are not our property. Mr. Buffett wrote them to his business partners, not to the general public. But they are of great interest, and Mr. Buffett has let it be known that he has no objection to people passing them around like this, but does not care for the idea of them being posted in a public forum. Please honor his wishes. PLEASE DO NOT POST THESE LETTERS, AND PLEASE BE SURE TO INCLUDE THIS PARAGRAPH WHEN SHARING. Thank you.”

So – please honor this.

I also have several great Charlie Munger speeches that have no such disclaimer, although I will treat them the same way.  If you want them, just ask.

Several people have recently asked me variants on the question “How should I compensate a board member in my young private company?” I’ve experienced this question from all sides, having been the entrepreneur with an early stage company, a board member of an early stage company, and an investor / VC in companies that had board members at early stages, so hopefully my answer is balanced and a function of the law of large numbers (I probably have over 100 direct data points at this point in my life).

In general, I have a set of simple rules for board member compensation:

  • 0.25% to 1.00% vesting annually over four years
  • Single trigger acceleration on change of control
  • Clear understanding as to how the vesting will work if the board member leaves the board
  • No direct cash compensation
  • Reimbursements for reasonable expenses
  • Opportunity to invest in the most recent financing

Following is a detailed explanation of each item.

0.25% to 1.00% vesting annually over four years: While the ask from sophisticated board members will vary widely here, I’ve found that most people will accept the argument that they are getting between 25% and 50% of what a typical VP will receive (1% – 2%).  It’s always better to grant more options that vest over a longer period of time then to do annual grants early in the life of the company – that way the board members’ incentives are aligned with all shareholders (presumably they are getting the options at a low strike price and will be motivated to increase the value of the stock while minimizing dilution over future financings).  These options should come out of the employee option pool and should be thought of equivalently to the employee base (e.g. if there is an option refresh due to a down round financing, the board member should be included in the refresh).

Single trigger acceleration on change of control: Acceleration on change of control is often a hotly negotiated item in a venture financing.  I’ll discuss it in greater detail in a future post in the term sheet series.  I rarely think single trigger acceleration in change of control is appropriate, but I’ll always accept it with regard to board members since 100% of the time they will not be part of the company post acquisition.  By providing 100% acceleration on change of control, you eliminate any conflict of incentives in an M&A scenario.

Clear understanding as to how the vesting will work if the board member leaves the board: In most cases, board members serve at the will of a particular constituency, which could range from a particular VC investor (e.g. the outside board member might be appointed by the Series A shareholders) to the entire shareholder base (e.g. chosen by a shareholder vote).  As a result, a non-VC board member is typically not contractually entitled to their board seat and often leaves the board (either because they chose to due to other responsibilities), is asked to leave (because he is not contributing actively to the business), or is replaced (by the shareholder group that has the contractual right to the board seat).  As a result, it should be clear – in advance – that the vesting on the options ends if the person is asked to leave the board or voluntarily leaves the board.  I’ve never had an issue with this when it was discussed up front; I’ve occasionally had issues when it wasn’t (e.g. the person wants additional vesting beyond their board service, which I think is inappropriate except in the case of the acquisition of the company – see the comment on single trigger above).

No direct cash compensation: Period.  If someone is asking for cash compensation for board service in an early stage company, they are not qualified to be a board member since they simply don’t get it.  If the board member is also doing specific consulting for the company beyond the scope of a typical board member, you’ll occasionally see some cash comp for the consulting services.  However, the bar for this should be high and well defined – a “monthly retainer” for “helping the company” is inappropriate.

Reimbursements for reasonable expenses: Board members should always be reimbursed for expenses they incur on behalf of the company.  However, these should be “reasonable”, should conform to the company’s expense policy (e.g. if execs travel coach, board members should only be reimbursed for coach tickets), and board members should be respectful of cash in early stage companies (for example, if a board member travels to several companies during a trip, he should only charge a company for the segment(s) pertaining to them).

Opportunity to invest in the most recent financing: I strongly believe that all board members should be given an opportunity to invest on the same terms as the most recent VC investment.  Depending on the characteristics of your most recent financing, this might be difficult (check with your lawyers) – at the minimum the board member should be invited to invest in your next round.  While I always encourage this investment, I don’t view it as mandatory – I think it’s a benefit an outside board member should have for serving on a board, not a requirement.

In seed stage companies – especially pre-funding – an early board member might receive founder status depending on his involvement in the company.  When I was making angel investments, I’d occasionally commit to a much higher role than simply “a board member” – occasionally I’d be chairman and/or an active part time member of the management team.  In these cases, I’d typically get an additional equity grant (usually founders stock) separate from my board grant.  As with other members of the founding team, I’d have specific roles and responsibilities associated with my involvement (usually financing, strategy, and partnership related) and – even though I was a board member – I was often accountable to the CEO for these responsibilities.

In addition to a board of directors, many early stage companies have an advisory board. I’ll dedicate a longer post to how to make sure these are effective (as they rarely are) – in any event, advisors typically have a much lower commitment to the company and, as a result, should receive a much lower equity grant.  In addition, advisory boards tend to come and go so it’s better to compensate members on an annual basis.  A good proxy for the amount is an annual grant of 25% to 50% of the four year grant you’d give a junior engineer (so 1x – 2x a junior engineer if the advisor stays engaged for four years).  Obviously, there are exceptions to this, but if you want to get meaningful, sustainable involvement from an “advisor”, consider giving him a more significant role.

Finally, VCs should never get additional equity for board service in private companies.  The VC has already purchased his equity and his board involvement is a function of his responsibilities associated with his investment.  I’ve been on the receiving end of this and it has always felt weird.  In a public company, it’s typical to compensate all board members – including the VCs – equivalently, but private companies are a different matter.