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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Talking to Directors

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On Saturday, I called a director at a company I’m on the board of to get a reality check on something that is going on.  Ten minutes on the phone solved three things: (1) I was able to road test my idea with someone I respect and (2) I incorporated his feedback into my idea, and (3) we were calibrated.

While this may seem obvious, I’ve never hesitated to call another director on any issue concerning a company I am involved in.  While board meetings are logical check in points, they are not the only ones and, in many cases, are not the most important ones.

I know some directors (and CEOs) who are uncomfortable talking with other directors outside the context of board meetings.  I’ve never understood this.  Pascal Levensohn has a nice post up about this titled Don’t Assume That You Have Consensus on Your Board– Make Sure You DoHis simple message is “communicate.”

Reflecting on it, my hierarchy of daily communication is Amy, my partners, CEOs of companies I’m an investor in, and then directors / co-investors of companies I’m an investor in.  Ok – I suppose my mom is in there somewhere also.

Communicating Sales Info To Your Board

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My partner Chris Wand is finally blogging (even though he’ll deny it) over at AsktheVC – he’s writing a series on what should be in a “board reporting package.”  My long-time friend Will Herman – who happens to be hanging out in Boulder this week making the rounds (and getting his bike fitted – whatever that means) – inadvertantly contributed with his post titled Communicating with Your Board: Sales NumbersWill’s post covers some good ground – I can’t tell you the number of times a clear sales report is missing from a board package.  It’s even worse when there is a sales report, but given the fact that I attend N board meetings a year (where N is a large number) the CEO doesn’t create any linkage to historical performance, current expectations or the plan.  Great stuff.

Metrics for An Enterprise Software Company

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Paul Kedrosky has a superb post up today titled Building the Perfect Board Package.  The entire post is worth a slow and careful read as it’s “guidance on the subject from a sales-guru colleague to a company’s management on whose board he sits.”

Buried deep near the end is the real gem – metrics for a “perfect enterprise software company” that would trade at 3x revenue (or significantly higher if a SaaS model).

Revenue (License / Service) 55/45
License to Service Gross Margin 75%
License GM 94%
Service GM 55%
Operating Costs 60%
Sales 29%
Marketing 8%
R&D 9%
G&A 8%
Operating Margin 15%
S&M Costs as a percent of Rev 68%

If you run an enterprise software company and need something to benchmark to in your “stable state” (after you’ve become profitable and are growing at a nice clip), here’s a model.

Recruiting a New Director

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In the life of most companies with an active board of directors, it occasionally becomes necessary to recruit a new director. In the case of VC backed companies, a new director candidate is often the suggestion of one of the investors. In these cases, the suggestions are often the result of the VC in question having a past, successful working relationship with the proposed candidate. These candidates are often suitable in terms of “knowing the venture drill”, likely a cultural fit, and appropriately skilled for the challenges at hand. However, the relationship between the VC and the proposed candidate can often be seen as “too close.” Therefore, if independence is a highly ranked criteria for you, Jim Lejeal and I suggest you consider a more formal and deliberate process (and we humbly offer this as the latest post in our Board of Directors series.)

Before you start the process of recruiting a new director, consider the following:

  • Manage the process with enthusiasm. A competent and enthusiastic new board member can re-energize an existing board. Use the process of inviting a new director to join the board as a chance to improve the leadership of your company.
  • Perform the recruiting effort with care. Adding the wrong new director – just like hiring the wrong key employee – can result in a negative and costly outcome. Executing a carefully thought out process can increase the chances you will end up with a great new director for your company.
  • Complete the recruiting effort in a timely manner. Adding a director is a serious affair and in our experience can help make good companies great. We’ve seen the process drawn out unnecessarily and take a back seat to all kinds of other activities. Treat recruiting a director just like recruiting a member of the executive team – do it quickly and take it seriously.

Now, let’s assume you are ready to begin recruiting a new director and your board has agreed to do this in a methodical way rather than just get “some friends or experienced execs we’ve worked with before” on the board. Following is a framework for running a process.

Determine who is responsible for running the process: Some companies like to have a formal nominating committee; others are happy to have the CEO work with one director to run the process. In most early stage companies, a combination of a CEO and one director is a great working group, recognizing that one of them ultimately has to take responsibility for getting it done. While “best practices of board governance” typically will put the responsibility on a director, the CEO is almost always heavily involved in early stage companies.

Perform a GAP analysis of your existing board: Begin by taking a look at your existing board and identify where your board’s skill set is strong and where it can be improved. Some key criteria that are often needed for growing companies include independence, financial expertise, and specific product, sales, or marketing skill sets. A great rolodex – especially for customer prospecting or future financing – is often nice to have, but should be not be the only thing you are looking for.

Establish and prioritize your selection criteria: The criteria you determine you need from your GAP analysis are unlikely to be equal in importance given the current state of your company and the nature of your existing board. Make sure you’ve got a handle on the critical capabilities, the nice to have ones, and the ones that don’t really matter much.

Work as a board to create a candidate pool: Engage all your directors in this as they are likely to be the best source of potential candidates. In addition, by getting everyone involved at this point, you’ll be able to confirm the capabilities you are looking for in your new director.

Approach at least three candidates simultaneously: Not everyone will be interested in the opportunity you’re offering. In addition, after the first meeting, you might not be interested in the candidate. By approaching a few candidates at the same time, you’ll benefit from being able to compare the candidates while hedging your bets in case a few of them aren’t interested (or interesting.)

Explain your process to each prospective board member: Be candid and upfront with each potential director that you talk to. Explain what you are looking for, why you are looking, and what your time frame and process is. Explain that the ultimate decision whether to invite the candidate onto the board is a shared decision of a company’s board and that a number of interviews need to be undertaken in order to actually extend an offer to join the board. Emphasize that the diligence process is a two-way street and that the candidate should feel comfortable performing their own diligence on the opportunity. Finally, explain that other candidates are being considered so there are no surprises.

Have more than one meetings: Make sure you spend enough time with each candidate that you are seriously considering. Get to know the person – just like you would with anyone that you would add to your leadership team.

Assist your candidates in their diligence process: Share information with the candidates to assist them in getting comfortable with your company and the opportunity to be a director. Make sure the candidates have good access to all other directors as well as members of the senior leadership team. Encourage everyone to be open – both about the good and the bad. Clearly explain your expectations of time commitment, board attendance, and compensation. If you are comfortable, share the last few board reports. Use this step in the process to understand more about the candidates you’re considering.

Schedule one-on-one meetings with at least a majority of your existing board members: All of your existing board members should have an opportunity to meet the candidates before an offer is extended. Often this isn’t practical, but make sure your existing board members’ expectations are well understood. As part of this step, consider doing reference checks on your candidates, especially if they are not known to all directors.

Observe the natural ranking your process creates: Running a parallel process of talking with more than one candidate simultaneously will give you the benefit of determining who is your top candidate. Collect feedback from other board members that have participated in the process to rank order your candidates.

Invite and Approve: By now you have run a comprehensive process and you are likely at a point where it’s clear who you’d like to have join the board. Typically the formal step of adding the board member is to invite them to their first board meeting where they will be formally added to the board by way of a voting action on the part of the existing board. Check with your attorney in advance on the most appropriate way to do this – especially if you have any specific voting provisions associated with appointing a new director.

A CEO’s View of Board Meetings

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Will Herman has an excellent post up titled Board Meetings – A CEO’s Point of View.  While I’ve never been on a board where Will was CEO, he and I have been on several boards together, and he’s an incredibly valuable and impactful board member.  His “top 11” list of suggestions is a must read for any CEO that has a board of directors.  Also – look for some new posts in the Board of Directors series that Jim Lejeal and I have been writing coming soon to a blog near you.

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