Category Archives: Board of Directors and Advisory Boards

Startup Hack – Go Best of Breed

What is best-of-breed?

In business, best-of-breed is a term used mostly to describe high quality firms and relationships. For instance a best-of-breed law firm would be a larger, more established company with a brand of which many people are aware. Best-of-breed is a very important concept to consider because it will give your startup credibility. And by definition since startups are early-stage, credibility is unbelievably important as you move your company forward. However there are a trade-offs (below), which must be considered when you are deciding to go best-of-breed or not. Generally best-of-breed firms are more expensive, so you’re trading dollars for credibility.

Examples of startup best-of-breed relationships:

  • Law firms
  • Accounting firms
  • Venture capital firms or angel investors
  • PR firms
  • Office locations (City or area within a City)
  • Suppliers/Vendors
  • Partners

To provide some real world examples, I will illustrate how a software company in Silicon Valley might look for best-of-breed relationships. This list is used just to provide some examples and is by no means complete or exhaustive. There are plenty of best-of-breed firms across every industry so the best-of-breed list below is only a small percentage of great companies out there:

Law firms

  • Cooley – https://www.cooley.com/index.aspx

Accounting firms

Venture capital firm or Angel Investors

Investment Banks

PR firms

Office locations (City or area within a City)

  • In Silicon Valley, an early stage best of breed location could be anywhere from Morgan Hill to San Francisco. Even some East Bay locations like Fremont can work. The key is if you want to go best-of-breed, you need to have an address in an area where people believe you will be able to succeed. A suggestion might be to take an office either in an area known for early-stage culture, or if there is not one available nearby, taken office in one of the larger cities. It will help for credibility. A best-of-breed example is Sand Hill Road. Most people know that the top-tier venture firms are located on that street in Menlo Park.

Suppliers/Vendors

  • This is completely industry-specific. However, if you’re choosing a supplier, if they have a brand name and are known to be the best at supplying that service or product, it will be helpful. As an example, I was working with a company that manufactured a consumer product. We chose a medium-sized manufacturing partner that had enough of a brand, people believed that the partner would be able to produce the number of units, and at the right quality and price we needed. Also the partner was in the United States so our argument was that we could go and visit the manufacturing plant to make sure that everything was on track. The choice was to stay in the US and then look at possibly off-shoring manufacturing at a later date. Investors like this strategy because they felt that we would have more control initially, even if the costs were slightly higher. We’ve all heard horror stories for startups and larger companies, where products were delayed in shipping or at the port. For an early stage company this could be a fundamental problem (see my article on “hard times” which describes how to handle fundamental problems).

Partners

  • Partners are also industry-specific. For instance if you’re going to have a database partner, you might want to think about going with Oracle or SAP. If you’re going to use cloud services, obviously Amazon is a good choice. I think you get the idea.

Best-Of-Breed Tradeoffs

Negatives

Higher Cost

As mentioned above, by choosing best-of-breed partners, you are making trade-offs. First, usually best-of-breed partners charge more. The reason is they are trying to protect their brand. So in the event that you are not satisfied, they realize that negative sentiment social media can harm the brand so they will work harder to ensure that they meet the agreed upon expectations. Therefore, theoretically best-of-breed partners should provide higher levels of service and be very responsive in the event of problem crops up. It is assumed that best-of-breed partners are larger and have grown to be that size due to the fact that they were able to provide high value and quality to a lot of other companies prior to yours.

Slower Speed

Second, sometimes best-of-breed partners may operate at a slower pace. Generally they are busy with more customers, and therefore you may or may not get the speed and attention that you may really want. However, if the relationship is “good enough”, then it’s worth staying best-of-breed. I found that working with larger best-of-breed partners sometimes can be slow, but if you work with the partner and let them know your concerns, sometimes you can speed things up. As an example, one of the larger law firms used by a startup I was advising, seem to be slow. So we brought on an additional attorney from a single office to help speed some of the work that needed to be done so that the larger firm could focus on more strategic issues (and continue to provide brand, via best-of-breed). To give you some metrics, when trying to set calls or meetings with the larger firm it would take from 3 to 5 days to accomplish the call or meeting. The smaller firm would simply pick up the phone and usually we could get the same meeting within a few hours. You will have to decide how to manage the situation to make sure you can keep your startup moving at the appropriate pace.

Delegation/Abdication

Another problem going best-of-breed is usually that you will sign with one of the brand name partners or company leaders, and then you could get delegated, relegated or abdicated to a junior. This happens a lot and you need to be very aware of it. I had a company that was going public recently and we hired a PR firm. We hired the firm specifically for the capabilities of the practice leader who was well known in the industry. It wasn’t long when the practice leader no longer joined the weekly conference calls and we were relegated to his underling. Due to our own mismanagement, we then found that over 50% of the weekly calls were then further delegated further so that we only had the junior associate participating. So we went from the practice leader through one of the directors, down to the least experienced person. Again this was our fault for not managing the situation and demanding that we stay in touch with people at the right level. Realize that any best-of-breed service firms are there to optimize their own margin while providing the highest quality service. Optimizing margin means if you can put a junior associate on an account without requiring hours from your top leaders (at higher costs), you will drive more to the bottom line. As a startup, you need to be aware of this practice and manage the situation closely to ensure that you get all of the attention you deserve.

Positives

Investors like It

By choosing a best-of-breed partner, you are establishing credibility for your company. First, investors will like the fact that you have chosen name brands assuming the costs are affordable. For example, I use Wilson Sonsini in a lot of deals because they provide top intellectual property and corporate guidance, but additionally investors really like the fact that Wilson is involved. Of course you could use some of the other firms above which are best-of-breed just the same. I use BayTech Web design for my digital properties as they are best of breed in Silicon Valley.

Realize that investors are looking to reduce risk. In any early stage company there are a variety of risks including market risk, technical risk, management risk, legal risk and more. As an investor looks towards a company, the first and foremost question is “will I lose my money?” This is a fundamental question that needs to be answered. We have all seen the scams that seem to continually occur.

Investors want to know that their risks are mitigated (as much as possible)  and for example, legal risk is significantly reduced by a firm like Wilson Sonsini. Wilson will ensure all of the investment paperwork, intellectual property, and corporate structure is locked down and in place. Now, you could choose a small firm, or maybe an individual attorney who could be excellent. Their work might be outstanding, fast and less expensive. However they don’t carry the brand. I have also used strategies where I have used specific individual attorneys in combination with larger best-of-breed firms. This way you can offload a lot of the more inexpensive, more mundane legal work to the individual attorney, and save the more important strategic legal work (such as intellectual property), for the brand based firm.

Best-Of-Breed – Breeds Best-Of-Breed (sorry, I just had to say that)

In many cases it’s hard for an early stage company to attract best-of-breed firms. Just because you are willing to pay a best-of-breed firm, does not mean they will take on your case. I recently had an experience with an enterprise software firm that was white hot as a startup. In other words they were becoming a “Silicon Valley darling.” However, when we approached some of the top Silicon Valley or San Francisco offices of a variety of PR firms, four out of the five of them either said they were too busy or not interested in taking on the project based on the company’s early stage status. I’m sure they questioned whether or not the startup was willing to pay their fees, and whether or not the startup would eventually succeed. So, startups are risky so in some cases best-of-breed firms may be less interested in associating with the firm in that early stage and would be happy to jump on the opportunity once the company has seen more success.

The point here is that if you have a best-of-breed partner, the other partners will realize and also believe that you must have something good or important if the other best-of-breed firm signed on. For example, if you sign a top law firm, and you let your potential venture investors know about it, they will be more comfortable that you have made some initial, right moves. Also, if you sign top venture, then the PR firms might be more interested in working with your firm. I think you get the point here. The more best-of-breed partners you attract, the more credibility you have, and thus it’s easier to attract the best-of-breed outliers that may not otherwise have been interested in you at that moment.

High Cost Should Generally Equal High Quality

When you go best-of-breed, you expect the highest quality and you also expect to pay for it. Now, there are plenty of exceptions where this does not occur, however if you manage the relationship correctly you should get the results you deserve. Note that just because a firm is best-of-breed, it’s not “automatic”. With any good relationship, it requires solid management and expectation setting on both sides.

Best-Of-Breed Has Your Back

Again, if you manage the situation correctly, and you’re utilizing all of the right people, processes and systems from your best-of-breed partner, the cost-benefit trade-off should be positive. You may find that best-of-breed partners actually begin to think strategically for you. They bring you solutions and strategies that you may not have thought of, or they may improve your existing solutions and strategies. A top partner should be an expert in their area and therefore you are getting the best advice possible. They should be able to predict landmines ahead, and optimize your resources for the best result. Startups are by definition, resource constrained. Therefore any partner that can help you ensure that your resources and assets are deployed correctly and optimally is valuable.

Board Members

One of the most important things you will do as a startup entrepreneur is to choose your board of directors. Key is to make sure that you choose your board very carefully and give out board positions only once a great deal of thought, communication, and trust has been created. I have seen many mistakes in my days were entrepreneurs gave board positions without the foresight necessary to really understand if the Board member was a good fit. Asking someone to leave the board is a painful process that you want to avoid. Of course there are times when things go sour even with the best planning, but the idea is to make sure that you put in the effort necessary to ensure your board works effectively for you.

What is the role of a Board member?

Board member roles vary to some extent depending upon the size of your company and the structure of your board. I have seen very active board members who will do everything including pickup the phone to generate business for you, and I have seen other board members that meet once per quarter or year to review the company. Obviously there are a lot of duties and tasks between those two extremes where Board members added value.

Board members provide overwatch on the CEO, watch finance and stay involved with the strategic direction of the company. On the negative side, Board members are not there to get involved in day-to-day operations and help run your company. One of the few times where this could occur is when there is a management change and (for instance) the CEO is asked to leave the company. In this case a Board member may have to step in to run operations. Generally though, Board members are there to advise, and usually meet once per month to help you with strategy and direction. They will also look over your reports and documentation to make sure the company is running correctly. Board members will certainly get involved with the financials and the legal structure of the company to ensure that cash is being spent correctly and that items like stock options are handled appropriately.

How are Board members compensated?

Generally, Board members are paid in equity/ownership of your company and are therefore an incentivized to make the company an overall success. In some cases, Board members get some money for expenses if they have to travel to Board meetings. In other cases, especially with large companies, board members will earn a cash allotment annually. For startups however, I would not suggest paying Board members any cash, and if a Board member is asking for cash, they are probably not who you want on the Board.

I would suggest as a startup entrepreneur you offer each Board member somewhere in the neighborhood of 1/10 of 1% of your stock up to 3/10 of 1% of your stock. So, if you have 10 million shares outstanding, you might issue a board member anywhere from 10,000 shares up to 30,000 shares for serving on the board with your company. Also the Board members’ options vest over time just like employee options.

How many Board members should I have?

Usually, for startups I recommend not less than 3 but not more than 7 Board members. Less than 3, and it’s not really an effective Board, and more than 7 is simply too much to handle. If you have friends of the company who want to serve in an advisory capacity, and don’t have room on the board, I would suggest that you add the extra folks to your Advisory board.

Who should be on the Board?

First, as the the CEO and founder, you HAVE TO BE ON THE BOARD. Never, never, never, give up your Board position, no matter what may happen. Let’s face it, sometimes bad things do happen and founders/entrepreneurs are asked to leave the companies they have founded. While unlikely, either way, you need to stay on the Board until you sell the company or exit via IPO.

If you are not the CEO, then you should invite the CEO to be on your Board with you, the founder. So you would have 2 Board seats as a result. There is no need to add additional officers to the board. The rest of your board should be a combination of talented confidants and outside professionals who will add operational strategic value or corporate development value. Sometimes you may add a Board member just because they are a huge name or recognized individual and they build confidence in your company just from using their name. However, usually this is not the case and you should look for Board members who want to and are able to provide value.

The Essentials – Directors and Officers Insurance

Board members have a fiduciary responsibility to your organization and therefore have some liability for the organization. Recall the Enron and Worldcom disasters of early 2000 and you will know that Board Members were scrutinized at least, and held responsible at best. So, you need to acquire Directors and Officers insurance (called D&O insurance) in order to attract Board members as they want insurance against liability. In addition you should secure errors and omissions insurance which also covers officers and board members. This insurance is typically called “E&O” insurance.

What Happens at Board Meetings?

As stated above, Board meetings are held on a monthly or quarterly basis so the Board can interact with the CEO to guide and direct company strategy. On occasion, you might have some of your VP’s attend a Board meeting to report on their given department or duties.

In most cases, you, as the CEO, should build the agenda for the Board meeting. It should be built with the Board in mind, having items that you wish to cover and they want to see and discuss. You should cover all areas of the company so that the Board can provide input and guidance: Sales, Marketing, Business Development, Product Development, Engineering, Manufacturing, Finance, Operations, HR and Administration and more. The meeting should last 1-2 hours unless you meet less frequently (quarterly or annually) or there are extreme circumstances (you need to discuss a merger or acquisition).

Startup Hack – Create A Strong Advisory Board

One of the secrets I learned early in my startup career was the value of having a strong set of advisers. This article will give you some insight on how to create an effective and impactful advisory board.

There are many reasons to add Advisors to your startup:

  • They bring needed expertise in your given industry
  • Sometimes their name will carry credibility for your company
  • Advisors can make meaningful contacts and introductions for the company
  • You need extra help with a certain aspect of the business such as operations, finance, sales and marketing or technology.
  • Advisors should be compensated via equity thereby preserving cash
  • They can help raise capital

I would suggest creating a number of advisory boards based on the needs of your company. For instance, you can have a technology advisory Board, a financial advisory Board, an industry advisory Board, and other advisory boards. By bringing on a variety of advisory board members, it enhances your viability since anyone who looks at your company will be intrigued by the fact that you attracted so many interesting and talented people.

Advisory Board compensation

People always ask me “how do I compensate my advisory Board members?” Usually advisory Board members are compensated in equity. On very rare occasions, where an advisory board member is able to add significant value, you might consider a small cash stipend. But generally advisory board members should provide anywhere from a few hours up to 10 hours per month to help your company.

How should I use advisory Board members?

First, you will need to have advisory board agreements that outline the relationship with your company, and what is expected of the advisory board member. Be sure to set up your advisory board agreements with expectations that are reasonable. You’ll want to use your advisers sparingly, unless they have more time available to help. The key is to make sure that if you engage in adviser, your requests of them are meaningful and impactful. Most advisers will be happy to help since they want to be part of a winning company. You can make a big mistake here by bringing on a great advisory team, but not utilizing them to the fullest extent. So be sure to understand each advisers’ value, and have a plan to help them move your company forward. I have found that if advisers are not asked for help, they probably won’t speak up, and you will miss opportunities to utilize their skills, contacts and advice.

Are advisory board members liable for any issues that arise for your company?

Unless there is a specific incident where a advisory board member causes material damage to your company, generally Advisory Board members aren’t liable. They do not hold the same role as a board member. Board members have fiduciary responsibility for your company, and advisory board members usually don’t. This is also one of the main reasons why they are easier to recruit. Board members are getting harder to recruit because many of them don’t want to take on liability for the company, even with directors and officers (D&O) insurance. Remember when one of the board members of Hewlett-Packard was accused of using underhanded tactics to spy on the board? Advisory board members usually are not implicated in these situations unless there is proof that they have actively participated.

How many advisory boards should I have?

Always start with a single advisory Board. While advisers can be important to your company, it still takes time to recruit them and bring them into the fold. So start with one advisory Board, and then as you grow you might add more advisory boards for specific areas of the company. Also, as mentioned above, you’ll only want to take on as many advisers as you can manage. It doesn’t do any good to have advisers whose skills go underutilized.

How many members should be on an advisory board?

Generally, a minimum of three and a maximum of seven. With less than three advisory board members, it’s not really a board. At the same time you really don’t want more than 7 advisory board members on any given board, as it will become too complex to handle all of the maintenance that goes in to having advisory board members. Remember that you can have as many advisory boards as you would like, and can utilize effectively.

How often should advisory boards meet?

It all depends. If an advisory board is extremely active and necessary, you might consider meeting once per month. If the advisory board is more for brochureware, meaning that you are listing names to establish credibility in your company, you might meet once per quarter or once a year. However, you should feel free to call on your advisory board members often to help your company.