One of the best ways to assure your investors that your company is operating effectively is to have good governance practices in place. A well-functioning Board of Directors having regular meetings is a great way to keep your key investors informed and engaged, and is a critical component of sound corporate governance. Here are some tips on how to accomplish this.
Hold regular meetings
Following any initial venture financing, expect to hold six to twelve Board meetings per year depending on investor preference. Venture capitalists are particularly sensitive to the first Board meeting after they invest—be sure to be adequately prepared.
Set a meeting schedule
You will find that it is hard to find mutually agreeable dates for all of your Board meetings. Try to schedule your meetings well in advance before everyone’s calendars fill up at least six months in advance. If your directors have assistants, be sure to include them on all messages around scheduling and administrative matters. Consider having some of your meetings away from the company’s offices, particularly if your office lacks privacy or a large enough conference room to hold the group. Your investor or counsel likely has appropriate conference room space.
Use a Board book
Send a Board “book” at least a couple of days in advance so all the participants have a chance to read it carefully. The Board book should include, at a minimum: a “dashboard” highlighting key financial and operational metrics (talk with your directors to see what metrics and information they want to see); summary financial statements including comparisons against plan/budget; pithy operational reports (sales, business development, product development/engineering, marketing, finance); minutes from prior meetings for approval; listing of proposed stock option grants for approval; an up-to-date capitalization table that includes a full listing of outstanding stock options; and any other information or documents that will be critical to the discussion topics. Your goal should be to spend as little of the meeting as possible rehashing information that had been circulated in the Board book. Include a summary agenda with the Board book, including estimated discussion times for each agenda item (see “Manage time” below). With respect to operational reviews, consider picking one functional area for deep focus at each meeting rather than a shallow survey of all of them.
Venture capitalists and busy executives are very sensitive to their schedules and as a result are very appreciative when management can run Board meetings efficiently. Board discussions can often take on a life of their own, and while it is important to allow the Board to have meaningful discussions on important topics, it is also important to manage towards a timeline so that your meetings do not run far beyond the allotted time. Assigning estimated discussion times next to each agenda item can be a helpful tool to help guide expectations regarding anticipated discussion times and to help ensure that you are able to reach each topic on your agenda. If a new topic clearly deserves attention or if the Board seems to want to spend much more time on an agenda item than has been allocated, consider moving the topic to the next meeting or arrange an interim call so it does not disrupt your ability to cover the intended material and so that you and your team will have a better opportunity to prepare for the discussion. You should also assume directors have read the Board book carefully (and if you spend time reading each of the slides, you may end up training them that good preparation is unnecessary). Detailed information can be placed in appendices to the Board book for review by Board members before or after the meeting. Most Board meetings can be concluded in a two-hour period if people are focused on being efficient.
Determine meeting attendees
Determine who gets invited to attend the meeting from the management team. Remember, this may be a political issue. Consider inviting management team members on a rotating basis to drill down on select topics. Empower management team members to make presentations to the Board on their functional areas (being mindful of “Manage time”). At the beginning or end of each Board meeting, allot time for an “executive” session” (i.e., Board members only, no other management team members), even if there is no set agenda. This will condition your management team to expect there to be a closed session every meeting, which mitigates anxiety about them. Also, consider scheduling time at the end of each meeting where the non-employee directors can meet without any management team members, including the CEO, present. While this might make you nervous, it is good practice. Some venture capital investors will expect this as a matter of custom. Ask your investors what they prefer.
Minutes are intended to be “summaries” of the meetings. Most venture capitalists and counsel would advise you that “less is more.” These shouldn’t be play-by-play summaries, but rather a very high level summary of discussions and actions, and attaching any appropriate resolutions adopted. Be careful about putting confidential information in minutes, such as the names of individuals you are trying to recruit, prospective investors, potential buyers or targets—remember, this will be seen later in due diligence by others and you may not want to discuss those details later. Have counsel prepare, or at least review, the minutes. (Learn more about best practices for documenting board meetings in What You Need to Know About Board Meetings and Record Keeping.)
Never surprise your Board with bad news
Keep in mind that Board meetings are not an alternative to regular communications with Board members, and they are a lousy forum for surprises, so be sure to keep your directors informed between meetings, particularly about important setbacks and what you are doing to address them. If you are going to discuss difficult or controversial topics, call each Board member individually before the meeting so you know what to expect and can manage the discussion. The boardroom is not a good place for drama.
Adopt compensation guidelines
Have the Board adopt compensation guidelines for salary, bonus and option grants that will provide parameters to management in between Board meetings and speed approval of compensation matters at meetings.
Elect independent directors
Try to identify and elect independent directors with relevant experience. Spend time vetting and getting to know the independent director candidates, especially if they are recommended by your investors. Aside from the “checks and balances” these independent directors can provide between founders and investors, having them may be essential for review and approval of interested party transactions, and will become important for Audit Committee and Compensation Committee membership. Set explicit term limit expectations for independent directors—if the person is not a fit, she will be easier to replace if there is no expectation of a perpetual seat.
At the appropriate time, create a Compensation Committee and an Audit Committee, each comprised of all or mostly non-employee directors if possible. This can help allocate key tasks to the directors most capable with respect to those tasks. If, for example, two of the members experienced in compensation matters have carefully reviewed proposed option grants or bonus plan parameters, the remaining Board members will have more confidence in the decision and should be able to approve them without a lengthy discussion, which frees up meeting time to discuss other matters.
Set an annual budget/plan
Management should present their proposed budget/operating plan for the following fiscal year at one of the Board meetings held during the final couple of months before the end of the current fiscal year. Allocate more time for this Board meeting to review and discuss the proposed budget/operating plan.
Create process for transactions
In the context of corporate transactions, such as future financings and M&A, the Board needs to be very careful about demonstrating a careful and deliberate process. Showing that the Board is informed about the transaction and alternatives is critical. It may be advisable to create a committee of the Board, comprised of independent directors, to review and/or approve a transaction where there is a significant “interested” component (such as when an existing investor proposes to lead a new investment round).
Protect attorney-client privilege
Be sensitive to protecting the company’s attorney-client privilege. This is different than just protecting “confidential” information. Never discuss sensitive legal matters, especially litigation strategy or potential liability of Board members, with observers or other non-Board members present or without counsel present. These matters should be reserved for the Board-only session and company counsel should be included in the discussion. This will help you protect those discussions from discovery by opposing counsel in the event of litigation. Privilege rules vary from jurisdiction to jurisdiction, so be sure to discuss this concept with counsel in advance of any meetings where this may be an issue.
Use your Board
Don’t view the Board as your enemy. Most directors expect to be an active participant in the company’s activities. They often have many helpful contacts, and new or different viewpoints on issues that help create a constructive debate. They are trying to push you to succeed; don’t be afraid to share bad news with them, and don’t be defensive about their comments and suggestions.
Take action to avoid dysfunction
If you sense that your Board is becoming dysfunctional, take action. Ask your directors for feedback. Discuss your concerns with them. It may make sense to bring in new members or swap out existing members to change the dynamic. The situation will not likely improve on its own.