00:04Stanford University so welcome back to
00:09ye 145 technology entrepreneurship in
00:12this video I'm happy to introduce a
00:15special guest Clint Korver Clinton is a
00:18four-time serial entrepreneur he spent
00:2015 years as an entrepreneur before then
00:23becoming a venture capitalist with Lulu
00:25ventures in addition he is co-founder
00:28and co-president of the Stanford angels
00:31and entrepreneurs group he has PhD and
00:34masters degrees from Stanford as well as
00:36an undergraduate degree from Grinnell
00:38College so thank you very much for
00:39joining us and I'm looking forward to
00:42your session teaching a class more about
00:44board of directors and how they work
00:46Thank You Chuck it's a pleasure to be
00:53a majority of promising startups fail
00:57due to self-inflicted wounds by
00:59promising I mean those that have
01:01received venture capital funding are
01:02able to receive venture capital funding
01:04and by self-inflicted I mean those
01:07internal decisions that founders make
01:09early on about who should be on the
01:11founding team what roles they should
01:13have how they should split equity and
01:14what investors they should bring in this
01:17comes from Nome Wasserman a professor of
01:19entrepreneurship at the Harvard Business
01:20School and his research now one of the
01:23shames of this is that a lot of
01:24entrepreneurs are making these decisions
01:26with little guidance from folks who have
01:29expertise in the area and they tend to
01:30fall into traps such as overconfidence
01:32and avoiding conflict and as a result
01:35miss important ways to structure these
01:37decisions and often are not aware of
01:40some of the long-term consequences these
01:42decisions create boards formal or
01:45informal it can help in this short video
01:49I'm going to describe the role of boards
01:52in a start-up how you can use them and
01:54how they change over time boards from a
01:58legal point of view are charged with the
02:00responsibility of governing the
02:01corporation now i'm taking a u.s.
02:04perspective on this so it might be
02:05slightly different in countries outside
02:07the United States but in the United
02:09States the reason for this legal
02:10structure was to address the inherent
02:13potential conflicts between owners of a
02:15corporation and the management of a
02:17corporation so when you have investors
02:20that are not there full-time but have an
02:22equity interest in a company they're
02:25important decisions management can make
02:27where they trade off their interests
02:29versus these shareholders so for example
02:31if you've got a small company and at the
02:32end of the year you have a million
02:34dollars in profit management can decide
02:36to give that to themselves and the form
02:38bonuses or give that to shareholders in
02:41the form of dividends now the concern
02:43from a legal point of view is that
02:44without any kind of governance structure
02:46management will act is self-interested
02:49and they will basically benefit
02:51themselves at the expense of
02:52shareholders now stated more pot and
02:55this is the role for a board of
02:56directors now stated more positively the
02:58role of the board of directors is to
03:00align incentives between management and
03:02shareholders there's even a broader
03:04thought of our own boards where
03:06their goal is to represent not just
03:07shareholders but they represent the
03:09interest of stakeholders so this could
03:11be anyone who has an interest in or is
03:14affected by the corporation such as the
03:16local community this is the legal
03:18structure for a board but there might be
03:20other reasons why you as a start-up
03:22might want to create a board so beyond
03:27just being legally required there's a
03:29form of accountability that can benefit
03:31startups so my first board when I
03:34created a company coming right out of
03:35school I had an ex venture capitalist a
03:38professor of entrepreneurship and a
03:39lawyer on my board these were people I
03:41knew I respected and I wanted to perform
03:44highly in front of this kind of
03:47motivation can raise the standards
03:50inside of a company and create better
03:52performance also boards are you unique
03:55perspective to give objective feedback
03:57unlike customers and competitors and
04:00folks in the industry they're on your
04:01side of the table their goal is to help
04:04you build a company as well and they
04:06still have the outside perspective so
04:08they can give you a unique type of
04:10feedback to help you make better
04:11decisions boards also for start-up
04:14companies provide a complementary skill
04:16set mini startup companies only have a
04:18partial management team maybe you've got
04:20a customer expertise and maybe you've
04:23got some product expertise but maybe no
04:25financial expertise so a board member
04:27for a short period of time can fill in
04:29that financial expertise and create a
04:32better functioning team boards also form
04:35meant also play mentoring and coaching
04:37roles and some of my boards I meet with
04:40my the founders of my boards on a
04:42regular basis a couple of times a month
04:44focused specifically on their personal
04:46growth and finally boards create the
04:49opportunity for connections to customers
04:51and funders that you might not have with
04:53your current network on the team and
04:55also when you're talking to funders and
04:58customers and so forth a board gives
04:59your company credibility now many
05:02founders become members of boards of
05:05directors and when you become a member
05:07of a board of directors this is a
05:08serious responsibility and there are
05:09legal obligations associated with that
05:11this is what they call fiduciary duties
05:14of a board of directors and there's two
05:15basic categories there's the duty of
05:19which requires directors to make
05:20informed decisions and there's the duty
05:22of loyalty which addresses conflicts of
05:25interest so let's talk about the duty of
05:27care first here are some elements for
05:31good decision-making you followed a good
05:33process it's transparent people know
05:35what how the decision was arrived at the
05:38board has examined available
05:39alternatives or they've ensured that the
05:41management team who are presenting the
05:42decision to them has examined available
05:44alternatives they've done their due
05:46diligence in terms of collecting
05:47relevant information and when they make
05:49the decision they're making the decision
05:51in good faith without conflicts of
05:54interest so in other words they're
05:55putting the interest of the company
05:56ahead of their own personal interest now
05:58many times this shows up in a fairly
06:00straightforward way a board might most
06:02decisions are nicely packaged you're
06:05talking about approving a budget or
06:07stock options or around a funding but
06:10sometimes decisions can be very messy
06:11for example in one of my companies last
06:14year the management team came to me in a
06:17bit of a revolt saying the CEO had to go
06:19just wasn't competent to lead the
06:20organization at this level now as you
06:23can imagine this was a bit of a messy
06:24decision and in these circumstances the
06:27duty of care becomes a very high burden
06:29so if you're a founder on the board and
06:32not the CEO which there was one it
06:34became a very challenging for him to
06:36manage his duty of care and put the
06:38interest of the company ahead of his
06:39personal interest and that's what the
06:41duty of loyalty really focus on in a
06:43very explicit way what this says is that
06:46when you're a board member you take off
06:49whatever interest you have personally or
06:52whatever stakeholders you represent and
06:53you're thinking first about the
06:55corporation even if this is not in your
06:59best interest so for example if an
07:02opportunity comes to you as an
07:03individual say a consulting opportunity
07:06and it happens to be in the same area of
07:08work a line of work as the corporation
07:11essentially duty of loyalty says you
07:13must first give that opportunity to the
07:15corporation before you can take it and
07:17when it comes to things like executive
07:20compensation where's clear challenges in
07:25terms of you being unbiased if you're
07:27say the CEO basically duty of loyalty
07:29says you should recuse yourself from
07:32of conversations now there's only a few
07:36sets of decisions really that come to
07:37the board where these issues come into
07:40play and here's a list of some of those
07:42board of activities first and foremost a
07:45lot of people think of the board is
07:46managing the CEO this is hiring firing
07:49setting compensation and evaluating the
07:51CEO which is certainly one of the
07:53important responsibilities of the board
07:55of directors other important board
07:57activities include approving major
07:59strategies and financial objectives
08:01providing advice and counsel to top
08:03management managing themselves so
08:06oftentimes as the board gets more
08:07developed they'll be a nominating
08:09committee and the board wolf will figure
08:11out who else should be on the board how
08:13do we evaluate ourselves and so forth
08:14and there's a compliance portion of the
08:18board which is reviewing the adequacy of
08:20systems to comply with laws and
08:22regulations so we've now gone through i
08:25call it sort of that the basics of what
08:27a board does and and how their what
08:30their legal responsibilities are so
08:32let's now get into the mechanics of what
08:34a board meeting really looks like here's
08:37an example of a typical board meeting
08:39structure so this would be true for not
08:42only startup companies but larger
08:43companies may have something like this
08:44as well board meetings happen on average
08:48eight times a year for for VC funded
08:51companies they may happen more
08:52frequently as quickly as monthly further
08:55very early startups and more like
08:57quarterly for more mature companies so
09:00board meeting lasts two to five hours
09:01it'll have board members present there
09:04might be a couple of observers and the
09:06very first thing you do is review the
09:08agenda and purpose so make sure
09:09everybody understands why they're there
09:11approve the minutes of the last meeting
09:13the idea here is that we're keeping a
09:16formal record of what goes on in this
09:18board meetings and these formal record
09:20of decisions made is important for the
09:23governance of the company and then the
09:25third element here is review relevant
09:27parts of the business now one of the
09:29challenges of a board member is you only
09:31show up once a quarter once a month
09:34maybe you have a few conversations in
09:36the meantime but these are busy people
09:38often have a lot of other things going
09:40on and so to help them get their heads
09:42back into the business it's helpful to
09:45well review of the plan matter of fact I
09:48would call the first three elements here
09:52essentially helping people understand
09:56the plan helping people understand how
09:58they've gotten there and give them
10:00context once we have that now it's the
10:04idea is to review okay well where are we
10:05as a company a lot of venture
10:08capitalists and board members like this
10:09notion of reviewing the highlights and
10:11lowlights since the last time we met so
10:14think of this is a one-page summary of
10:16the good things that have happened and
10:18the bad things that have happened since
10:19the last board meeting then there's a
10:22review the financial performance the
10:24boards are in fiduciary responsibilities
10:26fine manager finance of the company and
10:28making sure that's handled an
10:30appropriate way is one of the important
10:31responsibilities of a board and so
10:33they'll often be a review of the income
10:35statement cash flow balance sheet other
10:36sort of financial metrics and finally
10:39reviewing performance versus key metrics
10:42in the company this could be metric sure
10:44this OC ated with the technology the
10:46customers or whatever is important for
10:48understanding the business these next
10:51three I call essentially monitoring the
10:54progress of the company then we get into
10:58a less structured element of the agenda
11:01which depends very much on what's going
11:03on in that particular time period but
11:05making decisions so this could be making
11:08decisions that are simple decisions such
11:09as boards approving stock equity grants
11:11which is something they're required to
11:13do or it can be much more challenging
11:15decisions so in the case of the company
11:17I mentioned last year the management
11:20team is in revolt against the CEO what
11:22do we do do we fire the CEO do we fire
11:26the management team how do we manage all
11:28this incidentally the decision in that
11:31case was to bring in someone who was an
11:34expert on teams and do 360-degree
11:37reviews and essentially do a
11:38team-building exercise and team
11:40assessment exercise to see where we
11:42really were this i would call setting
11:46priorities so once you've made decisions
11:49then the next item is to will set goals
11:52and action items so that
11:54everyone's confident this decision is
11:55going to get implemented in a
11:56high-quality way this is all relatively
12:00structured in common with most board
12:02meetings the next two can either happen
12:05in a board meeting or outside of a board
12:07meeting but it's more open-ended so
12:09discussing challenges so for example in
12:12the we have a one company that is
12:15running low on money they don't have a
12:17specific decision but there's this
12:19general problem of where we're running
12:21low on money what do we do and so the
12:24board is a good context appropriately
12:27framed for having this conversation and
12:29that discussing challenges happens with
12:32the CEO in the room executive session is
12:35an important component of board meetings
12:37which happen without the CEO in a room
12:39what this allows is the board to have a
12:42conversation without the personal if you
12:48will barriers that might be created or
12:50hindrances of having a CEO in the room
12:53and just to be able to have a very
12:55transparent and open meeting and
12:57oftentimes after an executive session
12:58the CEO will come back in and the board
13:01will review that conversation this last
13:03bit I'd call addressing problems so
13:09within a board meeting you have this
13:10flow of the plan the progress the
13:13priorities and the problems that
13:14ultimately create a functioning board
13:17meeting and by the way this is the
13:19standard board meeting when you have
13:20exigent circumstances so I have one of
13:24my companies right now it had got an
13:25aquas acquisition offer and so we're
13:28having board meetings every couple of
13:29days as we try figure out how we address
13:31this situation so there are situations
13:33like this where it's not a typical board
13:36meeting but its handling specific
13:38circumstances so here's how boards
13:40change over time so I've given you very
13:43much the view of a start-up seed-stage
13:46board if you will this founding area
13:49where there are 124 directors it's
13:52mostly comprised of founders maybe you
13:54have an independent person in my first
13:56startup I had three independent people
13:58which is unusual but I found very
14:02needs at that level are often times very
14:05startup related and product related and
14:07from a governance point of view there's
14:09often not a lot of governance overhead
14:11that's really required there's an annual
14:14meeting that's required legally but
14:15other than that and basically having
14:18regular meetings and just monitoring
14:20progress is usually all that is required
14:24or all that is needed once funding
14:27happens so at the seed level the second
14:30column down here now moreover head
14:33starts to show up in the board investors
14:35will want board representation to look
14:37after their interest and so you will add
14:38investors to the mix you will also
14:41probably need some additional expertise
14:43on the board maybe some financial
14:44expertise or legal expertise and from a
14:47governance point of view financial
14:49reporting and controls so who signs
14:51checks and who approves payments becomes
14:54an issue as a company matures then it
14:57moves to call it the early
14:58commercialization the number of
15:00directors increases you might have
15:02additional investors that show up and
15:04the independents become more important
15:05and start up expertise becomes less
15:08needed less valuable but more management
15:12expertise how do you manage teams of
15:15people and manage managers and how do
15:17you understand your industry and markets
15:18become more important and at this level
15:20oftentimes boards will break up into
15:22smaller committees with very specific
15:25roles so for example an audit committee
15:28is a very common early committee that
15:30gets created and their role is to make
15:33sure that the financial reporting has
15:34been done appropriately and accurately
15:36record wreck represents the financials
15:39of the company and finally when you
15:41start getting the late stage and more
15:42public oriented companies essentially an
15:45early stage company will start to take
15:47on some of that public company
15:50infrastructure and they'll want that
15:51public company expertise as well so this
15:55has been a very quick overview of boards
15:58which is a complicated and important
16:00topic for those interested in additional
16:03resources here are three that I
16:05recommend first is a book by constance
16:08Bagley in Craig Dow she called the
16:11business law here's a copy of that it's
16:16a very good book on the legal issues
16:18that lawyers the legal issues that
16:20startup folks might want to know and it
16:23has a chapter in there on boards the
16:25next is a particle called the basic
16:27responsibilities of vc-backed company
16:29directors you can see a copy of that
16:33right now this is a white paper written
16:36by the working group on directory
16:37accountability in board effectiveness
16:39it's a free white paper is available at
16:41the websites you see here in vca org and
16:45wilson wsg r which is wilson sonsini the
16:48law firm's website and the last one I'd
16:51recommend is a Harvard Business School
16:52case study how serial entrepreneurs
16:55build and manage a board of directors
16:56and adventure back start-up now all
16:59these give you different flavors of
17:01startup boards there's not a book that I
17:04can recommend unfortunately I wish there
17:06was most of the literature out there on
17:08boards is really focused on large public
17:10companies or nonprofit companies and
17:12there's very little on startup boards so
17:15I'd start here and thank you for your
17:17time so thanks that was great just a
17:20couple of questions that might be of
17:22interest to the students either Stanford
17:24or watching online I know you also teach
17:26a class at Stanford called the boardroom
17:28on how entrepreneurs can build and
17:32interact with their boards so I'm
17:34wondering what are the some of the
17:35common mistakes that you see first-time
17:37entrepreneurs or students make with
17:39respect to their boards well there are a
17:42handful of common mistakes probably the
17:44most common is actually not having a
17:46board so once you incorporate you're
17:48legally required to have one and there
17:50are some obligations that come along
17:51with that but more importantly for a
17:54startup company it's not having a board
17:56as a missed opportunity to bring in some
17:59fresh perspectives and bring in some
18:01folks with real expertise who would be
18:03on your side of the table I guess an
18:05another common problem would be for
18:08those companies that do billboards a lot
18:10of times they put their friends or
18:12family on a board and they don't think
18:13very carefully about who the board
18:15member should be and again this is a
18:17missed opportunity and when
18:20important issues come up like the CEO is
18:23not the right person or a funding event
18:25these are the persons that are going to
18:27have decision-making authority in your
18:28company and you want them to be the
18:30folks that have the appropriate
18:31expertise to help you make those
18:33decisions and just a third problem might
18:36highlight is startup companies that put
18:38all of the founders on the board well
18:41this may seem like an easy thing to do
18:42early on it creates confusion with
18:45respect to decision making authority in
18:47the company so companies are set up in
18:49such a way that the CEO makes all of the
18:51management decisions and then the CEO
18:53reports to the board of the CEO is
18:55responsible for making management
18:57decisions in other words the buck stops
18:59there with respect to the other founders
19:01but now the other founders are also on
19:03the board and the CEOs reporting to them
19:05it create can create real confusion
19:07especially around important decisions
19:09where there's controversy right you also
19:12tell us a bit more about the Stanford
19:14angels and entrepreneurs group if I'm a
19:16Stanford student or Stanford alum
19:19watching or even a non Stanford alum in
19:22Silicon Valley watching the video where
19:25can I learn more and how can I get
19:27involved so Stanford angels and
19:29entrepreneurs is an official alumni
19:32association group that's been in
19:33existence for about a year you can learn
19:35more by the way at ww Stanford angels
19:39and entrepreneurs com or by going to the
19:41Stanford alumni association website and
19:43the purpose of SAA is to bring together
19:46within the Stanford community those
19:48folks interested in both funding
19:50startups and also starting startups and
19:54there's this rich set of resources here
19:56on campus and when you become an alumnus
19:58it's often challenging to get hooked
20:00back into the organization and so this
20:02organization is meant to be a helping
20:05alumni get hooked back into all the
20:07exciting entrepreneurial activities
20:08going on here at Stanford and like I
20:11said we've been around for about a year
20:12and we have over 250 members so far
20:14great great so thank you once again for
20:17being here and for teaching us a bit
20:19more about boards of directors thanks
20:21jack has been a pleasure great
20:24for more please visit us at stanford.edu
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