July 29, 2005

Board Behavior Tips for VC-backed Firms

Brad Feld points to an article by Dennis Jaffe (Saybrook Graduate School) and Pascal Levensohn (Levensohn Venture Partners) titled "After The Term Sheet: How Venture Boards Influence The Success Or Failure Of Technology Companies."

"Written in 2003, this is one of the best articles I've ever seen of the issues and dynamics surrounding the board of a venture backed company," Feld says. I agree.

An Extract:
The Board, and the roles and behavior of its members, evolve with the venture in three developmental stages:
• Start-up/Seed: An embryonic Board assembles as soon as capital is invested and VCs join the Board as preferred shareholders. Their first joint task is to recruit talented employees and define their roles. The optimal size of a start-up Board is between three and five people.This breaks down into one management representative and two venture investors, or two management representatives and three venture investors.
• Early Commercialization: A typical commercialization-stage venture Board has three VCs representing the largest investor in each series of preferred stock offerings (the A, B, and C rounds) and two insiders (the CEO and one other member of the management team, possibly the CTO or a co-founder). As a company grows, a successful Board adds new members with management and financial experience. As it enters the early commercialization phase, the company continues to demand active participation from the Board. Often the participation required is of a different and expanded scope than when the company was in pure research and development mode. Committees may form on an as-needed basis, including strategic review, merger and acquisition, and management integration.
• Productivity/Expansion: At this stage, typically three to five years after inception, the company has successfully launched its product and attracted customers. The VC Board Member is now looking ahead to exit options and helping the company become self-sustaining. While the CEO may be occupied with the company’s performance, the VC Board Members are motivated to look for exit options, such as a sale, an IPO, or a merger, and must also be looking for their own replacements on the Board. Independent directors who are likely to remain on the Board after an IPO often become more active at this time. Board Members skilled in structuring exits through mergers and acquisitions also may play an increasingly important role.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.