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Level up governance presentation dave litwiller - march 2013
1. Building Better Boards of Directors
Growth- and Expansion-Stage Tech Companies
Dave Litwiller
Executive-in-Residence
March 27, 2013
2. Introduction
• Looking beyond standardized recommended and legally
required practices for growth- and expansion-stage tech
company boards of directors
• Discussion of the tools, traits and techniques which have the
highest direct influence on board performance, and company
performance
Copyright, David J. Litwiller 2013 2
3. Going from Good to Great
• Collective productivity increase:
– 3* to 10* higher for great vs. good
– More time thoughtfully researching and deliberating the
right things
– Faster learning
– Better ongoing adaptation
– More constructive handling of conflict
• Outsized contribution to:
– Company leadership , by example and positive tension
– Winning culture
– Ecology of sustained outsized success
Copyright, David J. Litwiller 2013 3
4. Overview
• People
• Board Evolution
• High Impact Practices
• CEO Performance Evaluation and Communication
• Chairmanship
• Board Assessment
- Break -
• Corporate Metrics and Practices to Monitor
• Governance of High Impact Growth Initiatives
• Later-Stage Financing and Liquidity Board Issues
Copyright, David J. Litwiller 2013 4
5. My Background
• Twenty+ year trajectory of R&D, marketing, finance and general
management roles in early-, growth-stage and scaled-up tech companies
in Waterloo region
• Governance
• Spent a number of years heading M&A, divestiture, turnaround, and
corporate venture finance activities in semiconductor and enterprise
software businesses, as well as work in instrumentation, automation, and
med/biotech
• As EIR, presently advise over sixty tech companies’ founders, boards and
investors
Copyright, David J. Litwiller 2013 5
6. People
• Being a director is work, and people need to be work-like about it
• Yearly commitment of time to do it well
– Regular director: 250 hours
– Committee chair: 350 hours
– Non-executive chairman: 450 hours
• Devote time outside the boardroom 2:1 compared to the hours
spent in board and committee meetings
• Available to each other, the chairman and the CEO for 1:1 ad hoc
discussions
Copyright, David J. Litwiller 2013 6
7. People
• The board needs to collectively be knowledgeable about all
salient aspects of the business and its context, even though
individual directors’ skills can be more narrow
• Capable of expressing independent viewpoints, and
challenge others when necessary
• Not afraid to ask a “dumb” question
• Strongly competitive and ambitious for the business, but
tempered with integrity, judgment and adaptability
Copyright, David J. Litwiller 2013 7
8. People
• Attuned to the emotions and body language of others
as discussion unfolds
• Able to hear and assimilate what others are saying
• Able to adopt decisions as their own, after a decision
has been reached
• Willingly and easily communicate frame of reference
(goals, criteria) and thought process for reaching
conclusions, not just the conclusions themselves
Copyright, David J. Litwiller 2013 8
9. People
• Bias for action; somewhat impatient
• Relentlessly questioning to make the most of the
company’s opportunity
• Sound out their major concerns off-line with the chair
in advance of board meetings
• Usually operate more in a Socratic method than telling
management what to do, unless a crisis is unfolding
Copyright, David J. Litwiller 2013 9
10. People
• At least one person who is the Ying to the CEO’s
Yang
– i.e. if the CEO has a sales background and personality,
a counterweight board member with a technology or
operations focus
• At least one person who personifies the target
market or competitive ecosystem
– Frequently filled with one or more of the independent
director seats
Copyright, David J. Litwiller 2013 10
11. Evolving the BoD - General
• Term limits, typically three years
• Current directors and officers routinely
networking to develop director candidates
• Periodic board self assessment to identify
weaknesses and skill gaps as the basis for
targeting new nominees, shifting skills and
backgrounds, and better practices
Copyright, David J. Litwiller 2013 11
12. Evolving the BoD - General
• Designate directors to see that planned new
practices get implemented well, quickly, and
further tuned
• Balanced origination of nominees from CEO
and non-executive directors as business
conditions vary
– Don’t pendulate from one to the other
Copyright, David J. Litwiller 2013 12
13. Evolving BoD Skills with the
Stage of Company Development
Company Typical # of Typical Director Key Skills
Stage Directors Mix
Seed and 3 1 Founder Recruiting, technology, operational set-
Start-up 1 Investor up, angel/VC funding, ecosystem
1 Independent relationship development critical to
success over next 18 months
Growth 5 2 Founders Commercialization, operational
2 Investors refinement, institutionalizing know-how,
1 Independent scaling, growth finance, working capital
management, international reach
Late 7 2 Founders Increasing financial sophistication,
Expansion 2 Investors acquisition or IPO savvy, governance
3 Independents discipline and improvement, reduction of
surprises, sustaining strong growth
Copyright, David J. Litwiller 2013 13
14. Minutes
• All directors need to be engaged, active contributors, and
documented as such
• A director’s duty of care and fiduciary duty require
consideration of multiple possibilities on major decisions
• Bodies under observation (or prospect of future study)
behave better than those not
– Minutes serve as a kind of self-observation
• Vanilla minutes, describing decisions only, are insufficient
Copyright, David J. Litwiller 2013 14
15. High Impact Board Practices
Company Practice Helps
Stage
Growth • Executive sessions • Independence of board
• CEO and management • Correct quickly and early
performance feedback • Keep up spirited inquiry in the most
• Agenda effort impactful areas
Late • Continuous improvement • Evolution of the BoD as a self-regulating
Expansion of governance body
• Methodical director • Accelerate time to full individual and
onboarding group productivity, facilitating renewal
• Seek diversity in director • Avoid path dependency
candidates
Copyright, David J. Litwiller 2013 15
16. BoD Advice
• There’s no shortcut for spending the time and doing a lot of reading
and networking for a director to bring an informed, independent
viewpoint about a company’s strategic environment
• Speed, decisiveness and dexterity improve with a somewhat
smaller board than larger, IFF, sufficiently broad, experienced, and
dedicated directors are available to span the requisite disciplines
with a marginally smaller group
• Meet eight times per year, in person
• Don’t let the flurry of other business push aside a deep dive each
meeting into the matters which are keeping the CEO and CFO up at
night, and to understand what alternate data , viewpoints and
interpretations exist to richen the discussion on those matters
Copyright, David J. Litwiller 2013 16
17. BoD Advice
• Require board packages be delivered to directors 72 hours in
advance of meeting, with a cover memo identifying which items are
informational only, and those which will be deliberated and decided
• Structure discussion so that management’s recommendations are
clear, yet with room for director input, but stopping short (usually)
of unbounded possibilities
• At every board meeting, discuss the quality of information, agenda,
time allocation, and deliberation process with each director
contributing 1-2 improvements for future meetings
• Conduct brief executive sessions at each board meeting to discuss
management and board performance without members of
management present, as well as who will deliver that feedback
Copyright, David J. Litwiller 2013 17
18. BoD Advice
• Have executive management provide regular feedback on where it has
gotten the most help, and the most frustration, from the BoD
• In normal circumstances, use 75% of time in the boardroom looking
forward (strategic, market), and 25% looking back (finance, ops)
– Don’t get into caught in the trap of exciting near term events, routine updates, and
KPIs taking all the time
• Rotate which board member will take a hard stand on difficult issues as
they arise, so that one person does not always take the role of critic
• Designate one responsible director for the CEO performance evaluation
process, even though all directors participate
Copyright, David J. Litwiller 2013 18
19. CEO Performance Evaluation
• Make sure this isn’t the agenda item that gets cut
for time meeting after meeting
• Have a rigorous process for evaluation
• Separate short- and long-term goals
• Define poor, acceptable and outstanding
performance up front
Copyright, David J. Litwiller 2013 19
20. CEO Performance Evaluation
• Discuss in executive sessions the potential for incentive bias
– Ensure employment agreements include claw-backs for awards
which are subsequently wiped out by restatements
• Have two or more non-executive directors deliver
performance feedback
– Criticism then doesn’t come across as an axe being ground by
one which isn’t shared by others
• Be very cautions about retroactive performance target
revisions for compensation
– Quickly becomes corrosive to a culture of execution
– Trickle down effect throughout organization
Copyright, David J. Litwiller 2013 20
21. CEO Succession Planning
• Know who takes over from the BoD or from executive
management in the event of temporary CEO incapacitation
• Routinely discuss who would take over in a planned or
compelled transition
– The half life of a growth stage tech company CEO is about three
years
– Succession is not a remote probability which can be downplayed
– The probability of success with an insider is higher than an
outsider (culture, industry knowledge, technology know-how)
– Get to know the high potential executives below the CEO who
are able to work within the current system, but can also break
from the status quo
Copyright, David J. Litwiller 2013 21
22. CEO Succession Planning
• Directly confronting CEO succession prompts
the most constructive behaviours by the BoD
to provide regular performance feedback
– Boards which cannot confront succession planning
tend to also be much weaker on CEO evaluation
Copyright, David J. Litwiller 2013 22
23. Director Onboarding
• Get to know inbound directors as individuals
before the first meeting, outside of the
boardroom, to help build communication and
trust
• Have an incumbent non-executive director act as
a mentor to a new director
• Help prepare for first meeting to get a fast start
contributing
• Arrange 1:1 meetings with the CEO, other
executive managers, and all directors
Copyright, David J. Litwiller 2013 23
24. Director Onboarding
• Onboarding education package including past
two years’ minutes, last two reading packages,
corporate by-laws, etc.
• Disclosure of any matters discussed at most
recent executive sessions or full board
meetings, not yet minuted, of which the
inbound director should be aware
Copyright, David J. Litwiller 2013 24
25. Chairmanship
• The BoD can only be as good as its chairmanship for
setting the tone and interpersonal chemistry
– Leading among peers
– Tact: ability to disagree without being
disagreeable; constructive dissent
– Bringing everyone into the discussion, and not
letting one voice dominate
– Setting high expectations
– Communicating easily with other directors, the
CEO, and management
Copyright, David J. Litwiller 2013 25
26. Chairmanship
– Encouraging debate and expression of minority viewpoints
while sustaining cohesion
– Keeping conflict at a task level or a frame of reference
level, and not a relationship level or a fact level
– On difficult, divisive issues
• Requesting multiple options from each individual to prevent
premature polarization to single views
• Having proponents express both pro and con arguments to foster
balance and intellectual honesty
– Knowing directors’ leading concerns before each meeting
– Probing for unspoken concerns
Copyright, David J. Litwiller 2013 26
27. Chairmanship
– Formally checking with all members before a major
decision
– Keeping debate from dragging on to the point of
frustration
– Structuring deliberation and decision into a two-step
process on divisive issues
– Effort and preparation, leading by example
– Marshaling varied input into coherent action points
– Collaborating on agenda development with the CEO,
showing a clear sense of purpose
– Making sure that major business, financial, strategic and
team issues get discussed, and not pushed aside by
smaller matters
Copyright, David J. Litwiller 2013 27
28. Chairmanship
– Driven improvement of board practices
– Quickly reconciling emerging differences among directors’
visions for the board’s role, and those of management
– Promoting openness by encouraging board members to
make direct proposals, not disguised or oblique ones
– Weaving themes and points of importance together to
create an integration of each meeting around major
current issues
– Set-up each portion of the discussion with a purpose, what
management is expecting from the BoD (info sharing,
debate, decision), scope, and what has come before
Copyright, David J. Litwiller 2013 28
29. Chairmanship
– Being able to both criticize and support management
by intermixing comments
– Quickly dealing with director underperformance
– Rapidly addressing informational or disclosure issues
which cause surprises
Copyright, David J. Litwiller 2013 29
30. Executive Sessions
• Have at least one executive session at each board
meeting
• Better is two
– One just before the meeting to discuss any desired
changes to the agenda based on review of the reading
packages and other late breaking developments
– The other just after the meeting to discuss impressions
and provide feedback to the chair and CEO
• Routine executive sessions cut down on CEO
apprehension about directors meeting without
him/her
Copyright, David J. Litwiller 2013 30
31. Executive Sessions
• Regular in camera meetings provide a safe, non-
adversarial environment where non-executive
directors can speak their minds
– Helps keep little issues from growing into big ones
• Minutes
• Chaired by the board chairman if non-executive,
and otherwise by the lead independent director
Copyright, David J. Litwiller 2013 31
32. Executive Sessions
Matters to Always Discuss:
• Is time being devoted by the board to the right work?
• Is the supplied information adequate?
• Strengths and concerns about the performance of the CEO
and executive management
• How we’re doing coaching and providing performance
feedback to the CEO
• Executive compensation
• How are we, the board, doing?
• Gaps in board skills which are emerging?
• Implementation of action plans coming out from recent
board self-assessments
Copyright, David J. Litwiller 2013 32
33. Executive Sessions
Cautions:
• If self-evaluation of the board starts devolving
to structural issues only, rather than
effectiveness issues
– Can happen to protect egos, out of fear, or
complacency
Copyright, David J. Litwiller 2013 33
34. CEO Communication -
Biggest Worries
Three Quarters Ago Two Quarters Ago Last Quarter This Quarter
#1
#2
#3
#4
Copyright, David J. Litwiller 2013 34
35. CEO Communication –
Reading Package Cover Memo
Summary of:
• What has gone well vs. plan
• What has not
• Portions of the reading package to review with
particular care
• Potential changes to strategic goals
• What most needs to be discussed
• Decisions needed from the BoD
• What help is most needed from the BoD
Copyright, David J. Litwiller 2013 35
36. Board Assessment
• Beyond the standard checklist
– Systemic Learning
• Learning not just about outcomes, but about the
decision process the board uses
• Emphasis
– Experience is knowing what happened
– Learning is knowing why it happened
– Learning to learn is the ultimate goal
– It is the only way to achieve peak productivity in a rapidly
changing and complex environment
Copyright, David J. Litwiller 2013 36
37. Board Assessment
Decision Process
• What have I learned about my own frames of
reference?
• About the frames of others?
• About the way we gather intelligence?
• About the process we use to reach conclusions?
• Overall, what do I value and not value about our
decision process?
Copyright, David J. Litwiller 2013 37
38. Board Assessment
Decision Process
• Where should we spend more and less time
versus the recent past?
– Discussing frames of reference
– Gathering information
– Coming to conclusions
– Learning from outcomes
Copyright, David J. Litwiller 2013 38
39. Board Assessment
• Lessons learned
– From two recent successes
– From two recent failures
• Balance is vital in lessons learned analysis because
human bias is for successes to be seen as more
relevant over time, whereas more learning potential is
often embedded in the failures
• Immediate after-action lessons learned are particularly
important in time- and resource-critical decision
environments
Copyright, David J. Litwiller 2013 39
40. Board Assessment
• Learning Capacity
– Sufficient and clear information about decision results
– Enough time to make sense of the information available
– Opportunity to test learning conclusions in new decisions
– Ability to see how observed conclusions might be
interpreted differently
– Willingness to expose ourselves to learning feedback
– Open mindedness before reaching conclusions
– Feedback fidelity, acceptance and assimilation
– Objectivity separating skill from luck
– Learning fast and early, in time to make midcourse
corrections
Copyright, David J. Litwiller 2013 40
41. Board Assessment
• Like many other tools, assessments get dull
over time and less effective if the format and
questions don’t change
– Change the format yearly to get people thinking
and communicating in new ways
Copyright, David J. Litwiller 2013 41
42. BoD Early Warning Signs
Signals of insufficient director effort or poor skill correlation with
the needs of the business:
• Overreliance on service providers; they do not just provide
expert input, the BoD effectively outsources decisions
• Routine over-deference to the one board member with the
most expertise in a subject area
• Vital decisions are almost always made just with the facts and
arguments on hand, rather than spending time in some
instances to question the source information and get more,
varied, and better data
Copyright, David J. Litwiller 2013 42
43. Early Warning Signs
• Insufficient give and take between directors and management
• Lackluster inquiry into areas of underperformance
• Poor meeting management
– Time
– Agenda
– Spiraling out of control on issues without an ability to
summarize work to date, forward actions, and move ahead
to other business
• Insufficient declaration of conflicts
Copyright, David J. Litwiller 2013 43
44. Early Warning Signs
• Lack of discretion or confidentiality
– What goes on in the boardroom stays in the
boardroom
• Inability to discuss
– Assumptions
– Dependencies
– Next best alternatives
– Scenario plans and signals/conditions to shift tracks
• Premature major investments
Copyright, David J. Litwiller 2013 44
47. Master Metrics
• Customer preference ranking – quantitative and qualitative
– Get data not just from current customers, but also those that are
wavering and recently departed
– Good customers define quality
– Cohort analysis to monitor trends
• Rising efficiency (RoA, RoE, margins)
– Aim for fast completion of measurements, not for perfection
– It is big changes that need to be picked up upon and investigated
• Returns above the cost of capital (CoC)
– Regular review of past major investments and whether they retuned
at the expected levels, above the CoC, and why
Copyright, David J. Litwiller 2013 47
48. Master Metrics
• Growth of market share well above the market’s rate of
growth
– Look also for further evidence of whether or not the
company is setting industry expectations to which
competitors have to react, rather than the reverse
• Variances in results from success-premised plans
– Rapid attention when variability first re-emerges after a
period of relatively consistent and predictable growth
– Correlation=causality mindsets in mgmt & BoD often have
taken hold during the recent past time of smooth sailing
– Drill into recent past variances at more atomized level to
diagnose lurking trouble quickly
Copyright, David J. Litwiller 2013 48
49. Master Metrics
• Speed of execution, and, speed of feedback
adaptation
– Idea to product
– Market to sell
– Quotation to cash
– Forecast to delivery
– Issue to resolution
Copyright, David J. Litwiller 2013 49
50. Diagnosing Corporate HR Practices
People
• There is selective recruitment, challenging
training, methodical enculturation and removal of
misfits
• The business targets and rewards those who seek
responsibility and not merely accept it
• Staff and management see themselves as
responsible for more than their job descriptions
Copyright, David J. Litwiller 2013 50
51. Diagnosing Corporate HR Practices
Leadership
• Defines, communicates and reiterates corporate vision and strategy
– Staff is engaged and involved in the debate, though decisions are made by
leaders
– Once decisions are made, everyone abides by them as if those decisions were
their own
• Over-communicates about company progress, challenges, measures of
performance, and relationships to mission objectives
– Particularly in challenging circumstances, communication keeps up
• Hires for capability and a positive, winning attitude
– Roots out passivity, poor attitudes and passive dissent
• Walks the talk, leading by example
Copyright, David J. Litwiller 2013 51
52. Diagnosing Corporate HR Practices
Culture
• Results matter. There is a desire to win in all circumstances
• Work is fun. Energy is high. Whining is unacceptable
• There is one ego in the company, the company itself. There is esprit
de corps and a shared pride in the organization
• Group pursuit of mastery in the company’s endeavor. This
superordinate goal produces engagement, grit and determination.
It releases greater creativity than more rote objectives and converts
much more of work into something pleasurable
Copyright, David J. Litwiller 2013 52
53. Diagnosing Corporate HR Practices
Culture
• Motivation for staff comes from developing and
maintaining the respect of their peers as much as from
monetary rewards
• Obsess over customers. Do what it takes to make them
successful
• Exhibit mutual respect for what different people and
functions bring to the table
• The best idea wins, no matter from whom or where it came
Copyright, David J. Litwiller 2013 53
54. Diagnosing Corporate HR Practices
Culture
• Truth speaks to power, connecting leaders authentically to people,
protecting the capacity to inquire and improve
• Value learning and constructively harnessing the lessons of failure
– Smart failure – fast, cheap and not the same way twice - is not harshly
punished
– Mistakes are disclosed as soon as they are known so that they can be
corrected most quickly and cheaply
• Integrity is without compromise
– If integrity lapses occur, they attack all other aspects of an otherwise enduring
and strong culture
– Integrity breaches rapidly become malignant
– Any integrity deviations must be swiftly and decisively fixed
Copyright, David J. Litwiller 2013 54
55. Major New Growth Initiatives –
Re-Learning Early-Stage Skills
• Growth- and expansion-stage companies are accustomed to being right far
more than they are wrong
• Overconfidence can easily start overtaking governance and executive
teams
• Slowing growth leads people to seek to reaccelerate through nonlinear
growth endeavours
• Major new growth initiatives require a diametrically different mindset
– The initial trajectory is likely wrong
– The name of the game is to decrease the amount of “wrong-ness” as quickly
and methodically as possible
– Back to the Future: An early-stage mindset
Copyright, David J. Litwiller 2013 55
56. High Impact Board Practices –
Major Growth Initiatives
Practice Helps
• Prospective hindsight • Manage risk, coaching, coach-ability
• Reference class analysis • Reduce sampling and intuition errors
• Pre-commitment • Catalyze learning, antidote groupthink
• Commitment limits • Counter decision drift & confirmation bias
• Do more with less; pivot effectively
Copyright, David J. Litwiller 2013 56
57. Major Growth Initiatives –
Warning Signs
• Big bang initiatives
– Signal overconfidence
– Start instead with MVP and MVF, and iterate fast
toward the long-term goal
• Adjacency to the core business that is more
tenuous than people first recognize1
– Probability of success with true adjacency is about
40%
– It drops to under 10% as distance in technology,
markets and operations depart from the core business
1. Source: “Beyond the Core”, Zook, 2004
Copyright, David J. Litwiller 2013 57
59. Institutional Growth-Stage
Equity Financing
• Get to know the accounting used by a
candidate fund to report to its LP’s and for
calculating partner variable compensation
– Funds don’t like to talk about this
– Differences in accounting models and
compensation mechanisms are considerable
– These mismatches become most acute when
work-outs are required to adapt to changing
circumstances, complicating board function
Copyright, David J. Litwiller 2013 59
60. Institutional Growth-Stage
Equity Financing
– Moreover, if the fund has a board appointee, the
double fiduciary duty introduces intrinsic conflicts
which have derivative impacts to behaviour
– Due diligence through past investees of the same
fund and partners is the best way to understand
accounting models, prospective gaming, and
whether the intrinsic conflict for an appointee of
the fund is likely manageable or not
Copyright, David J. Litwiller 2013 60
61. Institutional Growth-Stage
Debt Financing
• Bank Lines and Structured Commercial Credit
– Periodically review the key terms, structures and
restrictive covenants
Copyright, David J. Litwiller 2013 61
62. Institutional Growth-Stage
Debt Financing
• Venture Debt
– If the company is not yet cash flow positive, pay particular
attention to jurisdictional fiduciary duties in the zone of
insolvency if the company is contemplating venture debt
financing
– Be watchful for material adverse change (MAC) clauses (a.k.a.
subjective default) which amplify technical, execution and
market risk
– Learn if candidate venture lenders are co-financing other
ventures with the governed business’ other investors since
reciprocity can be at play and introduce conflicts down the line
Copyright, David J. Litwiller 2013 62
63. Liquidity - IPO
• Rely much more on IPO data than i-banker advice
when contemplating sustainability and advisability
• i-banker largely just wants the fees as long as the
company can put $75M on the cover of a prospectus,
and has some visibility and predictive operating history
• From a governance perspective, the IPO process itself
is just the race to the starting line for crystallizing
value; the real race comes after
Copyright, David J. Litwiller 2013 63
64. Liquidity - IPO
• There are unique small cap issues which make
IPO success about much more than operating
execution
– Very different world from large caps where execution
is enough
• Trading volume is the root of almost all
premature IPO difficulties, not the culprits people
would rather cite which obscure the real issue
Copyright, David J. Litwiller 2013 64
65. Reinforcing Loop of Low Trading Volume
Low(er)
Trading
Volume
Lack of
Analyst Illiquidity
Coverage
Lack of
Institutional Increased Risk
Interest
Copyright, David J. Litwiller 2013 65
66. Low Public Company Trading Volume
• With low trading volume, a tech company ends
up in the untenable position of having to try to
appeal mainly to retail investors
• Ineffectual long-term manoeuvres then become
the only levers available, such as
– Engaging IR communication firms
– Stock buy-backs and reverse splits
– These kinds of measures only exacerbate matters mid-
to long-term for companies that should be growing
rapidly
Copyright, David J. Litwiller 2013 66
67. Low Public Company Trading Volume
• Raises cost of capital, harming strategic flexibility
• Pressures company to divulge more competitively
sensitive information than is wise, to try to
recapture investor interest in advance of having
better operating results
• Overall, balance of power shifts:
– The company needs investors much more than
investors need the company
Copyright, David J. Litwiller 2013 67
68. Liquidity - IPO
• Empirically and definitively:
– Trading volume falls off exponentially (not linearly) as
valuation drops below $500M
• Microcap options on venture exchanges in most cases
are only productive for junior resource plays and some
early stage pharma, not most tech companies
– Predictive value of early metrics much higher in resources
– Jr. exchanges are a financing vehicle, not a liquidity vehicle
Copyright, David J. Litwiller 2013 68
69. Liquidity - IPO
• Bottom line: An IPO is only a robust liquidity
avenue if a market cap above $500M can be
comfortably sustained through some post-IPO
ups and downs
• This has inferences even for express or implied
competitive liquidity alternatives to M&A as
the primary liquidity vehicle
Copyright, David J. Litwiller 2013 69
70. Liquidity – M&A
• To drive competitive buyer dynamics to maximize
shareholder value and stakeholder flexibility, there
need to be five motivated buyers for a business when it
wants to sell
• This end-game requirement has inferences for growth-
stage partnership formation
• It also affects zero-start auction mechanics requiring at
least forty plausible suitors in steady business
conditions, and up to eighty in more challenging times
Copyright, David J. Litwiller 2013 70
71. Hiring Legal Counsel – Tectonic Events
• Financings and Litigation
– Extensive, recent experience (prior 18 months)
– Representing similarly situated companies
– Similar financings or litigation
– Reference checks (quantity doesn’t ensure quality)
– Not: allegiance or incumbency from earlier times
• IP Disputes
– Above, plus
– Venue expertise
Copyright, David J. Litwiller 2013 71
72. Summary
• Get the right people
• Focus as much on what to discuss and independent learning, as is
spent in deliberation itself
• Delve into assumptions, dependencies and alternate interpretations
and approaches as much as the facts and figures themselves
• Keep up attention during implementation, both to foster execution,
as well as to provide further adaption
• Be pleased when things go well, but never be satisfied
• Never shy away from difficult conversations
• Evolve, learn and renew
• On target an IPO if the market cap can stay >$500M
• Strategic buyer dynamics are much better with five or more
motivated suitors
Copyright, David J. Litwiller 2013 72
73. Resources and Further Reading
– Directors’ Duties in Canada, Barry Reiter
http://www.cch.ca/product.aspx?WebID=3688
– Decisions 2.0: The Power of Collective Intelligence, Bonabeau
http://people.icoserver.com/users/eric/SMR_Collective_Decisions.pdf
– The Big Idea: Before You Make That Big Decision…, Kahneman
http://www.paginasprodigy.com.mx/RPA1958/BigDecision.pdf
– Winning Decisions, Russo and Schoemaker
http://www.randomhouse.com/book/159138/winning-decisions-by-j-edward-russo-and-paul-jh-schoemaker
– The Psychology of Human Misjudgment, Munger
http://law.indiana.edu/instruction/profession/doc/16_1.pdf
Copyright, David J. Litwiller 2013 73
Antidote groupthink, particularly when it is a risk for the executive management teamNo ambush governanceDidactic communication eviscerates management
Like any other workgroup, an onboarding process should signal a culture of performance to set expectations for an arriving director, in addition to the content it conveys and acceleration to full productivity
Polling -> reinforces a sense of collective effort, not individualism
- rolling four quarter view- See what is getting resolved, not, and what has come out of remission after seeming to have been fixed
Without it, trust goes, personal relationships are damaged, communication suffers and governance capacity collapses
Transition out: All of that may be well and good, but one of the places boards have to be most concerned is talent management. How does a board best lay out a roadmap of inquiry into HR practices? There is a set of practices which correlates highly with the most enduring, productive and strategically impactful expansion stage technology companies, sometimes referred to as the high commitment HR model.
Reality: It is better to be liquid than good, a distinctly small cap phenomenon