BackStage Pass

2006 Board Series– Session 2 of 3 Best Practices for Running a Board Meeting

June 13, 2006
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Today’s Panel
Pascal Levensohn, Founder and Managing Director, Levensohn Venture Partners Allison Leopold Tilley, Partner and Co-Head Corporate Securities & Technology Section, Pillsbury Winthrop Shaw Pittman, LLP Bob Walters, Former CEO, Teros (acquired by Citrix) Harry Taxin, Former Chairman & CEO, MegaPath Networks Inc. Matt Howard, General Partner, Norwest Venture Partners Joy Weiss, CEO, Dust Networks

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Session 2 of 3 – Today Best Practices for Running a Board Meeting
Introduction to the “Board Best Practices” Series What is the board’s role (from a legal perspective)? Most common board conflicts and issues Setting an effective board agenda structure Content of presentation slides at board meeting Time for team presentations Time without team Interaction with Directors outside of the Board Room Managing transitional board meetings Interactive discussion of venture board effectiveness metrics Q&A
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Preview of Board Series Session 3

Session 3 – November 30, 2006 Dealing with a Board in Crisis

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What is the Board’s Role?
Provide leadership, strategic direction, oversight and decision-making to facilitate corporation’s goal of maximizing shareholder value. Statutes: “… manage the business and affairs” Appointment of the Chief Executive Duty of Care Duty of Loyalty

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Personality and Valuations Are Top Conflicts
Most Common Conflicts Between Board and CEO

Venture Capitalists

CEOs

Sales & Mktg Strategy 12%

Personality 27%

Mgt. Changes 16%

Valuations 24%

Valuations 18%

Exit Strategy 18% Burn Rate 22%

Mgt. Changes 21%

Exit Strategy 22%

Sales & Mktg Strategy 20%

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Source: Dow Jones VentureOne/NVCA

Mgt. Transitions and Exits Are Biggest Issues for VCs
VCs: 2 Largest Strategic Issues Facing Boards

100%

75%

64.2%

57.6%

50%

25%

17.6%

17.6%

0% Timing of Mgt. Transitions Exit Strategies Roles of Early vs. Later Stage Investors Investor vs. Director Conflicts
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Source: Dow Jones VentureOne/NVCA

Financings and Exits Biggest Issues for CEOs
CEOs: 2 Largest Strategic Issues Facing Boards

100%

75% 47.6% 47.0% 25.1% 24.1%

50%

25%

0% Financing Strategy Exit Strategies Sales & Product Marketing Roles of Early vs. Later Stage Investors

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Source: Dow Jones VentureOne/NVCA

The Board Meeting Itself
Frequency of meetings In-person versus phone calls Distribution of presentation material before the meeting The board meeting agenda
• How long should the meeting last? • What pace should the board chair maintain?

Content of presentation slides and handouts
• Fewer slides are better • “dashboard” slides are useful

Presentations and attendance at meeting Executive session, time without management Managing transitional board meetings
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Board Composition– Best Practices
Typical Board Composition Early-Stage Board Insiders CEO CTO, Founder Investors Independents Total 1 0 or 1 1 or 2 1 or 2 3 to 5 1 0 2 or 3 2 or 3 5 to 7 Series B+ Board

Smaller is more effective Odd number preferred but even can be OK Balance investors with independents
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Board Meeting Agenda
Send out to attendees (and their PA’s!) one week before meeting. List all attendees, visitors, and proposed discussion subjects to avoid surprises. List contact information for call-in attendees. Identify breaks and food service so attendees can prepare appropriately. Typical agenda: General Session – Visitors and invited management
State of the company, global metrics, future issues – CEO Financial report (Last month/quarter, forward forecast) – CFO Sales and marketing report Operations and engineering reports Waterfall charts Special presentations (projects or individual initiatives)

Executive Session – Directors and observers only
Approval of minutes of previous meeting(s) Compensation issues (option grants, exec hires, etc.) Other sensitive issues (M&A, board membership, etc.)

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Typical Financial Reports to Board
Quick period-end Flash report
• Prepared and distributed within days of ending the period • Demonstrates close management of key variables

Full period report with variances to budget
• Should be available 10 to 15 days after period ends • Timing is a function of accounting system capabilities and business model (i.e., deferred revenue calculations, etc.)

Objectives
• Build and maintain credibility • Inform but don’t overload

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Quick Period-End Flash Report
Headcount, cash balances, other easily measured parameters in sales and operations, such as orders received, installations made (subject to more complete accounting in full report). Brief status of key projects and initiatives WHY?
• This is how the business should be managed every day, so this report builds credibility. • Note early warning signs • Take timely repair actions

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Full Period Report with Variances to Budget
Full P&L, Balance Sheet, and Cash Flow for the Period More details than needed or provided in “external” reports to shareholders, including foreword projections and trends Comparison to board-approved budget or annual operating plan Details of key events for the period: sales, marketing, operations, R&D
• Sales info to includes actual bookings, forecast, and actual revenue as well as variances to expectations

Discussion of key personnel adds and deletes BALANCE: Not Operations Review detail, but meaningful for board assessment of the business.
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Outside the Board Meeting
Interactions between Directors and Management
• Does everyone on the board know what the other directors are thinking?

What happens when the board pushes the CEO too far?
• Testing the CEO’s mettle?

Strategic discussions versus operational details
• Optimize the utility of your directors, remember why they are on the board and get as much out of them as possible VC’s should open doors for the portfolio companies and help them to close business

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Do’s and Don’ts for an Effective Board Meeting
Do call your directors in advance of the meeting to discuss important issues that will be covered at the meeting Do send the material out at least 48 hours in advance– one week may be wishful thinking, but 24 hours or less is unfair to your directors Do budget time appropriately across the entire meeting
• Stay on schedule!

Don’t squeeze the executive session– this is very important time Don’t bury your board with details and useless slides– this raises more questions than it answers Don’t save surprises for the board meetings
• Directors do not like surprises
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Metrics for Board Effectiveness are Absent in the Venture Industry
Venture Capitalists
Other 3% Specific metrics 6% Some metrics 17%

CEOs
Specific metrics Other 3% Some metrics 4% 6%

No specific metrics 74%

No specific metrics 87%

Why are No Specific Measurements Required?
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Source: Dow Jones VentureOne/NVCA

Best Practices
Director Self-Evaluations
• Blind and no attribution • Include CEO evaluation of directors • Why do VC’s have a problem with this?

Being honest about answering a host of questions
• How is the company operating? • Is it truly on a success path? • Are the CEO’s skills contributing to the company’s success? • Is the CEO largely operating from strength or weakness?

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Closing Discussion on Board Effectiveness
What are some signs of an effective venture board?

What are some signs of an ineffective venture board?

What are some effective methods for communicating whether the board is being effective or not?

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Handouts
“After the Term Sheet: How Venture Boards Influence the Success or Failure of Technology Companies,” Pascal Levensohn & Professor Dennis Jaffe, (November 2003) “Rites of Passage: Managing CEO Transition in VentureBacked Technology Companies,” Pascal Levensohn, (January 2006) The Problem of Emotion in the Boardroom, Pascal N. Levensohn, Directors & Boards, Directors & Boards Magazine (Summer 1999).

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Handouts
A CEO Advisor handout - "Why you care about your board package" Sample Board Presentation Template Sample Financial Statement format Sample report of Equity plan (i.e. shares issued, available, etc.) Sample Corporate governance guidelines Board Communication Checklist

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