Systems
Chapter 19 Board and Shareholder Management
It's easy as a startup CFO to focus on the hundreds of internal processes and systems that you'll have to create, and push any Board or shareholder tasks out. After all, your Board might only meet a couple of times a year, so why let that get in the way of doing the real work? Don't fall into that trap! The Board can be a huge strategic advantage for an early‐stage startup and the CFO plays a critical role in Board dynamics. Early on you should work with your CEO to establish processes and checklists for Board meeting materials, records, communication, and sources of truth for shareholder and equity information. The earlier the equity records and processes are moved away from spreadsheets, the better.
For the most part, the startup Board Book is a job for the CEO, but this is an area where the startup CFO can be a good partner. You can help the CEO establish an effective Board Book template and then produce the monthly reports for the Board with enough time for them to review the materials before the meeting. You don't want to provide materials for the first time at the meeting or you'll waste everyone's time.
The Board Book process we have used for a long time roughly looks like the following:
Agenda
Official Business (approval of minutes, option grants, etc.)
Primary Reading section. This would be anything meaty you want the Board to review or read and often includes an “On My Mind” section for the top things the CEO is thinking about.
Standard Reporting. Includes financials, KPIs, etc.
Appendix. Items you want to show the Board but may not want to discuss. Could include things like 409a valuations, product roadmap, etc.
As you scale, typically the meeting itself will evolve past just going through the Board Book and hopefully focus on strategic issues rather than a simple reporting out. And as you scale, the CFO may take ownership of coordinating the Board Book production and distribution. Ideally the Board Book could also go to a wider range of people than just the Board, including senior management. You can refer to Chapter 35 in Startup CEO for a lot more on the Board Book.
Corporate lawyers will often insist on fully executed resolutions and minutes during a due diligence process and they'll want those documents fast. So, start by storing these in a logical way to make your (and your team's) life a lot easier in the future. You also want to work with your outside counsel to agree on the minute taker, the source of truth for the records and resolutions, and cap table management. Generally, I prefer to have a person from the company as the minute taker; that way the company owns that responsibility and you have more control over the process and can make sure the minutes/records are complete and timely. Often, if you have your counsel take minutes, you don't see a copy of them until right before the next Board meeting. I like to take minutes during the meeting and sign them right after.
Another fun thing to do is include some sort of fun quote or comment in the minutes. People often don't read minutes (carefully) but once in a while they do and it is nice to give them a fun surprise. Once we had Shake Shack delivered for our Board lunch that included a couple of trays of shakes. Most of us had one, but our Board member Brad Feld ended up with two. I made sure to note in the minutes that Brad had to lie down on the couch soon after.
Once you scale a bit, you'll probably increase the Board size and change the cadence to quarterly. For quarterly shareholder mailings or calls, you'll need to understand requirements in corporate documents and be able to establish a source of truth for shareholder contacts. I'd also highly recommend a very structured meeting before, after, and during the Board meeting. We use 30‐minute quarterly updates that follow a script, send out quarterly email updates, and have an email system of record established.
Another item to keep in mind as you scale the business and raise money is the concept of information rights. Information rights are rights shareholders received per the shareholders agreement that all shareholders are party to. Typically, there will be some rights the preferred investors receive that the common shareholders do not. This can actually be a helpful clause because as you grow, and employees turn their options into shares, you may want to have the ability to control the distribution of information, such as the cap table and key financials.
Chapter 20 Equity
Equity Management
Equity management is another area that is important to organize and where you should have discipline as early as possible during a startup. There are a few areas to pay careful attention to:
Stock compensation form documents. It is useful to have form documents for option and stock grants, grant exercise documentation, and share transfers. Note that if you operate in different countries, you will likely need to have different stock compensation plans.
FAQ for employee questions. There are always a handful of questions employees have and having clarity on them will help employees value the stock compensation. Some of the most common include:Tax implications of the grants, which can be very different if the grant is an option grant (Non‐qualified vs. Incentive Stock Options), restricted stock, or restricted stock units.How to roughly think about the value. You should not give an exact value, but provide guidance on how to think about the valuation.How and when to exercise options. Employees will often want or need to exercise their options when they leave the company, but also may have opportunities to early‐exercise for a more favorable tax treatment.What happens when an employee leaves the company. For many years, most venture‐backed companies have followed a standard 90‐day post‐termination exercise period. No matter why the employee is leaving the company, they have 90 days to exercise their vested stock options otherwise lose them forever. This created unfair situations where employees, many without a lot of discretionary cash, were forced to either spend a material amount of money on the stock of the company that has no market liquidity, with tax implications too, or lose the value that was part of their compensation for years. In the last few years, many companies that have significant employee stock option plans have started to use other vehicles, such as restricted stock, or a post‐termination exercise plan (PTEP), that provides a number of years after termination for the ex‐employee to exercise. Although not perfect, it is fairer to the employee.How an employee receives additional stock compensation. Typically, employees will receive more stock compensation if they receive a qualified promotion or continue working for the company. The grants for longevity may be a small amount every year or two, or mirror grants as they finish vesting. Almost every employee will want to know the answer to this, so it is a very good thing to include in an FAQ.Note that employees in different countries may have different tax implications for employees as well as post‐termination treatment.
Board approval and communication. You will want to keep the Board informed of your stock compensation and how much of the reserved employee pool is remaining.Develop a clear philosophy and formulaic approach to most grants. Typically, an employee grant will be based on their seniority/market competitiveness of the role and cash compensation. This way when you include stock compensation grants in Board Books for approval, you can list the ones that were based on the formulaic approach previously discussed with the Board and call out ones that fell outside that approach, typically for executive hires.You should work on a stock compensation budget that generally should last for one to two years (or the first 20–30 employees for early stage), depending on the stage of the company. This provides visibility for you and the Board about how fast the company is granting vs. expectations as well as make clear to all when a plan refresh is likely
