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Getting it right, right from the start: many VC-backed boards experience dysfunctional behavior and often lack self-help tools to apply best practices in their governance.

MORE INEXPERIENCED corporate directors join venture capital-backed company (VCBC) boards than in any other industry. First-time entrepreneurs who become founding CEOs frequently become corporate directors even before they obtain their first institutional round of venture capital financing. While taking venture capital is always a choice, there is no opting out of the legal responsibilities of corporate directors.

Entrepreneurs are not alone on this maiden voyage. Many venture capitalists, particularly younger partners in larger firms, join founding CEOs as rookies on a VCBC board. Independent directors may also lack relevant board experience. While some independent directors are highly sought after for compliance reasons because of strong accounting backgrounds and others are recruited to VC companies for their relevant industry experience, they may arrive at that first board meeting with little or no VCBC board experience. In the current environment, regulators, institutional shareholders, and the courts are demanding greater oversight and sensitivity to governance requirements on the part of directors. To have a high-functioning, effective board, directors must be familiar and comfortable with board governance issues facing emerging companies throughout their life cycles.

VCBC boards are unique because of the challenges that are particular to emerging companies in rapidly changing competitive markets. The companies develop through four distinct stages: (1) seed funding and product/technology/service development; (2) early commercialization; (3) late-stage expansion; and (4) liquidity through either an acquisition or an initial public offering. Through this evolution, business processes become more complex, and VCBC boards are naturally exposed to various situations that raise inherent conflicts of interest among board members. As companies grow in size and invested capital, board sizes typically increase from three members to as many as seven. The composition of the board also changes to include more independent directors, particularly if the company wishes to go public.

Just as VCBCs must remain nimble and flexible in order to be successful as they grow, effective VCBC boards must adapt as they experience the normal process of maturation. The recommendations of our working group of 22 VC industry experts who collaborated on examining the challenges facing VCBC boards recognize that not all VCBC companies are the same, that boards are heavily influenced by individual personalities, and that different stages of development call for different applications of governance processes.

Clear communication is critical to every board's success, but communication must begin with board members knowing the minimum acceptable performance expected of them in their board service, both by law and as a matter of good business practice.

For a VCBC to be successful, you need both a CEO who is appropriately empowered and an economically and strategically aligned board of directors that can also add value while serving as a fiduciary for all of the shareholders. Effective boards can contribute significantly to the development and growth of a successful company. However, many VC-backed boards experience dysfunctional behavior and are often lacking self-help tools to resolve their problems. Left unchecked, these patterns can negatively affect the value of the company.

The author can be contacted at pascal@levp.com. A copy of the full white paper is available on the firm's website at www.levp.com/news/whitepapers/shtml.

Pascal N. Levensohn is founder and managing director of Levensohn Venture Partners (www.levp.com). He has been a professional investor for more than 25 years and has worked actively with private and public companies at the board level since 1990. This article is adapted from A Simple Guide to the Basic Responsibilities of VC-Backed Company Directors, a white paper released in January 2007 by the 22 venture capital industry members of the Working Group on Director Accountability and Board Effectiveness, which Mr. Levensohn established in 2006 and now chairs.

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RELATED ARTICLE: What works and what doesn't

Common characteristics of effective private company boards/directors

* Establish a clear and mutual understanding of expectations between the directors and the CEO

* Conduct a formal annual performance evaluation of the CEO

* Have routine executive sessions among non-management board members only

* Have directors who work as a team and who make important contributions outside the boardroom

* Encourage open/honest communications

* Resolve differences of opinion constructively and quickly

* Have directors who are accountable to each other

* Promote continuing director education about current best practices

* Know and understand their responsibilities as directors

* Are informed when they arrive at the board meeting, know the industry, and know the company's context in the industry

* Do not attack the CEO or other board members

** While it is the responsibility of a board to challenge the CEO and the team, care must be taken to do so respectfully and without creating personal animus

** The CEO's credibility should not be undermined in front of his/her team, even during a transitional period

* Participate in free and easy communication outside of the boardroom

* If appropriate, provide a different perspective as an individual member of the group

Common characteristics of ineffective private company boards/directors

* Fail to communicate--both in and out of the boardroom

* Suffer from denial--fail to act and make decisions

* Fail to reconcile diverging viewpoints

* Avoid addressing existing conflicts

* Regularly hold excessively long board meetings (more than three hours without a strategic planning or other extraordinary agenda)

* Allow the use of PDAs and computers during a board meeting for purposes not related to board business

* Feel compelled to say something and to be heard, even if their comments are not relevant or effective

* Become disengaged because they no longer feel that their opinion matters--this could be over a strategic disagreement

* Fail to resolve disagreements quickly and constructively

* Do not attend board meetings regularly

* Deliver inconsistent messages between the actual meeting and their post-meeting behavior--passive-aggressive behavior

* Succumb to lead investors who discourage constructive discussion from the rest of the board

** Smaller firms in particular are afraid to break ranks with a dominant investor for fear of not getting into future deals. They should speak up and express their views independently.

Source: White Paper, A Simple Guide to the Basic Responsibilities of VC-Backed Company Directors (January 2007), Levensohn Venture Partners
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Title Annotation:EARLY-STAGE BOARDS; venture capital
Author:Levensohn, Pascal
Publication:Directors & Boards
Geographic Code:1USA
Date:Mar 22, 2007
Words:1006
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