How do we build our external team?
Discussions About Building Your External Team
Recall from a previous Article that the founders are the first of three strands of DNA assembled, the second being the early employees and specialists, and the third being the board of director members. Effective directors play a key role in ensuring an early stage venture’s future growth and value.
Such a corporate governance system offers clear lines of reporting and responsibility, prevents or resolves conflicts of interest, captures and organizes expertise, and also provides oversight and accountability to the equity owners, as well as setting standards by which corporate management practices and conduct are carried out.
A common pitfall with entrepreneurs assembling a venture team is that they do not seek out the advice of competent advisors, most likely because effective networking is a challenge for most entrepreneurs, for whom time is a valuable resource. We highly recommend the use of creating a formal external advisory board. Such a board of experts can begin working with you on an informal basis very early on. They can immediately help fill in the gaps in your venture team and even help you recruit new executives and employees.
They bring you immediate execution intelligence, domain expertise, and connections, all without the legal entanglements and formalities of a regular board. You gain control of advice and counsel from outsiders without being legally bound by their decisions. It is easier to “remove” someone from an advisory board. It is also less expensive (we suggest providing advisory board members with honoraria of $1,000 to $2,000 per month, or around $5,000 a quarter). And your external advisory board is a great way to screen and test-drive a number of people in action, to see how they can help you before you consider selecting one or two as regular directors.
Developing Your Board of Directors
Why are there boards of directors? A high-quality board of directors provides a new business venture with instant credibility and opens doors that would otherwise forever remain closed. Great directors have access to people who can make things happen. Today, the corporate board is no longer just a legal formality. It is a competitive necessity. As William J. McDonough, president of the Federal Reserve Bank of New York, states, “The board of directors is meant to oversee the development of the overall strategy of the organization and the decisions made by senior management in pursuit of those objectives.” Jay Lorsch, a subject matter expert at Harvard Business School, says that the board’s duties are to monitor what is going on in the venture and the business space, correct and/or adjust business strategies as needed, and “to get rid of the CEO at the right time.”
Experienced boards can also help lead entrepreneurs through uncertain times. Michael Dell discovered this: “If a company is having problems, the role of its board becomes greater. Many board members may have seen recessions and downturns more closely than the people who are operating companies today. Because most managers have probably not been through something like this, the board can provide perspective.” And marquee board members can lead the venture to funding. Eugen Chan, CEO of U.S. Genomics, recruited Dr. Craig Venter, president of the first company to map an entire human genome, and by the end of 2002 U.S. Genomics received $25 million in funding.
It is challenging to find directors who are sufficiently independent but still knowledgeable about and engaged in the business of the company on whose board they will sit. Susan F. Shultz, the author of The Board Book: Making Your Corporate Board a Strategic Force in Your Company’s Success, writes that ventures should strategically recruit board members and that such a strategy requires a plan and a dedicated commitment. A great resource, her book details “nine steps to strategic recruiting” of board members and provides some tips for interviewing board prospects.
Working with Professional Service Providers
Recall what we said above, that you select your board members from your advisory board, and that you select your advisory board from your professional service providers.
Your universe of available consultants includes the following:
– legal counsel
– business plan developers
– financial intermediaries
– marketing consultants
– business strategists
– technical specialists
– scientific advisors
– patent counsel
– angel investors
– new product consultants
– real estate brokers
– business brokers
– public relations
– executive recruiters
– nonprofit trade groups
– academicians, professors, and other scholars
An advantage of working with service professionals, besides the fact that outsourcing saves cash, is that each professional brings a different perspective based on a particular needed discipline by your venture as it grows. As we said in a previous Article, there are three types of consultants: strategists, tacticians, and field support. We found that the most successful ventures begin cultivating relationships with consultants before they open their doors, usually starting with respected legal and accounting firms. The impact can be great when the venture begins moving forward. For example, a business plan whose financial statements were reviewed by a reputable accounting firm adds instant credibility to the deal.
It pays to start with an excellent legal firm that knows its way around the specific legal needs for new business venturing, such as incorporating, legal structuring, private equity, venture capital, taxes, legal issues in hiring employees, stock options for employees, contract law, securities, M&A, transactions, and real estate. Richard Riordan, of Los Angeles-based Riordan and McKinzie, confirms the importance: “The start-up CEO needs to use a lawyer that will structure the deal today to take care of the events of tomorrow. That is why the lawyer needs to know venture capital well and also have a good sense of business.” Other legal needs include intellectual property issues, employee agreements, strategic partner agreements, and litigation.
Choosing a commercial banker is one of the most important decisions you will have to make for your venture. But what are the key factors in selecting a bank? Richard Shuttleworth, senior vice president at Silicon Valley Bank, told us that he provides his emerging growth ventures “coaching, consulting, and connecting.” All in all, it is important to manage these consultants, especially because their ideas are often in competition with the ideas of other consultants, and they can become “organized around competition rather than collaboration.”