By Dan McCue
Staff Writer

It’s one thing to assemble a board of directors or advisors to help guide a startups early stages and enhance its standing in the eyes of out-of-town venture capitalists. It’s quite another to ensure that it works effectively, experts say.

“The trick is not just to assemble a board, but to assemble a quality body that understands the CEO runs the company,” said Steve Swanson, president and CEO of Mount Pleasant-based Automated Trading Desk LLC.

“It’s a very clear line: The board is not to be involved in management,” he said. “On the other hand, the CEO has a clear responsibility to explain his vision of where the company is going to the board.”

Five factors for a board

Eric Friberg, a former director of McKinsey & Co. and a current member of its advisory council, said when it comes to assembling a workable board, whether it is purely advisory or otherwise, CEOs should consider five basic factors:

• Are the people you’re talking to committed to your project? Are they willing to invest the time and effort to understand your business?

• Are they willing not only to ask the tough questions, but also to do so in a collegial manner?

• Will the board members willingly assist you with management advice and counsel without trying to run your business for you?

• Do they bring relative experience to bear that is of value to the company?

• Are they people you honestly feel comfortable with?

Friberg and dozens of other startup business owners and venture capitalists recently gathered at the College of Charleston to discuss entrepreneurship and luring venture capital to the region. They stressed three key points about dealing with boards comprised of retired corporate executives.

First, meetings should be held regularly but not more often than necessary. For early startups, the consensus was that the board should meeting every four to six weeks, with six weeks being optimal. Then, after the company has grown, meetings should be held once every three months, with an update call scheduled in between.

Secondly, although boards are formed typically because the CEO needs either advice or capital, he must nevertheless set the agenda for all board meetings.

Finally, every effort should be made to quickly get through the mundane—the standard but necessary staff reports—and onto more compelling matters.

Getting things accomplished

One of the saddest things in the world of startups and boards is when “a bunch of smart people get together and don’t get as much done as they can,” said Ted Dintersmith, a venture capitalist with Charles River Ventures in Massachusetts. “That’s why, as you’re reaching out to people who might become future board members, you should be visualizing your strategic challenges. You want to assemble a board that has the expertise to solve them.”

A board with that expertise is more likely to challenge a startup CEO’s assumptions and offer constructive insights.

Board compensation

Whether a startup entrepreneur compensates his board members depends on the company and its upside potential.

Some companies for whom Swanson sits on a board require a minimal investment as a prerequisite to bestowing the seat, he said.

Typically, startup companies give each board of director member a 0.25% stake in the company, typically tied to some kind of seed investment on their part, Dintersmith said.

If a stake in the company is given, there should be a timetable that specifies when it will vest or become exercisable.

“A typical vesting schedule is 25 percent per year on the anniversary of the grant date,” Dintersmith said. “That means that after one year, up to 25 percent of the options granted may be exercised; after two years, up to 50 percent; after three years, up to 75 percent; after four years, all of the grant.”

Of course, that’s not the only vesting option. Cliff vesting, for instance, is a vesting schedule in which all options become exercisable on a single date. Performance-based vesting and reverse vesting are other examples of vesting schedules.

Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@charlestonbusiness.com.

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