What do VCs want from their CEOs

What do VCs really want from their CEOs? A recent study by VentureOne shows that #1 is sales and marketing, followed by operations leadership, financial management and product development.

The study summary can be found here

This study of VCs and CEOs reflects some interesting, but not surprising statistics about board members in startups and tech companies.

• most companies have 4-7 board seats, with 4-5 being the highest out of that range. 5 is a pretty common number, since that avoids a deadlock.

• in about 1/3 of the companies, the VCs hold 20-40% of the seats; in about 1/3, it's 40-60%. Again, a board of 5, 1-2 seats is commonplace.
• conversely, company management holds 20% or less on most boards - 1 seat for the CEO then in office is pretty common. If that CEO is also the founder, and later is displaced from the CEO office, it is common for the founder to remain as the Chairman of the Board.
• As far as compensation for Board membership, it looks like most companies do not compensate their directors in any way, and that a minority does so with stock options. Cash and stock seems to be a more phenomenon, which makes a lot of sense considering how cash dependent most startups tend to be.
• It is a bit surprising to find that both VCs and CEO agreed that the most significant value of a VC boardmember is for help with financings and locating investors. The answer I would have expected from the VCs is their business expertise and strategic vision is their most valuable asset. Sales and marketing experience is valued, albeit in second place.
• Finally, "dilution of investment" is cited as the biggest factor of conflict on a board. This is a good reminder that while your investors are usually aligned with the founder's interests, when it comes investment time, all bets are usually off and its every man (or VC) for him/herself. This is especially true if you have been lucky enough to have had multiple investment rounds (or "series") and have various illustrious investors on your board. Since this is something that most investors fully acknowledge, founders should not be afraid to voice their concerns about potential conflicts and should seek to have at least some disinterested (independent) directors on their board.

Recent Massachusetts case on corporate freezeouts

A recent decision by the Massachusetts Supreme Judicial Court (SJC) found that in a close corporation context, the estate of one of the company’s founders that was a minority shareholder was not entitled to a buyout. See here for the opinion: http://www.socialaw.com/slip.htm?cid=16741&sid=120

The court stated that in a freeze-out situation, the buyout is not the only reasonable remedy. Instead, since the freeze-out denies the minority’s “reasonable expectations of benefit” of being a stockholder, the remedy should, to the extent possible, restore to the minority shareholder those benefits reasonably expected, but not received because of the breach.

The court explained that “in ordering the defendants to purchase the plaintiff’s stock at the price of her pro rata share of the company, the judge created an artificial market for the plaintiff’s minority share of a close corporation — an asset that, by definition, has little or no market value.” This is a very interesting position, considering all of the ado over 409A and stock option valuations for startup companies in the last few years.

Recent Massachusetts case defines defacto merger

A recent Massachusetts appeals court decision defines Mass law regarding defacto mergers and successor liability regarding environmental claims. The case can be found here: http://www.socialaw.com/slip.htm?cid=16545&sid=119

This case summarizes as follows the Mass law regarding defacto mergers:

Factors considered in determining whether a sale should be treated as a de facto merger are: “whether (1) there is a continuation of the enterprise of the seller corporation so that there is a continuity of management, personnel, physical location, assets, and general business operations; whether (2) there is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation; whether (3) the seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible; and whether (4) the purchasing corporation assumes those obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.” Cargill, Inc. v. Beaver Coal & Oil Co., 424 Mass. 356, 359-360 (1997).

The court noted that one key is looking at continuity of management, employees and shareholders.

This decision is also instructive on the liability a buyer would assume pursuant to express language in a purchase agreement. The court found that buyer’s assumption of liabilities of seller “as then existing” pursuant to an asset purchase agreement was not sufficient to hold that buyer assumed CERCLA liability then unknown.

CEO transitions in life of venture-backed startup

Most startups suffer high staff turnover, and their CXO’s are no exception. In the short but exciting lifespan of a venture backed startup, it is not unusual to see two or more CEOs and other CXOs rotate through the company to navigate it through the rough waters of going from idea to beta to market, and so on.

See the following link for a recent whitepaper that honestly discusses this point: http://www.pwcmoneytree.com/exhibits/RitesOfPassageArticle.pdf

While experienced, or “repeat”, CEOs are less prone to find themselves in this position, most early stage executives may find that the investors want to make a change or bring in a more specialized industry player with execution success. Founder teams that plan to seek investment capital are wise to plan for such a potential change and position themselves in the company where they could have a long-tenured position. Discussing this issue upfront with their investors and negotiating appropriate employment agreements is always a good idea to give both sides the comfort and incentive necessary for promoting the overall success of the business and gaining the investors’ trust.

PWC Moneytree Survey shows increase in VC investments into Media and Entertainment

PWC Moneytree Survey shows increase in VC investments into Media and Entertainment

The PWCMoneyTree Survey for Q4 2006 shows in increase in deals over the last 5 years. VCs invested over $25 billion in 3,416 deals in 2006, a 10 percent increase in deal volume and a 12 percent increase in dollar value. 2006 had significant growth in life sciences, biotech and medical devices, and a strong year for Media/Entertainment, Energy and Web 2.0 companies. In particular, Media and Entertainment companies raised $1.6 billion in 299 deals (compared to 2005 when $1 billion went into180 deals). Telecom raised $2.6 billion, with wireless accounting for 44 percent of the Telecom sector deal size. The study and related links can be found here: http://www.pwcmoneytree.com/moneytree/index.jsp

New England had over 400 deals in 2006 (11% of national deal volume in deal size), second only to Silicon Valley, which had over 1100 deals (35% of national deal volume in deal size).

Another report provides valuation tracking going back to 1997. The average pre-money valuation for “Early Stage” (i.e. Series A) seed level deals for Q3′06 was just over $6M, with a typical seed round around $5.6M. Expansion Stage deals (i.e. Series B or Series C) had an average pre-money valuation of $54M, with an average deal size of $13M. The report can be read here http://www.pwcmoneytree.com/exhibits/Valuations_95_06Q3_12MonthRollingAvgs.xls