Building the Right Board of Advisors

One of the easiest ways to extend your team and build your credibility in the early stages of your company is to build a Board of Advisors.  What is a Board of Advisors you might ask?  A Board of Advisors is a group of people who are loosely connected to your company that can help you with connections, operations and credibility.  Personally, look for three main characteristics in my board members:

• Workers: For working members of the board, I look for people who are going to spend time helping me get through operational hurdles.  Examples of operational issues could be employment decisions, financial challenges, deal structures (partnerships, licensing or sales), or simply moral support.  Board members of this type will take the time to meet with you for a couple of hours and hammer out the details on these issues.  These people will often give you more time than your other board members (although you should always keep the time you use of board members to a minimum).
• Connectors: These board members either have great connections or know how to get to people you want to connect with.  They will help introduce you to clients, investors and/or strategic partners.  They may help you find talent as well.  They are very well connected in the markets you are pursuing.  An example of a connector in the medical device market might be a VP level person or higher at Medtronics.  Most of your interactions with connectors may be as simple as email request for introductions or short phone calls of a similar nature.  If you are looking for financing, you may want to include a board member who is prominent in that community.
• Centerfolds: These members are people that may not be able to do much for you directly, but will look very good on your website and literature.  They may not be available to attend many meetings.  They may not even connect you to too many people.  However, the fact that they are showing an interest in your company by joining your board means something to either investors or customers.

Board members may fall into one of these categories or all three of these categories.  I have found it important, however, to make sure they fit at least one of the above categories.

In order to attract people to be on your Board of Advisors, you need to think about how you will incentivize them.  A stipend is always a nice way to keep them motivated, but in the early stages this may not be possible or practical.  Other ways to incentivize them can include stock grants or stock options.  Over the years, I have been told by potential board members that one half of a percent of the company is a common compensation for a board of advisor member.  Again, this can be provided as stock or as options for stock at some future date.  Stock incentives can be a great way to compensate these members of your team.  First, it reduces the amount of cash you have to spend.  Second, it properly incentivizes your board to make your company worth a lot of money.  However, in some cases it may be simpler and more practical to pay them for their time.

Beyond monetary compensation such as stock or stipends, it is important to understand why potential board members might be interested in working with you and your company.  Sometimes a prospective board member may simply be interested in helping.  Maybe they like you and want to see you succeed.  They have a genuine interest in your technology, product or service.  They may see opportunities to connect with your other board members.  Being on the board may simply look good on their resume.  In any case, be aware of the non-monetary reasons these people are interested in helping you.

To be clear, Board of Advisors members have no fiduciary responsibility to the company.  Members of the Board of Directors, however, do.  In the early stages of your company, it can be important to keep your Board of Directors quite small.  Membership of the Board of Directors is typically reserved for people who either invest a significant amount of money in your company or who are founding members of your company.  In this blog, I am specifically talking about Board of Advisors.

Although Board of Advisors members have no fiduciary responsibility, it is still important to make very sound decisions about who joins this group.

Realistically, you should keep your Board of Advisors to a reasonable size.  I like to target about five or six board members at most.  It is unlikely that you will have the time to leverage more than five or six board members.  And, getting more than five or six successful, busy people to come together for a meeting can be quite challenging.

When building a Board of Advisors, think big!  You want to pull in the best people you possibly can, even if you are starting with nothing.  If you truly have an innovative company, this is a very low risk way for smart people to get engaged.  Think very big when pursuing board members.  If you are respectful and polite when you ask, your worst case outcome is that someone tells you no.  However, even if the say no, they now know who you are.  When I started with my most recent venture our team thought Mark Cuban would be a good candidate for our board.  After sending emails on several different email accounts I found using Google, I finally got a very polite no.  Even though he said no, I did manage to get an answer from one of the most famous and successful entrepreneurs of our time.  I have to say that I was very impressed by not only his willingness to respond, but the courtesy of his response.

In pursuing board members you do not know, do your best to connect with them at their level.  Read anything you can about them.   Come up with a title that catches their interest.  Mark Cuban’s was promoting people pay a lot of taxes as part of becoming very wealthy in one of his blogs.  In my subject line I put “My Attempt to Pay Lots of Taxes”.

Be sure to leverage any board members you currently have to help you pursue new board members.  These people may have better luck connecting to very high level people that could put your company into overdrive.

Once you have gathered together members of your board, be sure to promote them on your website and in your other company literature.  Include them in your executive summary.  You may even consider including them in a press release.

Now for the important part: how you use your board.  At a minimum, you should keep in touch with board members every month or two.  If possible, you can organize a regular formal meeting where everyone comes together either in person or on a conference call.  During these formal meetings you want to have a structured agenda.  A portion of the agenda should be focused on updating your board on key activities in your company that have happened since the last meeting.  The rest of the agenda should be focused on getting their advice on key issues, opportunities and challenges.  Keeps these meetings focused.  Take no more than an hour for these meetings.

Informally, I like to reach out to individual board members as I have a reason to contact them.  Sometimes I may simply send an email about needing a connection.  Other times, I may ask for a meeting to discuss a deal or address an issue.  In some situations, it may be necessary to work intensively with a board member on a critical issue for days or weeks.  With other board members, you may not connect with them for months.  Be sure to keep in mind that these people will have many other demands on their time.  Be as efficient as possible with their time.

Realize that your board may be interested in interacting with each other.  Offer or invite opportunities for them to connect with other board members with or without you.  This can only help your cause.

Finally, it is OK to rotate the members of your Board of Advisors as your company grows.  The board members you need early on may not be as useful as your company grows.  Members of your board should respect your need to grow and change.

In the early stages of your company, you are typically cash strapped and resource poor.  Building a Board of Advisors can be a way to create a virtual executive team while minimizing your cash requirements.  If approached in a positive and respectful manner, people are willing to help.  Challenge yourself to think big and bring together a team that will help you achieve your goals!

Cash Flow ~~~~

Cash flow is the life blood of a business.  As the leader of an early stage company, properly managing cash flow should be one of your biggest priorities. Investors and accountants may be concerned about profit and loss statements or balance sheets, but the survival of your business will weigh much more heavily on proper management of the cash you have to pay your financial obligations.

Let me explain. Profit and loss statements are often run based on accrual accounting. What this means is that revenue is booked when it is earned and expenses are booked when invoices are received.  The actual movement of cash to and from your bank account may happen significantly later than the timing reflected on your profit and loss statements. Further, good profit and loss management has a lot to do with tax management.  Depending on your tax situation at the end of the year, you may book some receivables or payables in December or January.  These adjustments can confuse your understanding of your cash position.  In accrual accounting, you also deal with accounts receivable or accounts payable balances that transfer over from last year.  Further, equity raised or dept principle paid may represent movement of cash, but none of this activity shows up on your profit and loss statement.  For this reason, you can have profitable years were you are borrowing money to pay bills or loss years were you have plenty of cash.

Having a good budget may give you some guidance, but I have found that a budget alone does little to help you understand the effect of your income and expenses on your available cash now, one week from now or six months from now.  Use your budget to give you insight into how to set up a proper cash flow management system, but I recommend you not rely on a budget to help you understand how to manage your cash.

For most businesses, good cash management can be done through a simple Excel spreadsheet.  The spreadsheet needs three main elements. First, I recommend a set of rows at the top of the spreadsheet listing your income sources. Each row in the income section should represent a client or other party that puts money in your bank account (income). At the bottom of your income sources, create a row representing the total of all income sources for that column.  Next, create a set of rows for people to whom you pay money (expenses). List out each person or vendor you pay. You can lump big items like payroll or credit card payments into one group for efficiency. At the bottom of expenses, create a row with the total of all expenses, just like you did for income. Once you have your rows labeled, you should add column labels for every week for the next year.  Although I recommend picking Monday or Friday as the date you choose for your labeling, any day of the week will do.  At the bottom of the cash flow sheet, create two more rows. Row one will be the Total Difference, which is the difference between the income total and the expense total for that column.  You can label the next row Cumulative or Total Cash.  For the Cumulative row, you will add the Cumulative value from the last column to the Total Difference from the current column. For the very first week you can simply add the amount of cash in you bank account to the Total Difference in exchange for the Cumulative value, since you have no previous Cumulative amount.  See below:

NOTES: This is a fictitious example of a cash flow spreadsheet.  I have added some color coding to track certain activities.  The orange color represents items that have been received or paid.  Color coding these items is important in tracking what is actual and what is still pending.  On the Cumulative line I have added a conditional setting to turn any cell purple when the balance goes below $1,000.  Visually, this color coding allows me to quickly see any low points in my cash flow.  The Balance column can be a place for you to put money due or owed that you are not ready to commit to the cash flow.  For example, you may be performing work for a customer where you are unsure if or when you will get paid.  You may want to put any unsure amount(s) in the Balance column to remind you of this potential income.  You can then wait until the invoice is sent to move it onto the cash flow.  Finally, I like to take notes on any item that may not be self explanatory (see the NOTES row).  This allows any one viewing the cash flow to have a better understanding of what each cell means.  This personally has saved me headaches when reviewing upcoming expenses or past payments that seemed unusual.

Good cash flow management requires understanding the impact of every income or expense on a weekly bases. Given that due dates for bills vary throughout the month, bills must be paid weekly.  I recommend not going more or less granular than weekly.  Using your budget, plug in all the items you have to pay over the next year.  Be honest about everything you will have to spend cash on. Fill in the income sources you have. It is important to be conservative when listing income. I only put income on the cash flow when I feel pretty sure I know it is coming.  Remember that this spreadsheet is not for impressing investors or others, it is to help you manage your cash.  When building and maintaining your cash flow worksheet, be very realistic.

In the example spreadsheet I have provided above, you will notice my balance gets pretty low during some weeks.  This is OK.  Actually, it is the point of this entire blog.  Your budget may tell you that you are going to make a lot of money every month.  The reality, however, may be that you have one week out of every month where you are out of cash.  Some companies may find that certain months during the year are very tight months due to yearly expenses that come due.  All of your other financial management tools will fail to tell you when these short fails will happen and how bad they will be.  This is why good cash flow management is super critical.

Hopefully you will see a Cumulative line with all positive numbers. Honestly, though most small business may always have negative Cumulative balances a few months out. During hard times, you may battle to keep your Cumulative balance positive on a month to month basis.  It is critical to be OK with seeing negatives at some point in your cash flow forecast. Being very honest about what you have to pay and what money you feel certain will arrive will provide you the information you need to get very good at understanding what money to chase and who you should pay on a weekly basis. Further, you will understand the impact of each decision on your cash position now and in the future.  You will also gain insight and visibility to yearly cycles in your business where cash becomes very tight.

ADDITION NOTE: Some business may draw on a line of credit to cover monthly or yearly lows.  I recommend adding a row labeled Line of Credit to manage the money coming in and out of your line of credit.  You can add a separate Expense line for interest paid or you can simply include that amount in your Line of Credit row.  The goal of this spreadsheet is good continuous cash flow management, so don't worry about adding Line of Credit or Credit Card balances to this tool.  The more complicated you make the spreadsheet, the less likely you will manage it well.

Even if you have no desire to learn the ends and outs of accounting, I highly recommend you learn good cash flow management.  You may want to implement this system for both your company and your personal finances.  If you keep up with the spreadsheet weekly, you should find it only takes a half hour to an hour a week to manage it.  This may include deciding what bills to pay and paying them.  Setting up the spreadsheet initially may take some time, but it is well worth the effort.

If you think cash flow management is simply an operational detail, you are wrong.  Good cash flow management can be a huge energy booster for you and your company even in the hardest of financial times. Understanding the impact of your financial decisions can help keep you and your team stay calm or even get excited during challenging financial situations.  Knowing that you are going to make it through a tough month and knowing that you will recover well shortly after a tough period can be a huge confidence booster.  Simply knowing that you are in a tough spot can give you the knowledge you need to rally your team and overcome difficult periods with confidence.

On a final note, realize that it may be hard for your brain to comprehend why the numbers are what they are.  Your budget may be telling you that the numbers just don't work, but your cash flow may show that everything is fine.  You may show a loss on your profit and loss statement, but have plenty of cash.  Avoid comparing or attempting to understand these discrepancies.  Obsessing on these differences will only cause headaches.  Use the tool for it purpose and only its purpose, cash flow management!

Best of luck in your cash flow management, and may all your Cumulatives be white;-)