What to include (and leave out) in Board financials

Many a post has been written about rules of thumb for holding effective Board meetings.  People should be present, meaning actually focused on the meeting and not doing other work (this one from Brad Feld at Foundry).   There should be an Executive Session scheduled with plenty of time for it (this one via Fred Wilson of USV).  I’m going to focus in particular how presenting financials can be done in order to maximize value and keep things focused on what is really important.
First of all, whatever you present as the CFO, it needs to be distributed ahead of time, preferably at least 72 hours.  This is one hard and fast rule that I try not to violate whenever possible.  There is nothing worse as the CFO than numbers that go out the night before an 8am meeting.  It’s not just Board members that hate this.  It invites scrutiny and questions, and is a signal – I am big on signaling – that management doesn’t quite have its act together.
What should be in the package?  Here are the things I minimally include in businesses that have a meaningful monthly cadence – which most build stage companies do.  For some it’s weekly; an example is an app where week-over-week growth is a meaningful metric.
  • Last month’s P&L vs. original forecast, and YTD vs. forecast
  • Last month’s P&L vs. prior month – dollars view
  • Last month’s P&L vs. prior month – unit economics view (meaning, take your P&L, and divide everything by the unit that’s most important in your business.  Could be square feet, available days for appointments, hours sold, hats – you name it)
  • Meaningful YoY stats by product line, location, or some other way to give investors an idea of where growth is (or is not coming from)
  • Headcount summary – by department, where are we against plan?  For many startups, this is where cash either gets burned (hiring too fast) or revenue growth is thwarted (because you can’t find the right head of marketing and while this saves you money in the short run, it means you are not driving top line in the medium-term)
  • Rolling forecast vs. original projection – meaning, if I re-forecast the business for the rest of the year (which you should be doing on an almost constant basis), where am I going to end up
  • Cash projection
If you have these ready to go 3 days ahead of time in well-formatted slides with pithy color commentary, you’ll serve everyone well.  You might need to add a few more based the particular business that you’re in, but this should get everyone grounded in the results and communicate how things are going.  Investors will have the opportunity to look through the numbers and draw some initial conclusions, which will make the financials review section of the meeting much smoother.
Your goal as the CFO is to let the strategic discussion take center stage and let the numbers support that discussion.
Caveat: sometimes you will have Board members/observers who do not read numbers early no matter how early you provide them, and are going to ask nitpick questions about one obscure figure that you know is not vital to anything.  Take a deep breath and go with it.  It’s not constructive behavior, and with any luck, the other Board members will talk to this person offline about expectations.  Your role is to set them high, and keep them there.

Who CFO’s report to

Not long ago I had a Board member of a company where I am the CFO inform me that I work for the Board, not for the CEO.  My impression is that it’s somewhat more common in larger companies to have the CFO report to both the Board (in particular, to the head of the Audit Committee) and the CEO.  I think it’s rare in build-stage businesses.

I am not a fan of this kind of reporting either.  I think the CFO should report to the CEO and only the CEO, full stop.

First of all, I am a believer that in a company, there are 2 kinds of people: the CEO and everyone else.  Others can skip the holiday party, not be on the phone with the most important client, ignore unflattering press mentions, not attend Board meetings.  The CEO cannot do any of these things.  Their jobs are demanding in a way that no others are.  So, they need to trust their teams implicitly.  It is much more difficult to do this when reporting structures are unclear.

Relatedly, the CFO role is challenging for a number of reasons I’ve outlined in other posts.  For one: you’re often held responsible for the numbers but don’t sell, develop products, handle customer service or make ad buy decisions.  It’s hard enough without serving 2 masters.  I have been in situations before where Board members, usually inexperienced ones, will approach the CFO to provide numbers to them without letting the CEO know.  I have made this mistake before and will never do it again.  The damage this does to trust all around is not worth the seeming expediency of getting certain information.  Transparency and trust are everything.

In a similar vein, I want members of my team to feel like they work for me.  There is formal reporting and there is how it feels, which are not always the same.

When they have a question, CEOs frequently go directly to the person with the answer.  I give them a lot of latitude to do this, because as mentioned above, their jobs are hard enough (see above).  However, when this inevitably happens with someone in the G&A structure, I’d hope that they would let me know, and the CEO would know that they were going to let me know.  It is more difficult to insist on this as CFO when your own reporting structure is vague.

In some cases, the investors in my companies have wanted to make a change at CEO and involve me in the process without letting him (it’s been a “him” each time) know.  This is  governance at its worst and I will never do this.  My response is always that if they are looking for a CEO exit and want my help during a transition, operationally or otherwise, first make the change and then we’ll discuss how I can help.  Until then, I work for the CEO and that’s it.  Under no circumstances do I ever want a CEO looking over their shoulder at the CFO wondering what he and the Board are up to.  Once that trust is violated, it is nearly impossible to get it back.

I’ve been fortunate not to have worked as CFO in companies where the CEO has committed some kind of fraud.  My main deliverable is integrity, so if that’s being violated by doctoring results, I’d probably react badly.  Short of that though, this rule of thumb on reporting has always served me well, and I plan to stick with it.

 

Integrity

A colleague once told me that as CFOs, we don’t really have measurable output. Salespeople have bookings, engineers launch products, marketers drive leads, manufacturing has a whole set of statistics. Our only product is integrity.

This saying is always playing in the back of my head when I’m asked to pull things in a certain direction. Can’t we show that cash will last 18 months instead of 15? Can’t we show that those months where we got rent abatements were profitable? Can we just up the size of a few deals in the pipeline so that it looks a little fatter?

It is difficult to push back against this sometimes. It is also difficult to push back against what you can show is expansion that is way too fast.

This happens all the time, and I mean all the time, in the SaaS world where companies flush with cash feel obligated to spend it as quickly as possible on a much bigger sales and marketing operation. Their investors often want this too. Sometimes growth does not materialize, for which there are usually adequate warning signs (examples – not enough leads per salesperson, salesperson tamp is taking way longer than expected). A good CFO can see this coming a mile away. But there is tremendous pressure not to “be negative”, so many say nothing. Then one day there is a reckoning, and a restructuring. For some CFOs, this is when they too find themselves looking for a new job.

I have left a client over this before, and I’m sure it will happen again. I understand the prsssures in growth build stage companies and consider myself an optimist and someone who helps management teams set stretch goals. We’re not A/P at IBM after all. But I remember always that my only product is integrity.

Board compensation

Recently I got a call from a CEO who asked me a question about options for a Board member.  This got me thinking about some of my build-stage company experiences in the world of Board compensation.

Generally, build stage companies do not compensate their Board members who represent the early investors.  These directors usually represent their general partnership’s interest on the Board so their compensation comes indirectly that way.  Or, if they are Board observers, they had to negotiate for that right and so winning the right also to be compensated for it would have been pretty challenging.

They will all almost always have their travel reimbursed.  I have seen this run the gamut, from very successful senior partners at top firms who fly inexpensively and try to split the costs among portfolio companies, to Board observers who appear allergic to any hotel other than the Four Seasons.  Ironically, these are often the ones who want startups to remain “scrappy”, meaning cheap.

I’m making a joke, but they are onto something – build stage companies don’t have a lot of resources.  This also goes for options, for which there is a fixed pool.  Occasionally, I’ve seen a Board member who spends a lot of his or her time actively helping the company receive an options grant.  Unfortunately it happens more when the Board tends to be “clubbier”, meaning the investors all know each other.  Or, it happens more with first-time CEOs, and/or management doesn’t feel it has clout to push back.

Usually these grants top out around 0.5%, although more often I have seen closer to 0.25%, which is about where many advisory board members’ grants land.  Startups have a limited option pool and granting them to a Board member who is there to represent his or her fund’s interests takes those options out of circulation for others.

It is not the end of the world, but once this cycle starts, it is hard to stop.  Better not to start it at all.  If you do, try to signal that this is going to be rare.  I usually recommend a polite, professional and protracted discussion that is not over in an afternoon.

I also recommend that instead of doing one grant for X% that vests over 4 years, do it as a smaller grant of (X/4)% that vests in a year.  Continued service is a requirement for continued vesting.  The signaling of this is important — plus, it is nearly impossible to shut off vesting for someone on your Board even if that person is missing most meetings and falling asleep in the others.

I’ve seen options grants for Board members that vest in 3 years instead of the more standard 4, so in this case, just divide by 3.  Close enough.

One final note: outside Board members, on the other hand, usually do receive some compensation in the form of a monthly stipend.  Usually this is on the other of $1,000 per month in the build stage.  An options grant on the order of 0.25% usually accompanies this.  By the time an independent Board member is added, the company is usually closer to “scale” mode,  0.25% is a more significant grant than it was a short time ago in the company’s life.   Which, despite how much this might hurt, is a sign of success.  Enjoy the high class problems when you have them.