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Independent director

I have been building the corporate infrastructure for an early stage company with interesting IP that applies to a very wide industry segment.  The company has been self funded to date and there are no VCs or other independent investors. We have two management/ ownership  factions and I am trying to establish an independent Board member position to provide a safety valve and indpendent decision maker when issues arise.

Because of the need for perceived independence, such a candidate could hardly be someone presently known to either of the factions. Other than randomly trying to solicit candidates via Linked in, I am wondering whether others have had this challenge and how and where did they find suitable candidates. Also since the Company is wanting to channel its cash into product development, they are wanting to compensate the independent director in stock. Does anyone have a feel for the range of % stock ownership that might be required to attract a suitable candidate, vesting over say two years?

Answers

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

I have dealt with dueling ownership factions before and the key, I found, was to bring in a third party who, as you note, neither knew personally, but both knew of and had a good opinion of. Lacking that, you would have to go with someone you think highly of which neither faction knows. But that may be a painful process with many folks running the interview gauntlet. If you bring in someone who already has reputation established it will prove easier to get the sides on board.

Vesting for board members typically happens over the period of their service these days, I think. As usual, this is a negotiation, but I like to approach in equivalencies. That is, "what would I grant to an employee of equal import to the company's future". Just another way to think about it.

Topic Expert
Rex Jackson
Title: EVP and Chief Financial Officer
Company: JDS Uniphase
(EVP and Chief Financial Officer, JDS Uniphase) |

Simon,

Agree with your analysis, and like Jeff, have seen this before.

I would first get the existing board + management to be very crisp on what they are looking for in terms of expertise (you could go for technical expertise in the area of the existing IP, or business expertise in one or more the "wide industry segment" areas you are attacking). If you can focus everyone on the substantive requirements and then start to develop lists of who would be great, hopefully the "who knows who" will become an asset rather than a liability. At the very least, it could become a secondary concern.

Regarding equity, it sounds like you don't have any existing practices, so Jeff's input here is spot on. Of course, if you find a serious heavy hitter, the number goes up. From a vesting perspective, I've seen annual grants that vest in a single year and 3-year schedules. If you have a board that is elected annually, I'd do the former. If you have a staggered board (not likely) with 3-year terms, I'd do the latter.

Yusuf Azizullah
Title: Bus & IT strategist Professor
Company: University of Maryland
(Bus & IT strategist Professor, University of Maryland) |

Simon,

My experience with such situations is seek referrals from your external counsel of candidates that he/she has seen met or spoken at conferences and liked their published work on IP, such as academics or external consultants who might be interested in sitting on the Boards.

If you are trying to find an independent director. Start obtaining referrals through external means; lawyers or industry experts.

Professionals that advise Boards on areas needed / Lacking on your Board

Short list the prospects and start reaching out to them.

Remember to always Google the candidates and read about them.

Let me know, if I can be of more assistance.

Yusuf Azizullah

Renee Barnstone
Title: Chief Financial Officer
Company: Chief Financial Officer
LinkedIn Profile
(Chief Financial Officer, Chief Financial Officer) |

Simon,

I agree with all of the comments on selecting the independent director. I would add that for the selection process I would put great emphasis on the areas of need, as noted by Yusuf. And, I would look beyond the core Board needs, but also competencies that would serve the Board Committees as well, e.g. Financial "Expert" for the Audit Committee.

As far as compensation, I am not accustomed to seeing vesting like options, but rather pure stock grants for each year of service which are fully vested from day one, but restricted (subject to waiting periods, and removal of restriction for resale purposes). I am also accustomed to seeing a value of shares, e.g. $15,000 of value on date of issuance. As the Company begins to generate more cash flow and earnings and profits a cash director fee can replace the stock and/or have each director elect his/her preference for compensation.

Best regards,

Renee

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Thanks to everyone for your input. I have managed to come up with a couple of candidates unknown to either party whom both sides have said they will consider. However the role of being the independent decision make on the board knowing that the other two members will have partisan views on every topic could be a challenging burden that an independent candidate may be reluctaant to take on. Providing a bridge between cats and dogs, or republicans and democrats, is more than just a business issue, and while I have been up-front about the challenges, I suspect this will be a hard (and therfore expensive) sell.

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