Tech Crunch has a fantastic glimpse into the demise of Stage 6, DivX’s YouTube clone. When DivX launched Stage 6, it was essentially done as a result of both YouTube envy and a desire to showcase its alternative to flash, basically.
While Stage 6 - or any other competitor - had no chance of making a dent in the space, it did manage to create something of value. What that value was remained uncertain. This week, DivX shut down Stage 6. The initial culprit was rising hosting costs and no leverage in sale talks due to way too many me-too players in the space. We’ve seen manifestations of both in the market:
- YouTube was racking up hosting fees of well over $2M per month when it sold to Google.
- Revver sold for less than $5M, or 1/3 of the $13M it raised in financing.
Anyway, turns out, the culprit was neither costs nor leverage, but rather ego. According to Michael Arrington, the board members and their egos killed the company.
Earlier this week, VC Fred Wilson outlined some things to look for when you assemble a board. He mentions that the advice is better suited for large publicly traded companies’ boards… but the point remains: choosing a board is critical for all companies, large and small.
This past month, we’ve seen Yahoo!’s board come under fire with their mishandling of Microsoft’s takeover bid. That will end up in lawsuits, trust me (disclaimer: Long YHOO). In fact, the company now faces seven - count ‘em seven - lawsuits.
What Does a Board of Directors Do?
The Board of Directors’ main function is to represent shareholders. They have a fiduciary duty to represent the best interests of stockholders. Directors may be insiders or outsiders. It is generally recommended to have independent board members that the company management cannot manipulate and control.
While Wilson’s advice is for publicly traded firms, I thought of offering a few tips for entrepreneurs and startups as they seek to put together a Board or recruit advisors.
What Are the Differences Between a CEO, President and COO?
First, some basic definitions, all taken from my first book Course To Success: Everything You Need to Succeed Beyond School:
The Chairman of the Board is the main liaison between management and shareholders. Depending on ownership, power and the individuals, the CEO can at times also serve as the Chairman of the Board. In publicly traded firms, it is the Board of Directors that is ultimately responsible to shareholders, the community and all other stakeholders.
The CEO, conversely, is:
A company’s Chief Executive Officer plans, organizes, directs, controls and coordinates the operations, finances, infrastructure and administration of an entire organization as well as the interaction of its major departments, initiatives and programs. The CEO interacts with other senior executives to make sure that the firm’s actions reinforce their quest to meet their goals. Depending on the size of the firm, the duties of the CEO range from managing day-to-day operations to overseeing the general interaction of a firm’s various departments. The CEO is ultimately held accountable for the firm’s financials, actions and results. The CEO reports to the Board of Directors.
In large firms, the CEO may handle the strategic planning and corporate development of the firm but he will or may recruit a lieutenant to execute the business plan of the firm.
The main difference between a President and CEO, if any, is that the President is responsible for the execution of the strategy… sort of like a Chief Operating Officer. If there is any difference between the President and COO, it’s that the title of President is sometimes used interchangeably with that of the CEO… so in a small company, if you have a President and a CEO it might cause confusion to staff. You need to be very clear as to who does what, in essence.
If you are a CEO and will also have a President, you better trust that person with your life, because otherwise it becomes a potential trouble spot.
The Chairman: A Modern-Day Frank Sinatra?
When it comes to having a Chairman, it’s trickier. At our company, being a privately held, self-funded startup, we do not really have a Board of Directors yet, so this is all moot. You can load up a company with advisors, many in Silicon Valley do, but when it comes to directors, you should be careful. We currently have a handful of advisors, formal or informal but no directors.
If and when we raise money, that will change, as we will probably assemble a Board and appoint directors.
There’s no rule of thumb, but everyone will agree that small boards are easier to manage than large ones. There are countless of blog entries and advice on this and they all echo this. However, most of these suggestions and tips come from investors so be careful about running with that advice.
While the Chairman might seem like a symbolic figurehead, truth is the Chairman of the Board of Directors is more than just a title…the position has tremendous power over you the CEO and the company, because the CEO (or President) reports to the Board of Directors and the Chairman is the ringleader of the BOD.
However, the shareholders can always vote out the BOD if they have enough votes (hence why MSFT is trying to switch YHOO’s boardmembers).
My recommendation to anyone who starts a business is ask yourself if you get business. If you do, then you should remain Chairman of the Company. Obviously having a strong Chairman might make investors more comfortable with investing, oftentimes the investor might want to appoint a Chairman, especially if they hold a meaningful stake in the company (this need not be a majority stake).
However, appointing a Chairman is a big deal, it takes time and trust. It’s a two-way street: just because someone is interested in being your Chairman does not mean you should accept their offer, after all, if I walked into your house and offered to baby-sit your children, I fully expect you to bide your time before accepting my offer, even if I have the best of intentions. In all honesty, I had an amazingly experienced and successful gentleman offer to be my Board member, I really wanted him on board (literally and figuratively), but having been backstabbed and betrayed by some in the past, I awas wary at the time.
What is important is to recruit advisers, directors and eventually a Chairman is to find people who will make time for your company. The last thing you want is someone who “dials it in” and does not really have the time or desire to help you build your company.
Ultimately, as an entrepreneur, you should know your limitations and leverage your strengths. If you understand business and recognize that the role of a Chairman is, then stick to your guns and understand that it is always easy to give things up than ask for things back. That applies to ownership matters as well as the structure of the board. Of course, if you don’t understand basic things like the difference between debt or equity or how to read an income statement, then obviously, despite your best intentions, step aside and make room for someone who does.
If you want to build a world class empire, you can’t treat it like a bush league operation.
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