During the JP Morgan Healthcare conference, I bumped into an industry colleague running a VC firm in Northern Virginia. When I asked why he passed on a startup mobile company located in San Francisco, he stated that it was too early. Sometimes such a response can be confusing, unless one takes into consideration the mechanics of investing early by a VC firm and how board meetings play an integral part of that process.
In an earlier blog, I discuss the revenue model of a VC firm – where the limited partners allow the firm to charge a fee to the limited partners, which fee increases when a startup investment has been made by an additional 1% or 2%. Why the surcharge? Now that managing director is spending more time participating at board meetings for that startup at least once a month. He is closely monitoring the performance of that company
and measuring the company results during each board meeting.
I already know that the San Francisco company is almost 3,000 miles away from the VC firm. That would mean travelling back and forth for the monthly board meetings. That is a major burden for a managing director, who knows he can find other opportunities geographically closer to him. That is why he passed on the San Francisco opportunity, however great a company that could be.
Let us talk also about board meetings. Under the standard corporate governance rules, the final decision maker in any company is the Board of Directors. However, for the Board to have any authority, it must have the minimum quorum as defined in the Bylaws.
Second, for the Board decision to have any effect, it must have three important conditions: a) the meeting had been preceded by notice or that notice waived as defined within the Bylaws; b) once the meeting is held, voting has to be occur with the minimal voting consent; and c) minutes must be kept of the proceedings. C-corps must hold at least one Board meeting a year for standard management. And there are no limits as to the number of board meetings. In many startups, they occur once a month. If there is an extraordinary event, such as a major investment or M&A, there should also be a Board meeting.
Shareholder meetings also abide by the same methodology as stated in the Bylaws, and operate within the same requirements related to minimum votes and notices. Otherwise, they are not legitimate meetings. Since the directors represent the shareholders, the shareholders are not required to meet as often, unless extraordinary events require their consent.
So we now know that the Managing Director from Virginia, clearly knowing his duties as an investor and potential Director, would be reluctant to participate in company board meetings thousands of miles away every month. So it boils down to not simply geography but also appropriate corporate governance.