Board of Directors: Good Practices for Entrepreneurs Kevin Conroy CEO, Exact Sciences November 21, 2013

Entrepreneurship Really Matters 2 14 th in academic R&D 43 rd for businesses created with academic R&D 2007 data

New firms are the largest driver of job creation Source: The Kauffman Foundation 3

Startups Create More Jobs Than All Other Companies Source: The Kauffman Foundation 4

Overview Fundamental role of board Legal duties of a board Key board committees Board best practices Board size & composition at different stages Strategic planning Effective board meetings Personal experience

Boards Evolve as Companies Do Seed/R&D Stage Early Commercial Stage Late Stage Expansion IPO or Acquisition

Personal Experiences Third Wave Technologies

Fundamental Board Roles Set standard for integrity for management and employees Maximize shareholder value for all company shareholders Agree on strategic direction and plan Hiring and firing the CEO; succession planning Provide insight and mentoring to CEO and management team

Board Responsibilities Board Governance (Structure and Function) Strategy Input & Operating Guidance Human Capital Development and Succession (Board, CEO and Executives) Financial Oversight & Risk Management Counsel to Management Value to Shareholders

Legal Duties of Board: Duty of Care Requires a director to act with care that an ordinarily prudent person would exercise – Obtain information necessary to make decisions – Make due inquiry – Make informed decisions in good faith

Legal Duties of Board: Duty of Loyalty Requires directors to maximize value for all shareholders Requires a director to act within the best interests of the company, not personal interest – Avoid personal financial conflicts (inherent VC director conflict) – Avoid usurping a “corporate opportunity” belonging to the company – Do not abdicate oversight

Legal Duties of Board: Duty of Confidentiality and Disclosure Confidentiality - Requires a director to maintain confidences surrounding non-public information Disclosure – Directors must take reasonable steps to ensure that a company provides shareholders with all material information relating to a matter for which shareholder approval is sought

Key Board Committees Audit Compensation Nominating and Governance

Audit Committee Financial reporting and disclosure process Accounting policies and principles Hiring and overseeing external auditors Regulatory compliance, ethics, and whistleblower hotlines Internal control process Risk management policies and practices

Compensation Committee Set/recommend management compensation and align with company goals Review director compensation and make recommendations to board Incentive compensation structure Stock and stock option grants Long-term incentive plans Compensation consultants Public company: Say on Pay

Nominating and Governance Committee Director recruitment CEO succession planning Monitor governance processes Board and committee evaluations/assessments Director orientation and ongoing education Respond to investors on proxy issues/maintain knowledge of investor viewpoints Familiarity with company governance ratings

Board Best Practices Strategic planning Clear priority setting CEO performance evaluation Routine executive sessions Congeniality/teamwork among board members Open/honest communication Informed before board meetings, know industry and company’s role in it Bring diverse skills to company

Ineffective Boards.... Fail to communicate Fail to ask hard questions Come to meetings unprepared Succumb to lead investors over all investors Fail to mentor management Allow disagreements to fester Pursue individual agendas Allow use of phones, during meetings

Competencies of a Strong Board Industry Experience OperationsFinanceM&ALegalHR Sales/ Marketing

Attributes of a Strong Board Candidate Integrity Inclination to Engage Independent Mindedness Interpersonal Intellect and Judgement

Seed/R&D Stage Company Board 3-4 board members – Management 1-2 – Investor 1-2 – Independent 0-1 Governance covered by whole board Establish financial controls and reporting processes Active in helping company get off ground

Ideal Early Stage Board Members Possess.... Wisdom Early-stage experience Relevant industry experience Great mentoring skills Management experience Time But... be wary of domain experts who lack business experience... possible advisor

Early Commercial Stage Board 4-5 Board members – Management 1-2 – Investor 2-3 – Independent 1-2 Begin building for the future Establish audit and compensation committees Strong finance team and capital plan Sales & marketing plan CEO succession planning

Late Commercial Stage Board 5-7 Board members – Management 1-2 – Investor 2-3 – Independent 2-3 Establish nominating & governance committee Strengthen management team Public company governance practices

Public Company Board 7+ Board members – Management 1-2 – Investor: 0 (my biased opinion) – Independent 5-6 Formal board chair/lead director Significant public company board expertise Focus on long-range plan Understand Wall Street expectations

Board of Advisors Bring scientific, medical or industry expertise together as needed Use to inform strategy Change make-up as needed Compensate for time Don’t be overly formal or locked in to specific make-up Bring in to speak to board on specific topics

Board Strategic Planning Board must focus on three key plans – Long-range plan (3-5 years) – Annual operating plan – Human resources plan Without a clear strategic plan, board can’t fulfill fiduciary duties Impossible to understand value of business without understanding of future potential upside and risks

Strategic Plan Should Include... 1.Overview 2.Market opportunity 3.Competitive landscape 4.Situation assessment 5.Key conclusions & actions – Strategic objectives – Product roadmap – Organization – Financial plan

Effective Board Meetings Prior to board meeting... CEO monthly updates to board; frequent phone touches Clear presentations that confront challenges head on....rosy stories benefit no one Disclose all the challenges and problems... with your solutions Expose management team to board Have executive session Take clear notes and follow up on board questions

Best Advice from Board Members If you have more than 3 priorities, you have none The CEO gets to pick his/her team Pricing is the most important marketing decision you’ll ever make Raise capital when you don’t have to The most important relationship a CEO has is with the head of R&D It’s all about inventory turns Your work is what you do, your family is who you are