An entrepreneur recently asked what he should look for in a potential director on his board.  That’s a pretty tough question as any entrepreneur can tell you.  As I started listing off all the potential traits that would be important - prior startup experience, industry contacts, mentorship, leadership, board experience, operational expertise, etc. - I realized I may be describing a person that could never exist…

So instead of looking at all the traits a board member should have, I thought it was valuable to the entrepreneur to describe the key roles a board plays.  By understanding what a Board of Directors is responsible for (and is involved with) in a company, hopefully you can identify the right mix of people to round out your board.  So if you board is full of people with lots of industry contacts, perhaps you need to look for someone with prior startup experience or perhaps someone with finance and accounting skills.

There are five key roles a board of directors’ play within the company, and particularly play with respect to a high technology startup company. Those roles are:

• Legal Role
• Representative Role
• Strategic Role
• Advisory Role
• Service Role

The Legal Role played by the board of directors is determined by federal and state laws (primarily state laws governing the state of incorporation, but other laws may also be implicated), rules and procedures set forth in your corporate Articles or Certificate of Incorporation and corporate Bylaws, and additional rules and statutes from the Securities and Exchange Commission, Financial Industry Regulatory Authority or other entities that regulate certain stock exchanges.

The Representative Role relates to the relationship between the corporate shareholders and the board of directors. As discussed previously, the board of directors historically had been elected by the shareholders as representatives and acted out the will of the shareholders. And while that relationship does remain in some senses, particularly in that the shareholders continue to elect the board, the power has shifted in many cases to the hands of the directors. Even so, it is still important to recognize that the board does represent the interests of the shareholders and is responsible for providing oversight in the interest of all shareholders of the corporation. This relationship can be at issue in cases where a shareholder (oftentimes a holder of a sizeable stake of stock) believes the board is not acting in the best interests of the shareholders, but courts have tended to give substantial deference to the board.

The Strategic Role largely stems from the role the board plays in corporate decision-making. Due to the fact that a board will be responsible for approving decisions from potential acquisitions to option grants to new hires, the board will hold an important role with respect to certain strategic decisions. The challenge that some corporations is the balance between the board and management in these strategic decisions. However, there has been research that suggests there is a positive relationship between a board’s involvement in corporate strategy and the performance of the company.

The Advisory Role for a board of directors is most often seen in the earliest stages of corporate development. Early investors in the company, oftentimes who represent venture capital funds or other serial startup investors, will provide capital for the corporation, but may also view their role to guide and assist the company in its earliest stages. The experience many of these directors will have of working with numerous companies in a similar market, at a similar development stage, or facing common market conditions gives the board the ability to provide advice and insights to the company.

The Service Role of the board and its members come as a result of the fact that many small and early stage companies will not pay their board members until the company matures or will only pay a nominal fee for board service. Compensation will usually be in the form of stock options, reimbursement for travel expenses or stipend for meeting attendance. At least in some senses, the board and its members will be providing service to the company and its contributions will be aimed at adding long-run value to the entity.

When selecting anyone to join a board, remember the varied roles the board fills — and look to create a board with the right mix of personalities, skills and backgrounds to fill the roles.  Ultimately, a board can be a key extension of the management team and instrumental to the business’ success.

For many technology entrepreneurs, raising venture capital is an important part of their business strategy and may be a goal in and of itself.  As a result, I’m often asked: “What are my chances of being able to raise money from venture capitalists?”

Obviously, I’m not a venture capitalist (we lawyers, don’t pretend to know what exactly a venture capitalist is looking for and what they will require before making an investment).  However, you start to get a fairly decent sense of what a VC won’t fund.  I’ll save that list for another post and another time…

So my general answer to that question about whether or not an entrepreneur could raise VC funds is: it depends. It depends on the team you’ve assembled, the technology itself, the market for your technology, the right timing, and a little bit of luck. And while that may be the case, if you believe Sam Altman, the founder of Loopt, “If you’ve got a good idea, market, and team, raising money won’t be your problem.”

So, what are the odds then?

The truth is, the “it depends” answer isn’t very satisfying to most people. Entrepreneurs want to know their chances.  In a prior post, I wrote about the VC “Fit” Test.  That is one way to gauge if you may be a good fit or not (although, again, lots of subjectivity there).  The other way to gauge interest is to sit down with a few partners at funds and see the reaction (but that means you can get those meetings or are far enough along for them to be truly interested).

So, what about some more data into the chances of an unnamed startup?  Well, anecdotal evidence suggests that between two and three percent of businesses seeking venture capital financing will ever receive institutional funding. The majority of these cases are because venture funding is not the right type of funding for the business (not passing the VC “Fit” Test….). Sean Wise looked further and interviewed a number of venture capitalists to find out where their deal flow came from and the sources of deal flow that had the highest probability of closing. While these are not scientific numbers, these figures should offer some insights into the way VCs see the sources of their deals.

What are the odds of getting a meeting with a VC firm based on:

• an unsolicited business plan submission? Approximately 1 out of 100.
• a solicitation from an unknown agent? Approximately 1 out of 50.
• direct contact from venture fairs, financing forums, and other industry events? Approximately 1 out of 15.
• referral from professionals with fund relationships (accountants, lawyers, and market dealers)? Approximately 1 out of 3.
• referral from current and future investors? Approximately 1 out of 2.
• referral from executives of a portfolio company in the VC’s fund or other stakeholder in the VC’s funds? Nearly 1 out of 1.

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I recently had a terrific conversation with a soon-to-be entrepreneur.  He had pretty much everything set — a unique idea, the right set of skills, co-founders who would bring a nice mix of talent, enthusiasm, connections, etc.  If you asked me, this seemed like a pretty good start to a startup.

Then I asked the question — “So what are you guys doing for startup capital?”

A blank stare came back at me.  “Startup capital?  We don’t need any yet.  Well, I mean we’ll probably do an angel round or something… but we don’t need that for a while.”

Well… you may not think you need startup capital, but odds are nearly every business requires something to startup (more than just sweat equity of the founders).  The question isn’t whether you’ll need it (you will), but is how much (typical range is $15-75K) and where to find it (check the mirror).

What is “startup capital?“

Some people call this seed money; others call it startup capital or initial capital; and still others use terms like founder capital. The short of it is, that this cash represents what you needed that can’t be paid for with your sweat and your time.  Real cash expenses.

Unfortunately, what this promising entrepreneur I’d been speaking with failed to recognize is that it takes money to start a business — really nearly any business, even the most lean, bootstrapped business takes some cash to get it going.  And that isn’t the type money you raise from angels or the like.  This is real startup capital to buy things like office supplies, business cards, software, laptops, test equipment, licenses, paying for a developer or designer, etc.

How much startup capital does a business need?

Obviously, that depends — and it depends on what period of time we are talking about.  If you plan to bootstrap the entire way through, you may be talking one amount or if you are just trying to get setup and have a seed investor or angel investor lined up, then it could just be a month’s worth of startup costs.

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It’s not too early for some in the media to start speculating that the recession is already over thanks to a few good days in the stock market (thanks CNN).  So, next up, job opportunities for some of our best and brightest startups, right?  Not so fast, unfortunately (thanks Congressional Budget Office).  But those rays of hope may mean light at the end of the tunnel — companies will be looking to hire again (sometime) and others will start looking to bring on consultants.

For that reason, it may be time for companies to start considering the costs of adding a new employee and thinking about strategic hires sometime in the near future (perhaps there is a talented individual who was laid off from another company that might be a perfect fit).  What some new managers fail to recognize is that the cost of the employee are more than just their salary (and even more than salary and benefits).  Think laptops, rental space (if you need office space), lunches, taxes, training, travel, and everything else that goes into an employee.

There is no set number on the full cost of an employee and in fact it usually depends on the job itself and what types of “add ons” the company offers.  But estimates range from 1.5x to 3x of salary for the ‘fully-baked’ cost of an employee — the cost including things like benefits, taxes, equipment, training, rent, etc.  While bringing on an employee may only cost you $30,000 in salary, depending on the other costs, this could actually result in additional costs to the business of $90,000.

So how can you determine the true “fully-baked” cost of an employee?

The cost to add each new employee represents more than just the salary you’ve agreed to in the offer letter. You’ll be responsible for costs from taxes and benefits to rent and equipment.

The Department of Labor provides information on the costs an average employee costs to the employer (these don’t factor in things like equipment costs, rental costs, or other costs not directly tracked by the DOL). According to the DOL, an average employee costs $25.93 per hour when you factor in costs of salaries, benefits, and taxes. While these figures represent useful information, you should note that these numbers represent a broad range of employees across all industries in the U.S. economy.

Private Industry Employer Compensation Costs

U.S. Department of Labor’s Bureau of Labor Statistics (June 2007)

Employer Costs of an Employee

# Paid leave benefits includes vacations, holidays, sick leave, and other leave.

* Legally required benefits include Social Security, Medicare, unemployment insurance, and workers’ compensation.

So while the Department of Labor information represents aggregate data, the information can be quite helpful to gauge what it will really cost to hire another employee. If you’d like to estimate the real cost of adding a new employee, you may consider multiplying the employee’s base salary by a multiplier that would reflect their salary, benefits, rent, equipment, training, and other general expenses associated with another team member.

For instance, looking at the chart below, you could see that if you planned to add two programmers at salaries of $50,000 each and one manager at a salary of $100,000 for the following year, you could be looking at an increase of expenses of up to $540,000. When making your budget to add headcount, it is important to include costs associated with the employee in addition to their salaries. This is just a helpful “big picture” tool and each company will likely need to adjust its calculations to fit its own operations, however it is helpful in gaining a quick sense of the true costs associated with increasing headcount.

As you consider whether to bring on a consultant or hire a new employee, be sure to compare apples to apples — which usually means the full-baked employee costs versus the consultant’s rate.  There are oftentimes other “benefits” to hiring an employee over a consultant (perhaps a greater sense of loyalty).

There are rays of hope out there — some companies (hopefully yours) is looking to hire.  Plan ahead for the cost of an employee to be sure your hires don’t break the bank.