Wall Street Journal - © 2000 Dow Jones & Co.
Article written by Karen Jacobs

For many start-ups, directors offer desperately needed management skills. The problem is finding qualified candidates. If you think a cash-conserving dot-com has to settle for less when looking for directors, consider Skyauction.com.

The year-old New York-based start-up, which auctions travel packages on its Web site, has managed to snag seasoned experts in compensation, auditing and fast-changing cable TV, and even a former head of state.

In many ways, Skyauction's directors represent a new breed of board, spawned by the Internet. Many of today's start-ups are headed by younger, less-experienced executives who aren't well-steeped in corporate governance. As a result, many of these new entrepreneurs see value in creating a board with several proven business leaders who can help them navigate the dot-com frontier.

So, rather than merely being a sounding board, today's dot-com directors must be an extension of management. They must be active participants in creating and shaping strategy, defining markets and building senior-management teams. They have to hit the ground running, and sometimes help build a business from the roots up. And they have months, not years, to make an impact.

"This isn't a job where you get a call once a month and are asked to read the financial statements," says Leonard Schutzman, Skyauction's nonexecutive chairman. "This is an active job."

Enticing Equity

How did Skyauction attract this group?

Having a well-connected chairman helped. But the company also devised an attractive pay plan. Instead of a cash retainer, its six outside directors initially received options to buy 100,000 shares each of Skyauction stock at the first-round investor rate, or a pre-initial-public-offering price. Mr. Schutzman says those grants amount to less than 1% of the company's total equity being held by the outside directors.

If the company's IPO goes off as scheduled later this year, those grants could produce a pretax gain of about $1 million for each director. Mr. Schutzman says the directors are expected to pay less than $2 a share for their options, and the company has an IPO target price of $10 to $12 a share. Skyauction also is considering giving the directors an additional 25,000 options every year.

"In this world," says Derek Reisfield, a 37-year-old Skyauction director, "equity is the name of the game. And the big payoff for management and employees is if the value of that equity rises."

But as this fast-paced, do-or-die dimension to dot-coms raises the bar on director-level qualifications, the pool of candidates deemed most suited for the job -- those already in top executive posts -- is drying up.

"Most of the best board members have reached their limit" on the number of boards they can sit on, says Jeffrey Christian, chairman and chief executive of Christian & Timbers, a Cleveland executive-search firm. Therefore, "a number of companies are looking further down in the executive ranks for those future marquee names," considering as directors division presidents, vice presidents of interactive or electronic-commerce units, and chief executives of smaller companies.

While these up-and-comers may not have had the responsibility of managing big corporations, they still have skills dot-coms can use. "They may lack the experience of being a CEO," says Mr. Christian, "but they may have others -- such as technology expertise, or being closer to customers."

Skyauction's nine-member board is a mix of young and old, with ages ranging from 33 to 65. One-third are company officers, compared with the average 18% insider tally at most big companies, according to recruiter Korn/Ferry International in New York. And while some of Skyauction's outside directors aren't household names in the business world, they have diverse backgrounds and a wide range of experiences.

Mr. Reisfield started a couple of dot-coms while working as president at CBS New Media Group, a unit of CBS Corp. He now heads I-Hatch, a New York venture-capital fund that invests in early-stage Internet companies. Tom Baxter, 53, chief executive of Audible Inc., a Wayne, N.J., Internet distributor of spoken-word audio content, guided Comcast Corp.'s cable unit through its fastest period of growth. Merlin Dewing, the 65-year-old head of Skyauction's audit panel, is a retired former partner at accounting firm KPMG Peat Marwick. Brian Mulroney is the 61-year-old former prime minister of Canada. Brent Longnecker, 43, chairman of the compensation committee, had headed the compensation consultant practices at Deloitte & Touche and KPMG. The lone woman on the board is Ciara Burnham, 33, a vice president at New York investment firm Evercore Capital Partners LLC and a former research equity analyst at Sanford C. Bernstein & Co.

Compensation experts agree that traditional director pay plans may be out of step with dot-coms, many of which need to hang on to what precious dollars they have in order to be nimble in a fast-changing industry. "It's a very competitive dot-com world," says Mr. Schutzman.

Bids at Skyauction, an offshoot of Magical Holidays Inc., a New York travel consolidator, start at $1, and the typical auction lasts 24 hours. Many of the fares have limited windows of availability. The company says it makes money on most, but not all, of its auctions, but hasn't yet turned a profit.

Mr. Schutzman and Skyauction's two chief officers -- CEO Michael Hering and Chief Operating Officer Sal Esposito -- compiled a list of credentials they deemed most important for board members to get the company through its initial growth stage. They wanted someone who had worked with an Internet company and successfully financed it, someone who had guided a company through explosive growth, a compensation and audit guru, and someone with international connections, because many foreign airlines with which they hoped to do business are state-owned.

"Our attitude was not just 'Let's pick out the best names,'" says Mr. Esposito, 41. "More important was the question of 'What type of knowledge do they have?'"

Mr. Schutzman, a former senior vice president and treasurer of PepsiCo Inc., knew some people who fit the bill. He approached many of them and told them about Skyauction and its prospects. To reduce the chance of blemishing their own records with a failed start-up, many of the candidates insisted on doing their homework.

"I wanted to make sure I wasn't lending my name to something that was a bad apple," says Mr. Longnecker, now an executive vice president at Resources Connection, a Santa Ana, Calif., professional-services firm. "I think you should interview [for boards] as you would for a job."

He and others held meetings with Skyauction's officers, examined the company's business plan and even talked to analysts who cover the industry. "We're going to have a big shakeout with all the start-ups going up," says Mr. Longnecker. "You better make sure the one you're applying to is the right one."

The directors say they were sold on Skyauction's business model and the smarts of Messrs. Hering and Esposito, who both had travel-industry experience. But there were other reasons some of them joined the board.

"Being retired, I look for intellectual stimulation," says Mr. Dewing, the KPMG veteran who heads Skyauction's audit committee. "Discussing business issues is still very rewarding for me."

All Stocked Up

In crafting the board's compensation package, officers considered cash stipends and a cash-and-equity arrangement. Because most of the directors had been successful in other jobs, says Mr. Schutzman, "we figured a small retainer of $20,000 or $30,000 wouldn't mean very much to them." Mr. Schutzman also is being paid solely with options.

The company also felt an all-equity package would ensure it had the full attention -- and participation -- of the directors. The officers very much wanted directors who were going to be involved. "We didn't want to pay a sitting fee because we didn't want people to sit," says Mr. Hering, the 46-year-old CEO.

And so far, none of the board members have been sitting. Mr. Reisfield goes to Skyauction's offices about twice a week. And Mr. Dewing, who lives in Minneapolis, keeps in touch weekly. "In the next year or two," he says, "this company probably fits in the high-workload range."

Most of the board members were willing to forgo cash for options. "I didn't think we needed cash compensation," says Mr. Longnecker. "I believe it sends a huge message to shareholders when they see the board's entire package is based on equity. You do need to motivate board members to make sure they're working" on behalf of shareholders.

Mr. Longnecker says he sees dot-com board compensation going beyond the all-equity package. He says he has suggested that some companies require their directors to buy stock, and then grant them a certain number of options for every dollar of stock they buy. "It's far to the right of wanting to go all-equity," says Mr. Longnecker, who adds that many companies have dismissed such a plan as too aggressive. "But I think we'll evolve to that."

In the meantime, his fellow directors at Skyauction seem well aware of the risks in taking an all-equity payment.

"The potential of the equity compensation is very hard to judge," says Mr. Dewing. "What I do is look at the best-case potential. Worst case is, obviously, you walk away with nothing. I think that's how you have to go into it."

Article written by Karen Jacobs

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