In my work with founders and investors of start-ups I’ve experienced that the chances of success are considerably increased if founders implement a robust governance framework early on. Equally I’ve experienced failures of start-ups which could have been avoided if basic governance structures were in place.
All too often corporate governance is seen by start-ups as something that “big companies do” and they follow the “growth at all cost” mentality. Things move fast for start-ups and it is therefore important that proper governance controls and process are in place early on. Focusing on growth and corporate governance at the same time can be challenging for founders of early stage businesses but skipping to putting in place critical governance processes and procedures can be fatal for the business.
A robust corporate governance framework is a critical success factor for a building a long lasting and sustainable business. Putting sound governance structures into place early on can save a lot of problems later on.
Corporate Governance considers the processes and procedures by which companies are organised, managed and monitored. A well designed and functioning corporate governance framework ensures that the company is run in a transparent and responsible manner, based on integrity and accountability. Such a framework also considers the interests of all involved stakeholders including shareholders, employees, customers and increasingly also addressing ESG factors.
A carefully chosen and well-functioning board can be a great enabler and custodian of a robust corporate governance framework. Founders are sometimes reluctant to put in place a board early on and before a Seed/Series A investment, but in my experience a well-functioning board can be a game changer for a start-up. I’m a big fan of small boards anyway but typically a founder led board composed of two executive founders and one Non- Executive Director can be a great starting point.
Such a small but highly effective board is one of the critical success factors for any start-up. From an early stages of a start-up, a board can provide valuable guidance and support to the founders to put a robust corporate governance framework in place instilling accountability and oversight into the business as well as increasing credibility and legitimacy of the business.
Here just a few examples I’ve experienced first-hand of the risks and challenges some of the start-ups faced which would have been preventable if corporate governance processes and producers would have been in place:
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- Co-founders disagreements about the strategic direction of the company stopped them making vital decisions on time. Ultimately, they run out of cash as a consequence.
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- One co-founder wanted to exit the business early on with high/unrealistic demand for a cash buy out. As there was neither a founders nor a shareholder agreement in place which covered such eventualities this took a lot of energy, stress and very valuable time for the remaining founder to negotiate a payout which wouldn’t put the start-up at risk.
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- Founders followed the “growth at all cost” mentality not paying enough attention in monitoring and questioning the accuracy of the cash flow projections. Systematic errors in the way the cash flow projections were made were identified only when it was almost too late, putting incredibly stress on the founders to find bridge funding in order to avoid the worst.
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- Disagreements between co-founders ended up in court costing the start-up incredible management time and cash resources desperately needed in the business.
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- During difficult times a founder had been put under incredible amount of pressure by private investors. There was no board in place putting all the pressure and decision making responsibilities on one individual. The physical and mental pressure on the founder became too much and the business failed as a consequence.
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- The due diligence process for funding and for exit processes become proportionally more time consuming and demanding related to the lack of corporate governance processes and procurers.
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- The nonexistence of a shareholders agreement made the exit process twice as hard and twice a long than necessary.
It is never too early to implement a corporate governance framework that allows a company to thrive. A well-functioning board can be a great catalyst and guarantor for such a governance framework, considering the interest of all involved stakeholders including shareholders, employees, customers and increasingly also addressing ESG factors. Finally, corporate governance helps setting the foundation for a strong company culture.