The Reality of Corporate Governance for Start-ups

The Reality of Corporate Governance for Startups: Navigating Growth with Structure

When most people think of startups, they envision fast-moving, disruptive companies that embrace agility and innovation, often pushing the limits of what's possible. However, behind every rapidly scaling business is a crucial and frequently overlooked discipline: corporate governance. While startups are often associated with fast-paced ‘scrappy’ innovation, neglecting governance can result in chaos, inefficiency, and ultimately failure. Governance in the startup context isn’t about bureaucracy; it’s about guiding and supporting founders and management teams, establishing a foundation for sustainable growth, advising startups on team and process development, providing extensive commercial experience, and avoiding potential risks.

What is Corporate Governance?

Corporate governance is a set of rules, practices, and processes through which a company is directed and controlled. For large public corporations, it usually involves a board of directors, committees, formal policies, risk and strategy oversight, and regulatory compliance. In the case of startups, it involves establishing key decision-making structures, ensuring accountability for milestones and outcomes, financial oversight, supporting fundraising efforts, and supervising strategy and risk. When executed properly, governance is not about creating bureaucracy; rather, it’s about ensuring that the company can scale, innovate, and adjust swiftly when needed while safeguarding against risks. Frequently, founders and CEOs become so captured by daily operations that it is challenging to step back and consider the broader issues affecting the business. Start-up boards offer a means to achieve this.

Why Startups Struggle with Governance

Startups are built to move fast. Founders are often laser-focused on product development, establishing product-market fit, and customer acquisition. Governance can feel like an afterthought or, worse, a barrier to rapid growth. 

Some common reasons why startups struggle with governance include:

Founder Control: Many startups are led by visionary founders and technical innovators who are used to making decisions quickly. Introducing formal governance can feel like ceding control or slowing down.

Lack of Expertise: In the early stages, startups often lack experienced leaders or board members who understand corporate governance, leaving founders to learn on the fly.

Resource Constraints: Startups are usually strapped for cash and resources. Formal governance processes may feel like an unnecessary cost or time drain when every dollar and minute is devoted to establishing product-market fit and growth.

Short-Term Focus: In the rush to achieve milestones like product launches, fundraising rounds, or customer acquisition, long-term plans and structures like governance can be deprioritized.

Poor fit of Directors: Start-up boards should be expected to get involved and can often be pulled into short-term ‘semi-executive’ board and/or advisory roles. Not all board members are suited to this dynamic, so there can be a poor fit between the start-up and the board if the board members are not carefully selected.

Early-stage investor boards: In early-stage start-ups, the board can often comprise only VC representatives. While investor board members are incentivized to ensure the company is successful, they also have an overriding responsibility to their LPs to ensure their fund is successful. This can sometimes cause decision-making conflict with the CEO and founders. These conflicts can often be mediated with independent board members who can arbitrate for the best outcome for all stakeholders.

Why Corporate Governance Matters for Startups

Corporate governance is crucial for early-stage startups as it establishes a foundation for strategic decision-making, accountability, and growth. By early adoption of governance, startups can build investor confidence, attract top talent, mitigate risks, and ensure regulatory compliance. It can also be effective in aligning stakeholder interests, enhancing credibility,  facilitating strategic discussions, and preparing the company for successful exits. 

Key aspects of why governance matters are:

Attracting Investors: Governance becomes a key factor when startups are seeking external funding, in particular, after Series A. Institutional investors look for startups that are well-managed and have systems in place to develop growth strategies, deeply understand financials and mitigate risks. A startup with clear governance practices is often seen as less risky and more investable. In addition, board members can be appointed who have a track record in relevant technology areas, markets and growth success, and success in fundraising.

Preventing Founder Burnout: Founders can have many roles in the early stages. As a company grows, an experienced Board of Directors helps distribute decision-making across leadership and the board. It provides decision-making support for founders and management teams. During crises (which often emerge in start-ups), boards can help a management team navigate the crisis with effective internal and external communications. This can not only prevent burnout but also lead to better strategic decisions. 

Founder / CEO management: Boards are primarily responsible for hiring the CEO and managing CEO performance. They are best placed to make decisions around the skillsets required for the stage of the start-up. An experienced Board of Directors can help determine when new leadership is needed and as required, manage CEO succession. Boards are essential to successfully navigate any necessary founder transitions.

Risk Management: A lack of a risk management framework and risk oversight can lead to costly mistakes, whether it’s legal & compliance issues, regulatory challenges, financial mismanagement, strategic missteps, or customer development issues. Effective governance ensures that there are checks in place to catch red flags across all areas of the business before they become major problems.

Scaling Efficiently: Startups that scale without appropriate governance support often experience growing pains. Without a decision-making structure utilizing independent and experienced board expertise, miscommunication, operational inefficiency, and strategic missteps can creep into the start-up, stalling growth and impacting financial performance.

Adherence to key contracts: Decision-making authorities for major company-level decisions are often enshrined in a shareholder agreement; shareholders define which decisions they need to vote on, and which can be delegated to the board and management. Likewise, contractual promises and liabilities are defined in customer contracts and have to be managed to avoid legal risks. Effective start-up Boards can provide a useful checkpoint for founders and management teams to ensure adherence to critical contractual obligations.

Building Governance Without Losing Speed

The key to introducing corporate governance in a startup is to scale it in parallel with the company’s growth and ability to absorb increased oversight. Here are some guidelines on how:

Start Simple: In the earliest pre-seed stages, independent governance doesn’t have to be overly formal. It can begin with a board of advisors and regular meetings with the founder and key managers to discuss key business metrics, performance against milestones, risks, and decisions. The goal is to create a culture of transparency and accountability and provide a sounding board for ideas for the founding team.

Build a Board Early: While the term “Board of Directors” may sound too corporate and distant for the startup world, building a board early on provides founders with diverse perspectives and experiences. Early-stage boards often serve as a sounding board for strategic decisions and help ensure that the company stays focused on key operational and technical milestones and long-term growth goals. As the company matures, a board can evolve into a more formal structure with fiduciary and strategy approval responsibilities. Effective board members should be aligned with the start-up’s vision for success, but also be willing to challenge decisions when necessary.

Adopt Key Policies: Startups don’t need the large policy manuals of large corporations, but some policies are essential to avoid potential legal, financial, or HR-related disasters and existential risks. Key areas include:

• Financial and Business Controls: Clear processes for budgeting, revenue recognition, banking (deposits, withdrawals, statement reconciliation, credit cards), purchasing, hiring background checks, staff expenses, customer and supplier contracts, data privacy and security. 

• Employee Policies: Guidelines around hiring, terminations, stock option plans and compensation.

• Legal Compliance: Ensuring a company is following laws related to taxes, intellectual property, health and safety and contracts.

• Risk: Conflict of Interest, potential and risk management policy

Incorporate Feedback Loops: Governance should evolve with the start-up’s journey through its funding and growth stages. A start-up board should periodically evaluate the company’s governance structures to ensure they are supporting growth rather than hindering it. Feedback from board members, investors, and employees is crucial for refining governance processes over time.

Use Technology to Streamline the Process: There are governance tools designed for startups that allow for easy creation and dissemination of board papers, tracking of board meetings and minutes, key resolutions and decisions, and legal compliance of shareholder agreements and other contracts. These tools can help manage governance in a lean and cost efficient way, ensuring that it doesn’t become a burden.

Common Pitfalls to Avoid

While good governance can drive long-term success, there are some common missteps startups should avoid:

Overcomplicating Governance Too Early: Startups that impose overly rigid structures too soon may stifle innovation and slow growth. Governance should be lightweight and adaptable in the early days and grow in sophistication as the company develops.

Founder Overreliance: Many startups fail because founders hold onto too much control for too long. While the founder’s vision is critical, sharing decision-making responsibilities with experienced leaders and board members is key to sustainable growth.

Ignoring Governance Until It’s Too Late: Failing to implement governance until a major problem arises, such as delays in achieving milestones that impact the cash runway, a major lawsuit, regulatory issue, fundraising challenges, or investor pushback can be a costly mistake. Startups should lay the groundwork for governance before they encounter these challenges.

Appointing a Board Member who cannot adapt to start-ups: The ideal board member is someone who has start-up and scale-up experience, has start-up exit experience, and ideally has also worked with large successful corporations. This means they know what great high-performing organizations look like across the growth stages and can navigate all worlds. 

Misalignment of incentives: Start-ups can require a different type of involvement from Board members when compared to large corporate boards. Compensation is often only equity-based or somewhat smaller cash fees. Start-up board members should be carefully selected for skills that can move seamlessly between early stage and growth and should be comfortable with compensation that is aligned with the stage of the Company and its shareholders.

The Right Balance: Structure with Flexibility

The reality of corporate governance in startups is finding the balance between structure and agility. Good governance isn’t about slowing down the business or drowning it in bureaucracy. Instead, it’s about putting in place guardrails and decision support that help the company move faster, more efficiently, and with greater clarity. It's a necessary framework that allows for new strategic oversight, risk management, and operational efficiency. Starting small with governance structures, building a board early, and leveraging a board to support the scale-up process ensures that startups can thrive without losing their innovative edge.

For founders, embracing governance early on not only demonstrates strategic foresight but also signals to investors, employees, and partners that the company is committed to long-term success. While the scrappy nature of startups may be incompatible with formal corporate structures, governance can be the ingredient that allows businesses to scale and thrive in the long run. 

The critical role of an Independent Board Chair

In a start-up, an independent board chair is crucial for guiding the company during its early development. The Chairperson for a start-up company will have the required board and business experience to effectively moderate board meetings and facilitate productive, balanced discussions on issues relevant to the startup's vision and strategy. Acting as the leader of the Board of Directors, the Chair ensures the board’s skills are tailored for the stage of the company and that the Board and Company adhere to effective governance and strategy development practices. They provide strategic advice and direction, supporting the founder and/or the CEO in shaping the company’s long-term vision and addressing immediate goals and milestones to achieve these goals. 

Additionally, they are involved in assessing risk and are looking ‘around the corner’ for potentially serious issues. By cultivating a robust governance culture and holding management accountable for their performance, the board chair contributes to the development, growth and resilience of the company. They recognize the CEO leads investor discussions but, as necessary, can provide additional support for discussions with investors and bankers. The start-up board chair also serves as the primary liaison between the board and the founder and/or the CEO, supporting the CEO during major challenges and crises and being ready to assist in crisis management when necessary. An experienced Chair with a company-building track record can guide the CEO in building a strong leadership team and organizational culture. They ensure the Board participate in succession planning and key hires as appropriate. They will also often mediate between inside investors and the CEO and founders in complex discussions, and are particularly useful when things aren't going well to help translate between investor metrics and company objectives.

How Chrysalix thinks about start-up governance

Good corporate governance is essential for a start-up company’s success and, when done correctly, strengthens a company’s growth prospects and financial outcomes. As part of Chrysalix’s commitment to good governance in our portfolio of start-ups, we aim to assist our portfolio companies with achieving and maintaining effective governance practices. Chrysalix looks to appoint independent board members to its start-ups early in their lives, and ideally would want an independent board chair in place before Series A. 

We expect management and the board of directors of our portfolio companies to operate according to best practice governance guidelines. To that end, Chrysalix defines Pillars of Good Governance to guide its start-ups. We encourage portfolio companies to utilize these pillars of good governance as they structure their Boards and develop their growth plans. Chrysalix will support its portfolio companies by providing governance process recommendations, governance process reviews, board reporting templates, board member candidate introductions and hiring support as required. 

Pillars of Good Governance

Chrysalix recommends that these six governance principles be implemented and continuously developed through a company’s stages in support of its growth plans.

• Ensuring effective senior leadership, hiring a CEO, and managing founder & CEO performance and succession as a primary task of all boards

• Determining corporate purpose and strategy

• Developing an effective governance culture appropriate to the organization’s stage

• Holding management to account for company results

• Implementing effective and appropriate risk oversight, business controls and regulatory/legal compliance

• Ensuring effective stakeholder relationships, stakeholder value creation and supporting fundraising success