The Reality of Corporate Governance for Start-ups (part 1)

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.