The Reality of Corporate Governance for Start-ups (Part 2)

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