I don’t like the term corporate governance much, but I am a huge fan of what it represents and how much it can help startups. It should just be called “getting the best people together to support a startup”. Good corporate governance can help founders achieve their goals, both by building trust with investors and pointing founders in the right direction.
There are three groups of people that are involved in corporate governance for startups. Below are some ways for early stage startups to better define these roles and position themselves for future rounds from institutional investors.
1. Founders: Founders are the majority shareholders of early stage startups and should control the decision-making. The role of corporate governance is to look out for the best interest of the startup over the long term. Founders who set up a corporate governance structure with well-defined roles are positioning their startups to maximize shareholder value (which is good for everyone, since founders are major shareholders :).
2. Shareholders/Junta General de Accionistas: Non-founder shareholders of early stage startups usually include a group of people who together have a minority stake in a startup. Shareholders’ agreements outline the legal rights of this group. The founder’s job is to keep shareholders informed. Investors are an important source of capital in the future, so it is in a founders interest to be transparent and build trust.
- Provide standard reports to all investors through a monthly update
- Have a once a year meeting for all shareholders
- When an investor asks for a meeting invite her to visit the startup
3. Advisory Committee/Board: This is key. Founders that set up this structure, even if informally, benefit by challenging themselves both to think big and maintain laser focus at the same time. I have seen some early stage founders and investors get hung up with the legal implications of a Board. Votes and veto powers are not given away lightly. However, the purpose of a Board is to create a space where people can get together to think strategically about a startup’s future. Founders can start small with a core advisory committee and let shareholders know that this group is going to help make strategic decisions.
- Include independent advisors and a select group of shareholders
- Meet 4-6 times per year
- Create a presentation that you can share with employees and shareholders as well as potential investors (this is often a part of a due diligence requirement for future rounds).
Here is a great post with a description of the differences between Boards and Advisory Boards.
Corporate governance can help founders position their startups for success. Start small and informal. Over time you will build a tight-knit group of trusted advisors and investors to help make decisions that are in the best interest of the startup.