Startup governance is often overlooked by entrepreneurs as a priority until it is too late. Most startups have similar goals: to innovate products and services, to find and keep quality customers, to maintain strong financials, and to stay true to the original idea for which it was founded, taking an idea from conception to implementation.
Startups can have the best foundational bricks in place; however, without proper startup governance, it is only a matter of time before this structure crumbles.
The startup culture was turned on its head in recent years by corporate governance failures of massive tech ‘unicorn’ companies.
Some of these poor corporate governance examples include WeWork and Uber. The financial consequences to investors were enormous. As a result, both angel investors and Environment, Social, and Governance (ES&G) investors now closely scrutinize even the most promising tech company’s governance practices. Now, more than ever, startups have to ensure their corporate governance best practices can stand up to rigorous examination. It is best to do this when the startup is initially formed to prevent bad habits from becoming entrenched.
A startup is traditionally a company that is centered around creating a new piece of technology or digital service. Usually, it is based on a concept for an app, a digitally delivered service, or cloud software. At its core, it is about creating something completely new. Typically, the innovation period is funded by ‘runway’ investments provided by angel investors, with the final intention being product deployment and taking the company public. The dream of most startup owners is to become a unicorn, which is a startup with a pre-IPO value that is over one billion dollars USD.
Where unicorns have failed to fly
As recently as five years ago, startups were forgiven if they did not practice solid corporate governance, as it was argued that stringent rules and processes could get in the way of the most important part of a startup: innovation. This attitude seems to have been carried out in many early tech business histories, including Apple’s board firing Steve Jobs, its founder – which had severe consequences for the company’s direction in its earlier years without him at the helm. However, this foregoing of standard governance rules led to the development of practices and company cultures that would lead to failed IPOs for some particularly prominent unicorns: WeWork, Uber, and Lyft.
The number of issues these companies had that led up to their spectacular IPO failures is too many to cover, but most can be summed up in just three words: bad corporate governance. In Uber’s case, for example, there is no way any sentient board would have allowed the company, then valued at $80 billion USD, to state in its S-1 filing that it may never make any money.
Good corporate governance examples in tech
As far as good examples of corporate governance in tech, there isn’t much out there. The fantastic failures of tech unicorns garner much more media and public attention than the successes which are properly plodding along. Companies that have managed to implement solid principles include GoPuff, which has put corporate governance best practices at the forefront of its business model. However, there is much more material available in the academic sphere.
Best practices for corporate governance are mostly immutable and span industry sectors. Corporate governance for startups that are currently relying on venture capital to fund pre-IPO activities requires some finessing, as Elizabeth Pollman points out in her article on Startup Governance for the Harvard Law School Forum on Corporate Governance. There are some important divergences from the ‘usual’, including the fact that venture capital investors often sit on the board and that governance changes as the company grows over time. If you really want to dive deeply into specific best practices for a startup, you can download her research paper on Startup Governance.
Luc Sterckx is an INSEAD Certified International Director and member of a number of international boards. He has authored a book specifically about corporate governance in startups and offers some insights into how it differs from business as usual. He points out four ‘balances’ that are required in this space:
- A balance between short and long-term
- A balance between founders/managers and external shareholders
- Financial balance; a company should fund long-term capital requirements with loans and equity
- A balance between entrepreneurial, innovative spirit and best business practices
In addition to these special considerations, technology company boards should implement universal best practices for corporate governance.
These can include:
- Creating a diverse board of directors, both in gender and race
- Selecting directors with a rich background with different types of skills & expertise
- Transparency and regular communications between the C-Suite & BOD, & stakeholders
- Board meeting practices, taking good minutes, encouraging participation
Technology can enshrine good corporate governance practices
Correcting corporate governance issues can be a daunting task. However, companies can cultivate good corporate governance practices by using technology to support them in their decision-making processes.
Find out how the DiliTrust Governance suite can help you in the long run with good governance practices. Contact us today and ask for a free demo.
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