Protecting your startup and unlocking potential
Good governance creates value. They are the last thing on an entrepreneur’s to-do list, but poor governance practices are a big red flag for potential investors. Along with financials, corporate governance is one of the first (and perhaps the easiest) topics covered in due diligence exercises. Sure, no-one expects a startup to be run like a Fortune 500 company. But having a trajectory towards that kind of governance and professionalism must start before any professional investor will take a chance on your business.
Good governance doesn’t just create value by preventing devaluing habits. It can actually unlock the potential of your business. Simple things, such as improved communication and risk identification at board level, can encourage greater collaboration and cross-over amongst the management team as they grow a business. Angel investors, venture capitalists and early-stage private equity firms all invest in one key product: the team. Good governance allows that team to succeed.
Books and books have been written about governance, but here are a few key tips to be thinking about with your startup.
Ownership matters
Oftentimes, a new business emerges on an informal basis and, even where a company has been formed, the founders overlook the details on ensuring shares are issued and allotted in the intended proportions. This can be more problematic with friends and family who provide initial funding; the nature of the close relationships can mean clarity on whether the funding is a loan, a share of the company. Even where this is agreed, clearly documenting this in corporate records is essential (memories fade and, sadly, tend to favour self-interest in the absence of hard evidence).
This all becomes immediately obvious when an investor reviews share registers and corporate records. The key here is communication and clarity. Founders need to explicitly agree the ownership split between them, early. Similarly, the risk of misunderstanding with friends and family can only be managed with clear, simple, written proposals.
Board composition and practice
Founders are, understandably, loathe to relinquish control of their businesses. This can inadvertently happen if board composition is not carefully considered. Decisions are ordinarily taken by majority, so care with voting blocks is needed. At the same time, professional investors will expect a board with sufficient independence to challenge and guide the founders.
Good board governance is demonstrated through a track record of regular board meetings with decisions clearly documented. A failure to properly involve the board in important decisions can be a red flag to investors, suggesting a founding team that will be difficult to work with. As the startup grows towards the milestone of external investment it is important that these practices need to be embraced by the business.
Role clarity
Outside of the board of directors, having a clear narrative of management and leadership structure is essential. Is there a single leader who drives the vision? Are there three founders who share that role? There are many shapes to leadership in startups; the key is having a clear articulation of how it works in your business, who is responsible for what and the extent of each person’s authority prior to referring matters back to the team or the board.
Good governance hygiene makes these matters clear, which (when followed in practice) gives investors peace of mind to focus on the exciting opportunity your business is trying to unlock.
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At Osney Capital we are focussed on supporting our investments by providing expert advice on the key operational challenges startups face. This helps our partnered-firms avoid unnecessary mistakes and realise their potential sooner. By guiding you through these common missteps, our invested capital works harder for us and harder for you.
For more information on our approach and how to apply for funding, please visit www.osneycapital.com or contact apply@osneycapital.com.
Good Governance was originally published in Osney Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
