INTRODUCTION

Not every Bill Gates currently sitting in his parent’s garage actively thinks about corporate governance, board structure or shareholder interests. This often leads to corporate governance being relegated to the background, a subject left for later. Often startups are focused on getting funding, staffing, and generating a product-market fit. As startups have limited access to resources, they are often occupied with trying to gain market traction,¹thus pushing corporate governance best practices down the priority list.

The lacuna in the corporate governance structure of these startups become apparent when they need funding from angel investors and venture capital firms. However, where startups create a solid foundation for success with good corporate governance, more often than not they become even more desirable to lucrative investors.²

This article seeks to discuss how corporate governance practices can be adopted by startups in each stage of their growth.

CORPORATE GOVERNANCE AND STARTUPS

Corporate governance simply put, is the system of rules, practices, and processes by which a firm is directed and controlled.³ It is the framework that allows a company to thrive by balancing and addressing the vested interests of various stakeholders including shareholders, employees, and customers.

Thus Corporate governance structure for startups should identify roles, authority, and timing in key business decisions between shareholders, directors, and the CEO.⁴  Additionally, adoption and implementation of corporate governance practices foster company culture built on standards of integrity, accountability, transparency, fairness, responsibility and performance.⁵ Where this foundation is put in place early, the flexibility necessary for the management to fully focus on innovation, top-notch service delivering and expansion of the company would be a part of the company’s daily process. As earlier stated, it is natural for startups to begin to think about corporate governance structure when they require funding. And it would be unrealistic for the most advanced governance standards to become a priority when the company is just a little more than an idea. Governance implementation can however take place gradually and become more sophisticated throughout the process, as each stage of the growth process represents a favorable moment for adoption or improvement of certain governance practices.⁶

GOVERNANCE CONSIDERATIONS IN STARTUP STAGES

There are four stages in a startup’s evolution to maturity, success, and eventual scale up. These distinct stages compose of different priorities and characteristics, which means that the governance structure and considerations required in each stage differ. The stages include the:

1. Ideation Stage

This phase consists of the pre-seed and seed stages. This is where market analysis is done, and ideas are conceived. Thus, it is the stage of conception and union between people who connect around a defined purpose and begin to develop what could become a company in the future.⁷

At this stage, it is important to define aspects related to corporate governance to avoid problems and expand future opportunities. This is because decisions made at this stage (or the lack thereof) will have future consequences for the company. Certain governance practices can help start off on the right foot by laying the foundations on stable ground.

Governance focus at the ideation stage should be on:

1. Roles, expectations, and contribution of partners:
   The monetary or intellectual contributions of partners at this stage should be specified at this stage. And this contribution should be commensurate to the needs of the company at this stage.
   
   
2. Definition of equity interests:
   At this stage, good governance practice would be to establish in advance the requirements or conditions to be met by each partner to receive his equity interest. This is important from the beginning as certain partners may feel they have contributed more to the company than others.
3. Establishing rules for joining and withdrawal from the company:
   It is important to gather individuals dedicated and in alignment with the goals of the company.
4. Ownership of the company’s intellectual property:
   At the ideation stage, the company should focus on establishing that all products created by the partners belong to the company. Also, the duty of confidentiality among partners should be established, to avoid misuse of trade secrets.

2. The Early Stage:

The early stage also referred to as the ‘validation stage’, indicates the beginning of a phase in which the idea is left to evolve, until it becomes a product or service in the market.⁹ In this stage, the startup’s product i.e., the Minimum Viable Product (MVP)¹⁰, market and business model are undergoing testing and experimentation of propositions made during the ideation stage.

Furthermore, at this stage the company is formalized, already has a team, and can receive the first round of investments.

Governance focus at the early stage should be on:

1. 1. Company set-up and organizing rules regarding the rights and duties of the partners
   2. Organizing practices regarding potential key employees
   3. Relationship with customers and strategic partners
   4. New Partners and Investors: As stated earlier, at this stage the company can receive its first round of investments. It is pertinent that founders map out how these new partners and investors would come into the company. Usually, investors require an equity stake in the company and where proper care, attention and structure are not put in place, founders risk losing most of their interest just to accommodate a new round of investors. It is advised that the negotiation be conducted carefully. As the founders need to take into account that this situation will repeat itself in each round of investment. If, for every fundraising, founders extend new rights to investors in the current round and those from previous rounds, they will end up giving up some of their own rights or equity interests on a continuous and cumulative basis
   5. Means of resolving disputes: At this stage, it is important that the startup decides on the dispute resolution mechanism to employ in the event of a conflict. Where the startup decides to opt for arbitration or mediation, this must be expressly provided for in the articles of association and/or the partnership  agreement.
   6. Intellectual Property Protection: At this stage, ensuring confidentiality and protection of trade secrets is of utmost importance. The startup is to focus on registration of intellectual property, and to ensure ownership of brand names, domains, software, patents, and trademarks to protect the company’s value.