Building a foundation of trust, the board’s fiduciary responsibility, and other top takeaways on navigating startup governance

Governance is one thing startups must get right from the beginning while all else such as product-market fit, strategy, or even the core business itself can change and pivot over time. 

Misgovernance can crumble companies from heights of success while consistently good governance practice has helped others grow steadily. At LetsIgnite 2023, we delve into the many facets of startup governance. 

Catch Kanika Agarrwal, Partner, IndiaQuotient; Neha Singh, Co-founder and CEO, Tracxn; Vivek Ramabhadran, Founder and CEO, Aulerth, in a conversation with Abhishek Goenka, Partner, Aeka Advisors, at LetsIgnite 2023, India's largest conclave for startup investors.

‍Here are the key takeaways. 

Governance goes beyond clean financials 

Neha emphasises that governance is more than just getting your audit in process and maintaining a clean financial. The entrepreneur believes consistency in what startups report to investors and stakeholders, whether it is user growth, ESP growth or any other metric. One cannot be selectively cherry picking what you want to report. 

Informing them of major changes within the organization should also be a basic practice. “If something is not going right, then at least your key stakeholders must be aware of that so nothing comes as a surprise. That's another example of good governance,” she said, adding that good governance extends to just having good processes internally. 

The bar for governance is always absolute

Governance takes different shape and form as startups grow from a tight knit unit of just a handful of people to a large team. Kanika says that the bar is always absolute because startups must retain a high level of governance even as the touchpoints increase as startups grow. 

It is also important to clearly set out the core principles of the company, says Neha. As the team grows with multiple levels of reporting, it will help ensure that the culture actually translates across the organization. 

More precisely, for early-stage founders, Kanika suggests ensuring founders are not taking secondaries too early or they're not asking for extra ESOPs at certain times as well as the number and rate of angel investments and the related party transactions. 

Similarly, for investors, one can check for competing investments in their portfolio. At the end of the day, the interests of the company should come first and before the interests of the individual, the fund, and the founder.

Build a foundation of trust but move quickly

Vivek highlights that while early-stage startups are known for moving at speed and being agile, it is also important to build a good foundation of trust to lay the groundwork for good governance. 

Drawing from his past experience leading Swarovski India and South Asia, he says that the function of governance in corporates and startups are completely different as startups are building a culture from the ground up and dealing with investors. 

“There's so much ambiguity and uncertainty you don't know if a decision is going to even matter in the long run. Ultimately, if the intent is of transparency and to build trust, then fundamentally you can manage it as far as early-stage startups are concerned,” he says. 

This is why the founder becomes the key factor of investing in the early stage because the only mechanism of trust with the other stakeholders is what the founder says. 

Governance is the decision-making process 

Vivek believes much of good governance lies in the company’s decision-making processes. The high impact decisions for any organization or startup are the people in the team, financing which includes picking the right investors, strategy for the product and brand, and then operations. 

He believes that good governance practice allows you to involve all the stakeholders in a positive manner and with good intent. 

The board has a fiduciary responsibility 

Where does the board stand when the startup is up in flames due to malpractices in governance. While Neha believes that the primary responsibility falls on the executive leaders of the company and the board can be a good checker at best. 

However, Kanika emphasizes that it is the board’s job to know. If the right metrics and checks and balances are not put in place, it is as much the fault of the board as it is the company's. 

“It is not your money. You raise this money from LPs who are investing through you in this company. So there’s already a fiduciary responsibility to somebody else and you can't be asleep at the wheel,” she adds. Startups should also make sure that the person you are adding on your board brings a legitimate value to the company. 

Good practices must be established on day one even if startups may not hold formal board meetings in the early stage. There must be clarity on how you design MIS, what you consider revenue, and the intellectually honest metrics you want to track.

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