Why is governance essential for successfully scaling startups?

The management team relationships, and roles of the CEO/founder(s), shareholders, investors, and board of directors rapidly change in a successfully scaling startup. Who makes what decisions is rapidly changing.  A lack of clarity and common understanding of who makes what decisions and is accountable for what results can cause confusion, and slow down or prevent scaling.

The purpose of this article (supported by a one-page slide) is to provide a framework, process, and facts to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards. There is no one-size-fits-all answer.  The approach and action plan will be unique to the specific situation of each corporation.

The CEO/Founder(s) may be in the most complex situation: shareholder(s) without investing capital, on the board of directors, and part of management.

Investors need to be clear on governance, their role and accountability before they invest.  Some decisions are reserved for the shareholders and outlined in the shareholders agreement.  The founder(s) may have special voting rights.  Some decisions are made by the board of directors. Therefore, the decisions made by the board, board composition, director nomination process, and board voting need to be clear.  The CEO can make all decisions, subject to those reserved for shareholders and the board.  The CEO must also manage the communications and ensure there is broad awareness of planned decisions and results.

A successfully scaling startup goes through many governance stages, based on the size of the company.

Less that 10 employees.  This is a shared experience with everyone in the team involved with everything.  The CEO/founder is involved in most decisions.  The board is involved in detail and driving after-the-fact documentation of policies.

More than 10 employees.  The team is starting to have clear decision-making roles and accountabilities for individuals.  Everyone is not involved in everything.  The CEO/founder is no longer involved in most decisions.

The board continues to be is involved in detail and driving after-the-fact documentation of policies.

More than 50 employees.  There needs to be a layer of management. The board continues to be is involved in detail and driving after-the-fact documentation of policies.

More than 100 employees.  The CEO is architecting the business.  What got the company to this point is not what will get it to the future.  The board role changes in alignment with the CEO’s changing role. The board is no longer involved in the detail. Staff is driving documentation of policies.  Board talent requirements change but director changes may be constrained by the shareholders agreement.

More than 200 employees.  There is more than one level of management. The CEO is focused on talent (acquisition, retention, development, and allocation) and organization design.  The CEO proactively over-communicates vision and values, while also sharing employee and customer experiences.

Conclusion

The management team relationships, and roles of the CEO/founder(s), shareholders, investors, and board of directors rapidly change in a successfully scaling startup. Who makes what decisions is rapidly changing.  A lack of clarity and common understanding of who makes what decisions and is accountable for what results can cause confusion, and slow down or prevent scaling.

Your next steps

To enable discussion with your board of directors, CEO, and advisory board download the following one-page slide:

Why is governance essential for successfully scaling startups?

Your action plan:

  • Select investors with the talent to enable scaling.
  • Select a director or advisory board member who can coach governance.
  • The CEO/founder needs to regularly communicate who is making what decisions, based on the vision and values.
  • The CEO/founder must manage the stress and resistance which arise because: some people will no longer be involved in certain decisions; people will be making decisions they have never made before.

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