Why Governance Matters for Your Startup

Abstract

Founders, investors, board members, employees and all participants in venture-backed companies should understand the basic principles of corporate governance. Different rules and practices will apply depending on the type of organization, ownership structure, stage of the company, investor base, size, geography or industry. In this article, we only focus on corporate governance for U.S. private venture-backed corporations.

Specifically, we focus on the basic corporate governance framework for venture-backed companies and we address three governance issues: 1) the late stage “unicorn” phenomenon and its governance consequences, 2) conflicts of interests and “dual fiduciary conflicts”, and 3) multi-class share structures. As companies are “staying private for longer”, there should be an increased focus on governance of private venture-backed companies, particularly after a string of leading "unicorns" such as Uber, Theranos, Zenefits and SoFi, engaged in illegal and/or bad behavior that led to serious failures of culture, ethics and compliance.

There has also been an uptick in private company lawsuits, particularly in Delaware, targeting poor governance practices in some venture-backed companies. “Growth at all costs” should no longer be the sole driving mantra of Silicon Valley and the technology startup industry. Boards of directors of venture-backed companies should take notice.

Keywords: Corporate Governance, Venture Capital, Entrepreneurship, Growth, Startups, Corporations, Dual-Class, Corporate Control, Unicorns, Conflicts of Interests, Dual Fiduciary Conflicts

JEL Classification: G24, G30, G32