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Start-ups

A guide to developing start-ups was expertly written by Bryce C. Tingle in his book “Start-up and Growth Companies in Canada”. With permission, that book has been quoted below.

The first point to mention is that start-ups will typically need to demonstrate adequate corporate governance in order to attract funding, which is exactly what the services offered by Sopow Law and Consulting are designed to achieve.

... more mature companies have already established the board practices, routines and composition that earlier-stage companies must struggle to create. Even a casual review of venture capital terms sheets will reveal that a significant percentage of the provisions relate to establishing good corporate governance; once the investment is made, corporate governance practices and board composition are among the chief concerns of the venture capitalist between financing rounds.

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Regardless of how corporate governance arises as an issue, it should be a concern the moment the company begins spending money that does not belong to the founders. Establishing regular, formal corporate governance practices is an important part of founder-proofing a company. Founder proofing is even in the interests of the founders, as statistics suggest that at least one of them will likely depart from the project before the exit transaction. The reality is, however, that few entrepreneurs actually know how corporate governance is conducted or what procedures reflect best practices.
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Expertise

The second point is that, for start-ups, an Independent Director is the ideal way to address a lack of expertise in corporate governance.

If possible, the directors should appoint a lead director who is independent of management. Ideally this director should be made the chairman of the board, but he or she does not have to be. This director should receive additional compensation for the time that will be required to assist management in setting board agendas and putting together the reports and other information the directors require to make intelligent decisions. The lead director will also be responsible for ensuring the other directors canvass all the issues they must discuss, including regularly reviewing the performance of management. Finally, the lead director will be a private conduit for board communication with the CEO and vice versa. There is some feedback that it is easier to give and receive if it is not provided in a meeting in front of a large audience. Most startup executives have not, themselves, been directors, and so having someone lead the board with this experience is essential.
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Networks

The final point is that Independent Directors not only offer corporate governance expertise, but also substantial experience in business, and connections to useful professional networks.

Directors frequently have more business experience than the management of a startup. (Indeed, inviting experts onto the board is a common way to get them engaged in the business). They also often have broad social and business networks that can be deployed to assist the business to find talent and partners. In fact, the research on director “busyness” (directors who sit on multiple boards) suggests that, contrary to the assumptions of corporate governance theorists, busy directors add considerable value to companies through their larger networks. Startup companies, particularly, seem to benefit from these well-connected directors.