Governance
Following on from that OpenAI debacle, effective governance and the impact it can have on company valuation is solidly in the limelight. Two General Counsel -- Sally Roberts at Accel and Stephanie Dominy at Staffbase -- discussed the basic issues that form governance, how to manage relationships between senior scale-up GCs and VC GCs, and the question of board composition as a company grows.
How to get started: knowing what governance is and making friends with external counsel
Many GCs will not come from a corporate law background, and they may not be up to speed with all governance matters. A good place to start is asking oneself: do you know what company governance is? Understanding the key differences between what is needed in a private company versus a public company is also important. Sally added that, for the former, a good place to start might be understanding shareholder agreements and company articles.
Stephanie recommends that new GCs lean on external counsel, who can usually help break down the most basic aspects of a business’ governance, and then create a cheat sheet with the key things to remember, that inevitably will be asked of any GC: Who are the shareholders? What's the size of their stake? Who are the majority investors? Who needs to get approval for what, and what are the thresholds? What are the information rights, what’s the frequency of information rights and what must be included in them?
“You will be asked and you'll be fumbling around in documents. Not being able to access the answers quickly was one of the things that I found was slowing me down,” Stephanie said.
Key partnerships: relationships between fund GCs, portfolio GCs and investors
Stephanie strongly advocates for investment companies and VCs that organise meetings where portfolio GCs can meet each other, as well as their fund counsel and external advisers. “I found that really useful because I had a relationship that was starting to build with the investor, through the GC, and I could start building relationships with the other companies in the portfolio that had, obviously, things in common with me”.
Whenever a company makes an equal hire, try to meet that person, Sally says. Communication is key and shared knowledge can go a long way further down the line.
It’s also crucially important for GCs to have good relationships with their investors, Stephanie said.
Sally agreed, and said that this can be particularly true when companies might be thinking of changing their structure or where they’re domiciled because this can lead to a new governance system that all parties need to be appraised of: the company GC should check with their investors about share agreements, veto rights, board structures and consent rights before making any changes.
“I'm trying to work on making sure that [investors] know [that] we can have this open channel of communication at all times”.
Board seats and compositions
All companies need to decide -- and educate their fellow investors, board members, preferred shareholders, directors and others -- where responsibilities and vetoes lie for each group of executives. As companies evolve through funding rounds, so will their boards, whose expertise will need to change as a company matures. Governance is something that comes up as a company gathers pace and importance and the composition of a board is a topic that can get emotional for all sides.
“Founders absolutely want to retain control of the board: the company is their baby. But investors coming in also want seats as lead investors come in and the board grows with more seats, usually with a lead investor on each round, these boards can just grow to become monsters. It’s sort of our job to try to keep that in check,” Sally says.
Board composition can lead to difficult conversations that must be had because it might not be appropriate for certain people to remain on the board -- it must have people that will add value to a company as it gears up for an IPO, for example, or that fit into a certain skillset -- a financial operator or a security expert, as other examples.
“You have got to have conversations with founders, whether they’re the people to lead the company into its next stage, and founders need to be prepared to have difficult conversations with their investors. And investors also have to be prepared to step back,” Sally says.