Building a startup involves intricate decision-making and considerations. Initially, the founders serve as directors post-incorporation, but as the startup progresses through equity funding cycles, the board membership naturally expands. Lead investors in these rounds often request a board seat to oversee matters at the board level.
Discussion about including independent directors on the board is not widespread. Some believe independent directors are only necessary for public-listed companies or entities with a large shareholder base, as regulations mandate stronger corporate governance. However, the need for independent directors at the early stage of startups is often queried due to their private nature, requiring less governance.
Serving as an independent director for a tech startup during its Series A fundraising round enabled me to utilize my VC expertise and governance experience acquired from various board positions.
This experience has proven beneficial for both the startup and myself. Consequently, I advocate for sharing the advantages of having independent directors for startups.
What constitutes an independent director
According to the Singapore Institute of Directors (SID), an independent director is one who is free from any conflicts of interest with the company, its related entities, shareholders, or officers. This person provides unbiased judgement in the company’s best interest.
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While the definition may seem complex, it essentially means a person without conflicts of interest with the company. SID also stipulates guidelines like a tenure not exceeding three years for an independent director.
The case for independent directors
Having independent directors can bring several benefits to an early-stage startup. Here are some key advantages:
Objective decision-making
Free from any ownership in the company, these directors offer an unbiased perspective on company matters. This can be particularly valuable for startups, where founders may be driven by enthusiasm and a willingness to take risks in order to grow the company.
For example, a founder might be eager to use company resources to develop a new product, but this decision could be based more on euphoria than sound business assessment. By having an independent voice weigh in on the situation and ask probing questions, the company can make more informed decisions. In some cases, this might even mean deciding not to pursue a particular course of action in order to protect the company’s interests. With an independent director on board, the decision to do so carries greater weight and authority.
Expertise and experience
Independent directors bring a wealth of knowledge, experience, and expertise to the table. Their insights, guidance, and mentorship can prove valuable to the management team. In the case of investment deals, particularly for deep tech companies, it is common to see a tech or science expert serving as an independent director on the board, providing credibility to the technology IP being created.
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Successful operators and entrepreneurs often serve as independent directors, lending their reputation and networks to the company. This can be crucial in attracting stakeholders, building relationships, and securing good partners and potential clients for young startups.
Independent directors on the board are vital in advising the management team on business operations and strategies to avoid common startup failures due to inadequate product-market fit, poor marketing, or being outcompeted.
Corporate governance and compliance
Independent directors play a critical role in ensuring good corporate governance practices for startups. They provide oversight, accountability, and assist in maintaining robust governance frameworks, internal controls, and ethical standards.
While not essential for startups until Series A, having an independent director can establish good governance practices early on, enhancing the startup’s reputation, mitigating risks, and fostering long-term sustainability.
Conflict resolution
Independent directors can act as mediators to resolve conflicts within startups effectively, preventing escalations that could harm the company’s interests.
When to include an independent director
Selecting the right independent director for a startup board is a complex process that requires careful consideration based on the industry, startup’s needs, stage of development, and the director’s expertise.
Some candidates may be better suited as technical advisors or mentors if they lack governance experience or understanding of limitations.
In conclusion, startup founders should carefully select independent directors to support their growth to the next level.
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This article first appeared on TRIVE’s blog.
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The post Unbiased guidance, enhanced governance: The power of independent directors for startups appeared first on e27.