While a lot has gone wrong in the startup world, general suggestions around corporate governance have been about compliance and audits, a POSH (protection of women from sexual harassment at workplace) policy or a whistleblower policy, things which are important but are post facto. A company going to IPO (initial public offer) needs a large set-up including a chief financial officer (CFO), a very diligent board and various internal and external checkpoints. But many of these problems are seeded much earlier. Very well-meaning founders and early investors get corrupted with perverse incentives and then the problems we see are just a manifestation. If you have a dumb incentive system, you get dumb outcomes, said Charlie Munger. The whole banking crisis which happened in spite of a lot of governance and controls was due to the flawed incentives of the bankers. Early investors have a significant impact on shaping the initial culture, founder mindset and subsequent governance of these young firms. And in recent years, against traditional wisdom, investors have allowed founders to get used to really perverse incentives in order to win deals or to improve their founder ‘friendliness’. As an example, if a founder takes tonnes of money in a two-year-old high-burn company, just because it is able to raise a lot of money, then raising money and taking some of it out becomes the main incentive. And then there is good reason to fudge numbers because it enables more fundraising. In the short run, till the problems come out in the open, this also makes investors look good.
We need a governance charter that aligns the underlying incentives of both founders and investors to the success of the startup. Therefore, we propose integrating a founder cum investor-centric governance model before a formal governance and compliance structure is set up. Let’s not forget that incentives work in both directions: while founders have faced public scrutiny for recent governance failures, we believe that investors also bear responsibility for sowing the seeds of bad behaviour.
READ MORE https://www.moneycontrol.com/news/opinion/time-to-clean-up-the-startup-ecosystem-and-put-a-governance-charter-in-place-10869651.html
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