Governance

🔖 Contents on this page:

• Governance Bodies in early-stage startups
• Advisory Board / Board of Directors
• Liability of Advisory Board Members
• 📚 Useful Resources

Since 2000, b2venture and the b2venture angel investor community have supported startups across all stages of the startup lifecycle, from pre-seed to IPO. While governance in the earliest stages of a company’s life is very informal, companies on their way toward maturity and the public markets need formalized structures in place - such as committees and policies that ensure all of the company’s shareholders are informed and aligned. Each phase of development carries with it a variety of challenges that require evolution and transformation - not only with regard to operations and management but also at the board level.

What does the ideal evolution of startup governance look like? And how can younger companies build governance structures that are dynamic and adaptive to their changing needs? The fastest-growing startups need boards that grow and govern ahead of the curve.

That is why we developed these startup governance resources for gathering, sharing, and implementing best practices for startup governance and board operations.

Governance Bodies in early-stage startups

A typical German early-stage startup has two legally required governance bodies: (1) the managing directors and (2) the Shareholders’ meeting. As far as the law is concerned, the advisory board (known as "Beirat") is not a requirement during the initial stages, but it typically gets set up when the first round of institutional funding comes in.

Advisory Board / Board of Directors

Many startups establish an Advisory Board, which serves as an intermediary between Managing Directors and Shareholders, typically required for GmbHs with 500 to 2,000 employees.

We believe the Advisory Board should be designed as a body with a strong and independent management team in the lead that aligns the interests of all other stakeholders and investors. It acts as both an advisory and oversight body, granting specific powers that can replace some Shareholders' Meeting responsibilities. Legally binding provisions for the Advisory Board must be in the company's articles.

The Advisory Board's typical actions and measures include:

• Supervising and advising the company's management
• Helping advise and prepare capital measures such as Mergers and Acquisitions, capital increases, and a public listing
• Managing directors' appointments, and decisions related to their compensation
• Approving specific consent measures, such as the annual business plan, hiring employees above a certain salary threshold, and establishing or closing subsidiaries
• Issuing of VSOP or other employee participation rights

Board interactions are often high stakes and can be complex. It's therefore important to manage boards and board processes properly and systematically.

Helpful resources to set up your board:

Liability of Advisory Board Members

The Advisory Board's liability is contingent on its rights and powers. Liability becomes crucial when board approval is required for actions and measures; in such cases, a Board Member may be held accountable for detrimental decisions, even with sufficient information and expertise. This shift of responsibility from management and shareholders to the Board underscores the importance of liability.

For Advisory Boards primarily serving a consultative function, liability is less significant. Prospective board members are advised to acquaint themselves with the articles and related responsibilities. Typical liability risks encompass inadequate management supervision, failure to prevent management fraud, neglecting to pursue damage claims against third parties or management, and the unauthorized disclosure of confidential information.

Personal liability is typically limited within the company's Articles or Shareholder Agreements, which is particularly relevant for optional Advisory Boards. Personal liability protection can also be achieved through D&O Insurance, a notable consideration for mandatory Advisory Boards.

📚 Useful Resources

Startup Boards

Startups that are backed by professional financial investors almost always have a Board of Directors that consists of some set of founders, investors and sometimes independent directors. While the management of a startup company deals with the day-to-day decision-making within the company (strategy, budgets, goals, tasks, compensation) ultimately the Board of Directors has the legal governing responsibilities for these things.

bothsidesofthetable.com

The SaaS Board Meeting

Soon after a startup raises its Series A round, it begins to have board meetings for the first time, and I'm often asked what the agenda and format should be. This post describes my recommendations for SaaS board meetings. To make things easier, you can use this board deck template that my team and I developed with Quaestor.

sacks.substack.com

Thoughts? Feedback? Something missing? Please let us know: johanna.junkermann@b2venture.vc