Building a foundation for success: Corporate governance in early-stage ventures

Co-authored with Bridgewest Ventures New Zealand & Orchestra

Our friends at Bridgewest Ventures New Zealand (BVNZ) work with early-stage ventures here in New Zealand to help founders turn deep tech ideas into successful New Zealand businesses. Working across different businesses, they understand how founders in this space work, and they’ve shared their approach and tips for setting up effective governance for early-stage ventures.

We approached Kate de Ridder, Senior Portfolio Investment Manager at BVNZ, and asked her a few questions about how they approach corporate governance when working with early-stage ventures here in New Zealand. We wanted to share a big thanks to Kate for taking the time to share her wisdom with our community.

Tell us about Bridgewest Ventures New Zealand.

Bridgewest Ventures New Zealand (BVNZ) is a globally connected Technology Incubator that has partnered with eleven early-stage joint ventures since it launched in New Zealand three years ago.

BVNZ is part of the Bridgewest Group, an Investment Firm with $3B under management and headquartered in Miami. Two entrepreneurs founded Bridgewest Group after their first successful exit and have since backed multiple disruptive ventures from pre-seed through to public listing or acquisition, with many notable billion-dollar exits. Bridgewest has invested globally but identified New Zealand as a good place to diversify investment.

BVNZ is an approved partner under Callaghan Innovation's Technology Incubator Programme and supports local ventures to commercialise deep technology on a global scale. They have physical offices in Auckland and Wellington but have invested in ventures nationwide.

BVNZ are focused on the very early stage, which means they partner with founders to understand the vision and disrupt industries to make a profound social, environmental, or economic impact. They do this by leveraging an experienced network of entrepreneurial advisors that have built up over 20+ years of venture creation and growth. Bridgewest has a philosophy of pooling expertise and sharing meaningful connections.

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Please explain a little about corporate governance as it relates to your portfolio companies.

Corporate governance is the system of rules, practices and processes by which a venture is directed and controlled. Early-stage ventures can benefit greatly from implementing a good corporate governance structure early on in their journey.

One of the most commonly overlooked aspects of corporate governance for early-stage ventures is defining clear roles and responsibilities for founders and directors, so we’ll share a bit about how we approach this, as well as the systems and processes, to ensure there is clarity as early-stage ventures grow.

What is the typical governance structure of companies in your portfolios?

Early-stage ventures backed by BVNZ typically have a governance structure with a maximum of four directors, including a mix of founder, investor directors, and at least one independent director who typically serves as the Chairperson. BVNZ aims to set up companies for rapid growth and supports replacing board seats as the business expands and requirements change. Founder and investor director roles are typically unpaid as they represent significant equity holding already. Independent directors and advisors are engaged through a mixture of Company Incentive Scheme and cash payments. Advisors support the founder while being accountable to the board.

The Governance Board creates the strategy, the Advisory Board informs it, and the CEO executes it. The CEO can seek guidance from an advisor and keep the Chairperson informed of progress between board meetings. Directors are responsible for compliance with various laws and hold D&O Liability Insurance, although some risks such as trading while insolvent or violating Health and Safety laws are not insurable. Effective governance is expected to facilitate success and must be reviewed if not achieved.

What are the key legal documents needed when setting up a venture?

For early-stage companies, once a term sheet is signed (it’s non-binding), this initiates the legal process required for the key terms to be translated into legal documents, including:

Subscription agreement:

• An agreement between the company and a private investor to sell a specific number of shares at a specific price.

Shareholders agreement:

• Ensures shareholder rights are protected​
• Provides safeguards for minority positions​
• Allows shareholders to make decisions about what outside parties may become future shareholders.

The constitution*:

• Outlines the rules for how the company will be governed,
• Appointment and removal of directors​,
• The powers and duties of directors,
• How the company can issue shares,​
• Rights attributed to a particular class of share,
• And the procedures for holding meetings and making decisions.

*The constitution is not legally required in NZ with the default position of the Companies Act 1993 (NZ) applied if not.​ Other important company documents that your company must keep accurate records of include financial transactions and liabilities, minutes of board meetings, the official share register and employment agreements.

Having all of this information easily accessible when you’re raising capital is key. It is great when you come to raising capital to have all this information in one place and easily accessible. We keep ours in the Orchestra ‘data room’ and use Orchestra for our Share Registry and ESOP management.

What are the reporting requirements needed to keep ventures compliant?

Your company must file an annual return with the NZ Companies Office (NZCO), which includes details such as the company's address, directors, and shareholders. Again this can be done from a share registry software solution like Orchestra, which automatically syncs with the NZCO.

Why is this important to get right?

When an early-stage venture only has enough capital runway for 18 months to 3 years, the way that they need to operate is very lean. Relying on the collective wisdom and critical thought of the Directors and Advisors with quick, effective decision-making to avoid unnecessary detours is the secret to success. Keeping accurate records and a best practice governance framework helps to make every single dollar go further.

Many of our ventures are working with bleeding-edge technologies in rapidly evolving markets. The majority of early-stage ventures will fail due to a lack of capital, poor leadership and execution. With a well-oiled corporate governance structure, the thousands of critical, make-or-break decisions made each day by the founding team can be navigated more effectively.

Part of our due diligence model is to examine the compliance of a company in terms of their record keeping; we rarely see good corporate compliance in early-stage ventures, but it is our duty to educate founders and ensure that they demonstrate excellence in record keeping before they raise capital in their next round.

What does best practice look like for your early-stage ventures?

Managing corporate governance effectively requires a combination of good processes, communication, and the right tools. Here are some best practices and practical tips for managing company governance:

A reguler cadence of engagement in the form of Board Meetings

During incubation with BVNZ, the board will initially meet with the CEO (or venture lead) weekly for the first two months. Dropping to monthly board meetings for the rest of the incubation period.

Monthly board meetings are important for early-stage companies as the strategy needs constant review as markets rapidly evolve and unforeseen challenges arise. Even though the implementation of the strategy is primarily the responsibility of the company's CEO, the board is expected to be very engaged with the business's vision and even help execute this vision as required (i.e. accompanying the CEO to important meetings or interviewing key hires). While the Chairperson is accountable for ensuring governance requirements are in place, it is delegated down to the CEO / Founder of the company to manage these even beyond Series A, including setting up the meetings.

Properly document key decisions

Founders may overlook the importance of adequately documenting important decisions made by the company, such as board meetings or shareholder resolutions. This could lead to confusion or disputes later on, particularly if there are changes in the company's ownership or leadership.

Keep accurate records

Most specifically, the company's financial transactions and other important documents such as the company's constitution and share register. We utilise Xero as a simple method of ensuring financial records are always up to date, and transactions are reconciled.

Clarifying director responsibilities

Directors have specific legal responsibilities, including a duty of care and a duty to act in the company's best interests. Founders may overlook these responsibilities or assume they can make decisions without consulting other directors or seeking professional advice.

Helping early-stage deep tech companies navigate the business's legal requirements while not drowning the company in overly burdensome compliance activities requires experience and constant critical thought. Also, consider the laws and regulations of the markets you are entering. This is where choosing the right people for the Governance and Advisory boards is important.

Communicate regularly with stakeholders

Regular communication with stakeholders, including directors, shareholders, and advisors, can help ensure that everyone is informed about the company's activities, milestones and goals. This includes providing regular updates on financial performance, strategic plans, and compliance issues. This can easily be managed and tracked in Orchestra, so all communications are in one place.

Use technology to streamline equity, compliance and stakeholder engagement

A secure, cloud-based equity management tool can provide a real-time source of truth for company ownership and help streamline processes such as issuing and managing shares, tracking shareholder votes, and generating compliance reports. Tools like Orchestra.io can help ensure accuracy and transparency in equity management and reduce the risk of errors and disputes.

Continuously review and improve governance practices

Corporate governance is an ongoing process, and it's important to regularly review and evaluate existing policies and procedures to identify areas for improvement. This includes soliciting feedback from stakeholders and incorporating best practices and industry standards.

By following these best practices and using tools like a cloud-based equity management platform, founders can help ensure that their company is meeting its governance requirements, promoting transparency and accountability, and laying a solid foundation for long-term success.

Helpful resources:

• Institute of Directors: Guides and resources
• Book: The Fish Rots From the Head: The Crisis in our Boardrooms: Developing the Crucial Skills of the Competent Director by Bob Garratt.

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