TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Navigating the start-up winter: How corporate governance can save the day
Founders of start-ups need to strike a balance in establishing good corporate governance but still allowing for agility and swift responses in a challenging environment.
Change Size
Tech start-up apps appear on a screen on Aug 2, 2021. (JP/Norman Harsono)
T
he start-up ecosystem faced significant challenges throughout 2022, with an economic “winter” hitting the industry amid rising geopolitical tensions and fears of global economic downturn.
Fundraising was reported by several analysts to be significantly lower in 2022 than in the previous year. The situation is no different within the Indonesian start-up ecosystem, where several outlets have reported much lower levels of funds raised over the last two years.
In these challenging times, start-ups need to find a way to keep the ball rolling in keeping their businesses afloat while also showing potential investors that they are worthy of investment. Pandu Sjahrir discussed in a recent op-ed in The Jakarta Post how good corporate governance could provide a positive and meaningful contribution to making sure that business ran smoothly and effectively for start-up companies. He said companies should set up good corporate governance practices covering transparency of financial statements and the implementation of environmental, social and governance (ESG) principles.
Many critics of corporate governance warn that a strict set of governance rules could hinder fast growth and agile decision-making. This is due to the common understanding that such governance is strict and inflexible in nature. However, this perception should not cloud the clear benefit of corporate governance in ensuring a strong fundamental business process within the company, including in a start-up company. Founders of such a start-up need to strike a balance in establishing good corporate governance but still allow for agility and swift response in a challenging environment.
However, as the company grows over time, maintaining good corporate governance – let alone establishing such a system if it is not done yet – may become a difficulty on its own. As time grows, it is not just a matter of whether a legal agreement is enacted to maintain such governance, but also the role of the founders and management in creating such norms within the company, with support from their investors and board members. It is then to be understood that such governance should not only be a legalistic text but should also be a culture that lives within the company that significantly influences the actions and judgements of the founders and management.
In its early stages, a start-up usually consists only of its founders as the company’s shareholders. In some cases, angel investors become shareholders as well after injecting their funds into the company. However, the percentage of their shares does not overtake those of the founders. With a relatively small pack of shareholders, founders can establish a simplified governance system as they do not need to worry much about pressure from their investors.
However, such simplified governance may need to be revisited as a start-up grows, particularly after a series of fundraising rounds from multiple investors. The number of shares issued will be increased, diluting the founders’ control over the company. New classes of shares (commonly referred to as “preferred shares”) will be introduced to the investors, providing them with rights that are unique to them only (for example, rights to appoint board members). In a start-up, major investors usually take a board membership position, which in some countries can be in a single board (consisting of solely a board of directors, such as in Singapore, the United States and other common law countries) or a dual board (consisting of a board of directors and board of commissioners, such as in Indonesia, the Netherlands, and other civil law countries).
