In the wake of Sam Altman’s abrupt departure from the helm of ChatGPT, a colossal $86 billion-dollar artificial intelligence behemoth, investor-backed founders across the world have found themselves terribly shaken. The unsettling reality of a founder being ousted by their own board has never been portrayed in a more unfeeling manner. Questions echo: Can investors wield such omnipotent influence that the essence of a startup, nurtured with sweat and sacrifice, dissipates at their whims? This isn’t an isolated incident but part of a recurring narrative, a stark reminder that the boardroom battleground is not for the faint of heart.
For African founders attuned to the heartbeat of the continent’s startup ecosystem, Altman’s saga might seem an anomaly garnering undue attention. After all, haven’t founders in Egypt, like those at Capiter, faced the guillotine recently? Isn’t Nigeria’s startup landscape a theatre of recurrent sackings, reshufflings, and restorations, exemplified by the tumultuous journeys of Risevest and 54Gene? Hasn’t Ghana’s Dash seen founders prosecuted, further muddying the waters of entrepreneurial uncertainty?
Yet, amidst this turbulence, a profound question lingers: Who is next? The attention on Altman’s saga serves as a compelling call for introspection, urging African founders to scrutinize the power dynamics within their own startup boardrooms. It’s a moment to pause, reflect, and decipher the implications of such upheavals.
In the African context, the urgency to dissect the power plays on the board might be downplayed. The prevailing survival mode, coupled with the less-sophisticated deal landscape dominated by pre-seed and seed-stage funding, may divert attention away from the nuances of board dynamics. However, savvy founders, those playing the long game, recognize that the road to entrepreneurial success is paved with a deep understanding of corporate governance.
As a seasoned corporate governance expert, having navigated the intricacies of numerous board and founder relationships, I seize this opportunity to sound the alarm. The questions that demand answers are not just about the when and why of constituting a board. They delve into the intricate details of power structures embedded in co-founder agreements, capitalization tables, and the strategic use of instruments like Simple Agreements for Future Equity and convertible notes. They encompass the delicate dance around intellectual property rights, Non-Disclosure Agreements, and other legal nuances, particularly those relating to stock options.
Decoding the Board’s Role in Your Startup’s Journey
In the labyrinth of a startup’s evolution, the question of when to establish a board of directors emerges as a pivotal consideration. While the embryonic stages — pre-seed, seed, ideation, and validation — may not mandate a formal board, astute founders recognize the importance of laying a robust foundation. Missteps in early structural decisions can inadvertently diminish founder authority when the critical juncture for constituting a board arrives.
Structural pillars such as co-founder agreements, capitalization tables, Simple Agreements for Future Equity, convertible notes, vesting schedules, and intellectual property ownership demand meticulous attention. Legal nuances, including advisor and consultant rights and stock option plans, must not be underestimated.
Setting the Stage: Establishing a Board for Your Startup’s Success
As a startup burgeons into the growth stage, especially during late-stage fundraising rounds, external investors often wield influence in board appointments. The board, a linchpin in steering the company, shoulders responsibilities ranging from senior management oversight to strategic direction setting. Founders, therefore, need a sagacious approach to maintain influence over board composition.
A cardinal rule in this chess game is filtering investors judiciously. The character of an investor can reverberate on the board, making investor selection a strategic lever for founders.
Sustaining Harmony: Strategies for Founder-Board Relationships
While trust is fundamental in founder-investor-board relationships, time-tested practices exist to fortify these connections. A few critical guidelines include:
- Diverse Board Composition: Strive for a balanced mix of Executive, Non-Executive, and Independent Non-Executive members. A majority of Non-Executive Directors, preferably independent, fosters impartiality, mitigates conflicts, and checks excessive board powers.
- Strategic appointment of independent directors: These seasoned individuals play a pivotal role in charting clear directions for the company, drawing upon their extensive experience to infuse the boardroom with fresh and innovative ideas. Independent directors who possess industry-specific expertise, as their insights are invaluable for navigating the intricacies of your business landscape. As a guiding principle, it is advisable to ensure that a majority of the Non-Executive directors are independent, reinforcing a diverse and objective perspective within the board.
- Regular replacements and changes: This proactive approach to board evolution serves as a catalyst for injecting new energy and diverse viewpoints into the decision-making process. Board members, like any other aspect of a startup, should not become immune to change. A three-year cycle for board members allows for a healthy rotation, preventing the entrenchment of specific ideologies and fostering an environment receptive to evolving market trends.
- Elimination of Bad Faith among Board Members: A strict avoidance of board positions in competing companies is paramount to uphold confidentiality and prevent conflicts. Therefore, prospective directors should disclose existing board memberships, minimizing suspicions and conflicts of interest.
- Separation of Board Powers: A sound board should have the roles of Chairman and Managing Director/CEO decoupled to forestall concentrated authority. For example, this prevents the chairman from assuming the CEO role if the latter is displaced. There should be a standing policy of the company’s board on this.
- Strategic Succession Planning: Early succession planning is not merely a precautionary measure; it serves as a cornerstone in concretizing the mandate and obligations of board members. By outlining a well-defined roadmap for leadership transitions, these plans ensure that the board’s functions remain uninterrupted, maintaining stability and strategic continuity. Succession plans offer a proactive approach to talent development within the board, identifying and nurturing potential leaders from within the existing ranks. This foresight not only mitigates the risks associated with sudden leadership changes but also facilitates a smooth transition by preparing successors well in advance.
- Conflict of Interest Vigilance: Timely disclosure of any potential conflicts is imperative, subject to the company’s Conflict of Interest Policy. Accordingly, CEOs and other directors must declare conflicts of interest upon appointment and annually thereafter.
- Independence: Ideally, MD/CEO and Executive Directors should abstain from remuneration, audit, and nomination and governance committees to uphold impartiality.
- Administrative Rigor: A sound board should appoint a company secretary, hold quarterly board meetings, establish board committees, and define directors’ terms of engagement for clarity and focus.
- External Evaluation: External Evaluation: Conducted periodically, typically on an annual basis, independent board effectiveness evaluations by external consultants serve as a vital mechanism to assess the board’s competence, diversity, and alignment with strategic goals. These evaluations are a valuable tool for identifying underperforming board members or those in need of realignment with organizational objectives.
- Transparency and Governance Policies: The effectiveness of a board hinges on robust policies that guide its actions and those of its members, eliminating unwarranted surprises. Therefore, it is essential for the board to establish well-defined policies right from the outset. These policies should cover critical areas such as ownership structure, related-party transactions, anti-money laundering, terrorism financing, donations, and fraud detection, effectively mitigating the risk of board overreach. To ensure seamless implementation, directors should undergo comprehensive training on these policies before taking their positions on the board. This proactive approach not only cultivates a culture of transparency and compliance but also equips board members with the knowledge needed to make informed decisions in alignment with the established policies.
As African founders navigate the intricate tapestry of startup governance, embracing these battle-tested tactics ensures not only a smooth ride but also fortifies the foundation for enduring success. In the volatile realm of entrepreneurship, where boardrooms mirror battlefields, strategic governance becomes the armor that safeguards the visionaries forging ahead. It’s not just about surviving the boardroom battlefield; it’s about emerging victorious, with a legacy that withstands the test of time. Founders who navigate these waters adeptly lay the groundwork for sustained success and resilience.
If you’re interested in a comprehensive assessment of your board’s performance through a board effectiveness evaluation, kindly reach out to us via email at info@progressionlawfirm.com.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer, who has several years of experience working in Africa’s burgeoning tech startup industry. He has closed multi-million dollar deals bordering on venture capital, private equity, intellectual property (trademark, patent or design, etc.), mergers and acquisitions, in countries such as in the Delaware, New York, UK, Singapore, British Virgin Islands, South Africa, Nigeria etc. He’s also a corporate governance and cross-border data privacy and tax expert.
As an award-winning writer and researcher, he is passionate about telling the African startup story, and is one of the continent’s pioneers in this regard
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