Efficient decision-making is key to the functioning of every company from startups to multinational conglomerates. However, many startups fail to make a binding decision on how its decision-making will take place. If you are planning to grow and scale your startup you must ensure that you have agreed with your co-founders on your how-to-guide for decision-making.
EYIF looks at the considerations every startup must have made by the time they embark on their journey of growth to ensure a smooth decision-making process for the future.
A Lesson from the Past on the Need to Look to the Future
Before looking at the decisions that need to be taken, a British court judgement from nearly a century ago illustrates the hazards of not defining your internal procedures — Re Yenidje Tobacco Co. Here, the relationship between the two partners of a highly profitable company had completely broken down to the point where they would no longer even speak. Prior to the breakdown of this relationship, they had made no agreement on how they would deal with the disintegration of communication, should it arise. As a result, when it did arise, the only solution was to dissolve the company.
When you begin your journey as a startup, this situation is unimaginable, as it probably was in the case of Yenidje Tobacco. Nevertheless, you must address it before the unimaginable becomes a reality and all the progress you have made with your startup is wasted! As Raad Ahmed, Founder and CEO of LawTrades, summarises: “When you’re starting a company, everything looks rosy: You see only success on the horizon, and you and your business partners will be happy together forever. Needless to say, this may not always be the case. As unpleasant as it may seem, you absolutely must have a written agreement with your co-founders that covers every foreseeable negative outcome”.
Key Decisions to Take Before Scaling
Two central tenets of any company which absolutely must be considered before any discussions on scaling-up or growth hacking take place are the concepts of ‘ownership’ and ‘control’. If decisions are not taken early on regarding these broad concepts, it is likely that your startup is already heading towards the rocks.
In the early phases ownership and control are normally exercised by the same group, but this does not make the decisions any less important. The following pointers may seem obvious but you would be surprised how many startups don’t make these decisions early on. This is the reason why Richard Harroch, writing for Forbes, listed “not making the deal clear with co-founders” as his top legal mistake made by startups.
The foundation of ownership for many startups is shares. But it is not as simple as you simply saying to your partner, “we are going to split the shares 50:50”. Much more needs to be addressed and here are just a few of the things you should consider:
- AGMs and Powers of Decision-Making: It is important that you hold annual general meetings where all (or at least most) of your shareholders are present. How will these be conducted? And what is the power of the shareholders at these general meetings? Furthermore, how you will appoint, remunerate and remove directors of your startup?
- Sale of Shares: What happens if one of the partners wants to sell some or all of their shares to a third party? What is the procedure for this? Consider whether existing shareholders will always have the first right to purchase the shares for sale. You must make a decision as to how shareholders will opt-out of the company in the future.
- Dividends: Assuming you plan to make a profit, you need to consider how you will distribute these profits to the shareholders. Who has the authority to do this and in what circumstances should you begin to consider distributing profits?
Control, as distinct from ownership, refers more to the day-to-day running of your startup. Basically, how are decisions taken and who has the power to make decisions? A report commissioned in 1992, outlined four concepts embodied in control which you should consider in relation to your startup:
- Strategy Formulation: How will decisions be taken on strategy, and who will make these decisions? Will you opt for unanimous agreement of the board, two-thirds majority or a simple majority?
- Policy-Making: Who will be responsible for the implementation of policy? Take the decision early on with regard to expertise. It may sound obvious, but if you have an accounting professional on your team, explicitly state that (s)he will be responsible for the balancing the books to avoid disputes later on.
- Supervision: Who is providing oversight of the team’s activities? It is important that there are clear lines of authority. Decide who is overseeing each area and stick to these boundaries. It can be as confusing for management and staff if nobody knows who is in control of each business activity.
- Accountability: Although in the early-phases of your startup shareholders and management are the same people, this may not always be the case. Think about how your management team will communicate information related to the aforementioned concept to your shareholders in the future.
These are just some of the things you need to think about before you start to consider scaling up. So, there is a great deal to think about for your startup and some complex issues but don’t think that you are alone in figuring out these questions. Check out the model articles of association from your Member State. Here are a few examples relevant to the UK, Germany and Spain.