Legal and Regulatory Health Checks Enhance Resiliency

From start up to scale up preparation for a Board of Directors and investors looking “under the hood”??

The month of April is a fine time to do a health check on your startup; kind of like spring cleaning.??

?While privately held companies (like startups), are not bound by the same requirements of a publicly traded company, springtime is a point in the year to take stock of the legal, compliance and regulatory aspects that a well governed startup should have in place reflective of their stage of growth.?

Similar to Proxy season,? a time period between mid-April to mid-June when large publicly traded companies prepare for the annual shareholders meeting in which financial performance is in review and matters presented in the proxy statement are voted upon, why not learn what you can do now so as to be prepared for the rigor of a publicly traded company??

The theme of the month in April at Next Act Advisors is good governance practices that can assist company founders to build resilience and sustainability.? Follow us at Next Act Advisors, for a podcast release of Board Director Lisa Greer Quateman- a prior attorney who she shares her perspective on??

“Enhancing resilience and supporting good governance by tapping legal expertise.”?

Like two sides of a coin, I will share good governance and bad governance examples. Additionally, with hindsight, I will share thoughts on what could have been done to avoid the penalties associated to non-compliance.??

?Finally, good governance is great for shareholders and the effectiveness and resiliency of capital markets.?

From an Angel Capital Association course on Startup Boards,? Good Governance is defined as:?

“ The ability to make informed, fair, transparent and accountable decisions efficiently, for the preservation of the company and safeguarding the legitimate interests of shareholders and other key stakeholders, in accordance with the law.”?

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Adopt governance documentation??

In a blog from Next Act Advisors on Why good Governance starts early, adopting basic governance documentation that is “stage appropriate for your company” does not have to? be over engineered.??

Set up your board for success by adopting governance that fits the stage, business model, and core assets, while keeping an eye on your comparables.?

Basic company documentation that provides for governing the “business side” is really about risk prevention and protecting the “crown jewels” of the company. Following is a non-exhaustive checklist of must have documentation:?

NDA – Non Disclosure Agreement – Crucial for protecting your intellectual property on meeting and discussing your secret sauce?

PIIA– Proprietary Information and Inventions Assignment with all employees and consideration for Independent contractors with access to proprietary content to avoid disputes?

Information and Security Policies and Procedures– heightened threats with respect to cybersecurity will only continue. Implement security awareness training not only when onboarding all employees and contractors but also have an annual plan.?

Employment agreements– An employment contract or contract of employment is a kind of contract used in labor law to attribute rights and responsibilities between parties to a bargain.?

Employee Stock option plan– Why not think about this ahead of time, and use it as a tool for recruiting and retaining employees.?

In a recent webinar, Keep Calm and Legally Carry On: Insights from Chief Legal Officers from Brex and Carta in response to prioritization of documentation, Ryan Loh Chief Legal Officer stated: “Your people are the foundation to the company; start with them.”??

First: Hiring agreements: Co-founder agreement, consulting agreements, employee agreements.?

Second: Commercial agreements where you make money: MSA, P.O.s Service Orders,?

Third: Business NDAs, Terms and Conditions Privacy agreement;??

Fourth: filing taxes, business permits, insurances, nuts& bolts of a corporation.?

Naturally, as a founder, your focus is on the product nonetheless by getting the foundational documentation right. You are setting yourself up for success particularly when institutional investors write that check.?

Guidance for “under the hood”???

As a company moves from an early stage to growth stage and into an eventual transaction, I liked the advice Lisa Greer Quateman provided in a recent podcast. She recommends that, at least annually, companies take stock of their basic protections, to update as needed.? This ranges from corporate documents such as minutes and filings, to employee files, intellectual property protection and insurance, among other things.? One great tool is to have a “corporate calendar”, so dates don’t get missed.? Tax payments, exercising renewal options for leases, secretary of state filings, etc., can be included, plus things tailored for your own company such as employee anniversaries or birthdays.???

As time goes on and a company begins to think about M&A activity or public offering, having these things in place can really help the smooth progress of a transaction.? At the right, think about what I call a “legal fluff and fold”, by which I am analogizing to doing our laundry.? Check to make sure that the company’s records are in order and if they’re not, get them in order before the due diligence requests start coming in.?

The buck doesn’t stop at the Shareholders meeting:? Public Company Accounting Oversight Board??

20 years ago, the PCAOB was created to protect investors and further the public interest by improving audit quality.?

In a blog post find an excerpt from a speech given by? Board Chair Erica Y. Williams, at the? AICPA & CIMA Conference on Current SEC and PCAOB Developments:?

“Before Thanksgiving the Board issued a new quality control (QC) standard for public comment.?

I called it a watershed moment for the PCAOB, because QC systems lay the very foundation for how firms approach audits.?

Resist complacency, sharpen your focus and meet your responsibility to verify the honesty our system depends on with a vigilance that is worthy of [investors’] trust.”?

Washington, DC, Dec. 12, 2022??

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?“By failing to prepare, you are preparing to fail.”??― Benjamin Franklin??

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If you are a founder, and you would like to learn how to prepare? your company’s governance,? before forming a Board of Directors,? book time with me at Next Act Advisors.?

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Brenda A. McCabe?

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