Corporate Governance and Technology Firms: A necessity or Burden?

Competitive management, good organization structure may affect the company’s future prospects when it comes to financing. Corporate governance’s role in a tech startup may be deemed as little, because generally, they have few shareholders and the board of directors generally consists of members that are also shareholders. Moreover, protection of minority shareholders would be a much less of an issue as well except for the shareholders that have dissenting opinions that may influence resolutions during the general assembly or board of directors’ meetings (if the shareholders is a board member). Considering such circumstances, management of the company comes into center of attention regarding corporate of governance in tech-startups.

Equity Financing of Technology Startups and Corporate Governance

Equity financing (generally through venture capital or private equity) plays a significant role in financing of high-risk technology startups. Equity financing is generally a financial relief to a tech startup that generally lacks the fund to properly expand its businesses. However, as other types of financing methods, it comes with a price. Depending on the type of the equity financing, the role of the outside investors with regards to the governance of the tech startup changes. Angel investors would more likely to have a share that does not have any privileges; venture capitalists on the other hand often through privileged shares gain additional management and financial rights. ^{This is often conducted through board appointment rights and additional voting rights. In this case, lack of managerial experience would be less problematic, but the founder would have much less freedom regarding the management of the company.}

 Corporate Governance for Technology Firms

Notwithstanding the size of the company, dissenting votes on resolutions on agenda items during the board of directors’ meetings and general assembly may result in conflicts that would lead to deadlocks. Such conflicts may arise due to variety of reasons and deadlocks may lead to severe adverse consequences and the startup may become ungovernable. This may even lead to the startup company’s liquidation as per the Turkish Commercial Code numbered 6102 and dated 14.02.2011 (“TCC”).

There are several ways to avoid deadlocks. Structure of the board of directors should be designated in a way that: (i) number of board members should be in odd numbers to prevent a deadlock; (ii) chairman may be given a tie-breaker vote in case of a tie. Although the latter is only possible in limited liability companies through a provision in articles of association; such arrangement for joint stock companies on the other hand is not possible in accordance with the TCC. If the number of founders is an even number and they all desire a board membership, avoiding deadlocks is much harder.

As for the general assembly resolutions, unlike the board of director resolutions, TCC requires different quorums for variety of resolutions.  For example, share capital increase and election of board members have different quorums. Shareholders may amend the articles of association in a way that all resolution requires a unanimous vote of the shareholders or a super majority. Such arrangements may be seen as suitable for the rights of the founders; however, existence of a dissenting shareholder would lead to a deadlock that may result in liquidation of the startup.

Moreover, squeezing out and/or exit rights of the company and the shareholder may be a possible solution against a possible deadlock. However, such arrangements are only possible in limited liability companies. Reasons for squeezing out and exit may be stipulated in articles of association, but it is possible to refer to abovementioned remedies without the existence of such arrangement in the articles of association. In joint stock companies, shareholder(s) may refer to the court for the liquidation of the company. Nonetheless, judge has the discretion for squeezing out dissenting shareholders or majority shareholders depending on the situation.

In conclusion, founders should carefully asses the current situation and future prospects of the technology startup. Management should always seek professional opinion if they lack the expertise for specific decisions. A corporate culture of compromise and being aware of the rights and obligations prescribed in TCC may lead to successful managerial and financial decisions.

Author: Batuhan Ecin