What governance is (and isn't)

Governance is not about bureaucracy. It's the set of rules that determine: who can make what decisions, what authority the board has vs. shareholders, what happens when a co-founder leaves or a key employee is fired, and how the company handles major transactions. In the absence of explicit governance design, Delaware default rules apply — which are often not what founders would have chosen if they'd thought about it.

Good governance protects founders from investors, investors from founders, and all shareholders from each other. It also enables faster decision-making by clarifying authority: everyone knows who decides what, and decisions don't get stuck waiting for alignment that wasn't designed into the structure.

The founders agreement: the most important governance document you'll ever sign

The founders agreement (often implemented as a Stockholders Agreement or co-founder agreement alongside RSA vesting) is the governance document that matters most in the first few years of a company's life. It answers the questions that destroy startups: What happens if a co-founder leaves in year two? Who makes the call when founders disagree? Can a founder sell their shares to an outside party?

Key terms every founders agreement should include:

  • Vesting schedule — 4 years with a 1-year cliff is market standard. This means if a founder leaves before year one, they get nothing. After year one, 25% vests, then 1/48th per month over the remaining 3 years. The purpose: the company's equity shouldn't be held by someone who isn't actively building it.
  • Good leaver / bad leaver — a founder who is terminated without cause (good leaver) typically keeps their vested shares. A founder terminated for cause (bad leaver) may forfeit unvested shares and, in some structures, be required to sell vested shares at a discount.
  • Right of first refusal (ROFR) — before a founder can sell shares to a third party, the company (and/or other founders) have the right to purchase at the same price. This prevents equity ending up with strangers.
  • Drag-along rights — if founders representing X% agree to sell the company, other shareholders can be dragged into the transaction. Essential for preventing a minority shareholder from blocking an exit.
  • Decision-making thresholds — what decisions require unanimous founder consent vs. majority. Typically: changing the share structure, bringing in new co-founders, or taking on significant debt.

Board composition by stage

At formation: For a two-founder company, the board is typically just the two founders, or one founder and one designated seat. No outside board members yet.

At seed round: Seed investors typically receive observer rights rather than a board seat — they can attend and speak at board meetings but don't vote. Some seed investors (especially institutional micro-VCs) may require an independent director as a condition of investment. The board usually remains founder-controlled at seed.

At Series A: The typical Series A board is 5 members: 2 founder seats, 1 investor seat (lead Series A investor), and 2 independent directors (often one chosen by founders, one by the investor, or both chosen by mutual agreement). This creates a balanced board where neither founders nor investors can unilaterally control outcomes without the independents.

At Series B and beyond: Board complexity increases with additional investor seats and more formalized governance. Board committees (audit, compensation) often form at this stage, particularly if the company is approaching IPO territory.

Protective provisions: what they are and how to negotiate them

Preferred stockholders (investors) receive protective provisions — veto rights over specific major decisions, regardless of their percentage ownership. Standard NVCA protective provisions cover:

  • Issuing new shares or rights to acquire shares
  • Taking on debt above a threshold
  • Selling the company or materially all its assets
  • Liquidating, dissolving or winding up
  • Amending the charter or bylaws in ways that adversely affect preferred rights
  • Paying dividends
  • Changing the board size

These provisions rarely trigger in practice — they're designed for extreme situations. But their scope affects the company's ability to take strategic actions. Negotiation points: the debt threshold (set it at a meaningful amount for your business), whether M&A votes are by class or all preferred together, and whether liquidation/dissolution provisions require super-majority approval.

Governance as infrastructure

Governance isn't a one-time decision. As the company evolves — new investors, new board members, key employee departures, market pivots — the governance framework needs to evolve with it. Board minutes should be maintained for every meeting. Resolutions should be properly approved and documented. The cap table should be reconciled regularly.

Companies that maintain governance continuously have a dramatically easier time when investors conduct due diligence or when a transaction needs to close quickly. The institutional discipline of proper governance is itself a signal of operating quality that sophisticated investors notice.