Early Governance: Your Strategic Advantage
Part 3 of the "Building Category-Creating Boards" Series
In Part 1, "Why Your First Board Seat Should Be Independent", we explored the three critical levels of category protection - tactical, strategic, and market evolution - and why getting governance right from day one matters more than most founders realize.
In Part 2, "Finding Your Vision's Guardian", we covered the specific criteria, interview questions, and evaluation frameworks that help you identify true vision guardians.
With these next three posts, we'll explore exactly how to build and maintain strong category-creating boards:
Part 3 (this post): Making It Real - Practical steps to implement strong governance from day one, including protecting independent seats through critical documents
Part 4: Working Together - Beyond board meetings: frameworks for making governance a genuine strategic advantage
Part 5: Evolution - Growing your board while maintaining the independence that protects your vision
Every founder building something new faces a critical choice that most don't even realize they have: Will your governance enable category-creating moves, or kill them before they start?
When I was building Nori, I made a mistake that would echo through years of company building - I saw governance as a necessary evil rather than a strategic advantage. That mindset cost us dearly. But more importantly, I learned exactly how early governance choices create the space for category-defining innovations to emerge - or ensure they never will.
Today, I'll show you specific structures that protect your ability to make bold moves when traditional metrics would kill them. Not theoretical frameworks - exact provisions I wish I'd implemented from day one.
Most governance advice focuses on investor protection or exit preparation. But category-creating companies need something different: structures that actively protect your ability to make non-traditional moves. Get this right, and you:
Create space for category-defining innovations when traditional metrics would kill them
Build strategic support for bold moves before you need it
Save years of painful negotiation by establishing the right precedent early
Protect your vision through crucial transitions
Get it wrong, and you'll face increasingly difficult battles to protect what matters most.
The Power of Early Implementation
Most founders think governance matters most during crises or exits. But here's what I've learned: the governance you establish before your first investment shapes every decision that follows. This happens through three critical mechanisms:
1. Precedent Power
What you put in place early becomes the baseline for all future negotiations. When you're starting out, you have maximum leverage to establish governance structures and other protective items such as employment agreements for yourself. Each subsequent investor must work within the frameworks you've created.
Let me make this concrete: In Nori's final year, we faced a fundamental timing challenge that's common to category creators - we were just unlocking significant supply through our Bayer partnership that would generate hundreds of thousands of tonnes of CO2 removal credits. But we ran into a critical mismatch between our runway and market reality: corporate buyers typically make carbon credit purchases just once per year, meaning we needed 12-18 months of runway to properly sell through this new supply. Our metrics showed healthy progress on multiple fronts - acres enrolled, credits issued, pipeline building - but we needed governance structures that could help bridge between these leading indicators and the time required to convert them into revenue.
This challenge isn't unique to carbon markets. Category creators often face mismatches between their natural business cycles and conventional growth metrics. The right governance structures don't just track progress - they help boards understand and protect the space needed for new categories to emerge.
The time to establish these protective provisions isn't during a bridge round negotiation - it's in your founding documents. Get these foundations right and strong governance becomes self-reinforcing. Get them wrong and you'll face an increasingly uphill battle to protect category-creating potential.
2. Strategic Guidance
A properly structured board doesn't just protect - it enables. The right governance creates space for bold moves that would die under traditional evaluation:
Tesla maintaining direct-to-consumer sales despite dealer pressure
Amazon reinvesting profits into AWS despite market skepticism
Netflix pivoting to streaming when DVD metrics looked strongest
In each case, strong governance created space for category-defining moves by establishing specific mechanisms for evaluating non-traditional opportunities.
3. Vision Protection
Early governance shapes how your company evaluates decisions. Without proper structures, category creators get forced into metrics that don't match their reality. Strong boards help evaluate:
Leading indicators of category adoption before revenue appears
Market education and stakeholder alignment progress
Natural business cycles in new markets
Progress in reducing friction points (like sales cycles)
The right governance structures don't just protect against bad decisions - they help boards develop appropriate ways to measure progress when conventional metrics don't apply.
Specific Governance Provisions You Must Implement
These principles sound good in theory, but how do you actually implement them? Here are the exact provisions you need:
1. Board Composition in Founding Documents
Reserve Independent Seats: Establish in shareholder/voting agreements that specific seats must be independent directors. Your first board should be two cofounders and one independent and should be established at the time of incorporation.
Tie to Future Expansion: If the board grows to 5 members, maintain balance (e.g., 1 founder, 2 VCs, 2 independents). It is imperative that investors stay in the minority. As you move from a three person to a five person board, you will likely drop a cofounder seat in favor of another independent.
Supermajority Requirements: Require an independent director's vote for:
CEO changes
Independent director removal (this can be added once you have more than one independent director)
Board composition changes
Quorum Requirements: At least one independent director present for the meeting to be valid
2. Shareholder Agreements
Founder Right to First Independent: Common shareholders appoint first independent director
Future Selection: The best case is that common shareholders continue to own the appointment and approval of new independents, but at the very least push for exclusive nomination rights even if the preferred shareholders need to approve
Cap on Investor Seats: VCs cannot occupy more than 40% of board seats
Removal Protection: Investors cannot unilaterally remove independents
3. Independent Director Agreements
Core Components:
Equity Grant: 0.25-1% with tenure-based vesting (see my previous post for more on this)
Clear Role Definition: Support category-defining innovation while balancing milestones
Alternative Metrics Mandate: Evaluate using category readiness and stakeholder alignment frameworks
Legal Protections:
Indemnification clause
D&O insurance requirements
Right to independent counsel at company expense
Termination Protection: Removal requires both founder and investor approval
4. Novel Governance Structures
These structures go beyond traditional governance to specifically protect category-creating potential:
Metrics Committee: Independent-led group developing alternative performance metrics specifically for evaluating category progress. This helps establish frameworks for measuring success when conventional metrics don't apply, like evaluating progress in market education or mapping natural purchase cycles in new categories. For example, in Nori's case, this could have helped establish frameworks for evaluating our pipeline development given typical corporate carbon purchase cycles, allowing us to show meaningful progress months before revenue appeared.
Vision Protection Clause: Major strategic shifts must document category vision alignment. This creates a formal process for evaluating how decisions impact your ability to create something new.
Board Evolution Charter: Living document outlining governance evolution through future rounds. This helps maintain proper balance as your board grows.
Dynamic Independent Roles: Allow directors to advise on specific strategic areas while maintaining independence. This helps you access expertise without compromising governance.
Implementation and Costs
The best time to implement these structures is when you're first incorporating your company. This allows you to build them into your founding documents and establish the right precedent from day one. However, if you haven't done this yet, prioritize it now - the longer you wait, the harder it becomes to implement strong governance.
Working with experienced counsel is essential. The specific cost will vary significantly based on your company's situation, existing documents, and what else you're implementing at the same time. While it's a meaningful investment, the cost of not having proper governance is far higher, as I learned firsthand.
Your Next Steps
Document Review
Understand your current governance structure
List every board-level decision from the last six months
Identify which decisions needed better frameworks
Note any missing protections from this post
Protection Planning
Map your ideal board composition through next two rounds
Identify critical decisions that need independent oversight
Draft your key governance principles
Consider which provisions matter most for your category
Legal Implementation
Research firms with startup governance experience
Schedule conversations with 2-3 potential counsel
Come prepared with specific questions about these provisions
Be ready to discuss your category-creation challenges
Don't wait for your first equity round to implement these structures. The governance foundation you build this week determines your ability to protect category-creating moves for years to come.
In the next post we will cover: Working together beyond board meetings: frameworks for making governance a genuine strategic advantage
Previous posts in this series: