Field Notes: Governance at Pre-Seed

I had the good fortune of spending the last several days with a couple dozen of my contemporaries in seed investing. On my flight back East this afternoon, I was reflecting on some of the common themes and the topic of start up governance stuck out.

As we continue to manage through the choices of the 2020-2022 era, it appears that many firms were focused on the next check and not stewarding their portfolio. Some statements that stuck with me-

"I assumed [they] would have had a quarterly board meeting to ensure the company was on the right strategic path, but I was wrong."

"While board meetings where held, there was no oversight of things like employee compensation and I now need to step in and try to reconcile what's been going on."

"[They] are checked out even though they hold a Directorship. It's frustrating."

At Dynamo, we're managing through a couple situations akin to the above and in reflecting on lapses in governance in our portfolio, we recognize that many companies who've raised several millions of dollars on SAFEs sit without any sense and/or semblance of governance. There is a population of Founders that are thrashing about without a singular body to go to for advice, operating with limited oversight, and nearly no semblance of governance.

Governance should start early and while common practice is to avoid a board at pre-seed, it's worth revisiting. I'm not for encumbering Founders with a bunch of Board prep work when the most important thing is to spend time with customers, learn, and iterate quickly. All said, taking 90 minutes per quarter seems reasonable (call it 4-5 hours including prep) to: 1) foster healthy dialogue/debate, 2) drive strategic alignment, and 3) instill strong basic governance. Note, it isn't necessary to have a formal Directorship (you'll likely be outvoted anyways) but about creating space to engage in the above.

At Dynamo, we're experimenting with "mock Board meetings" at pre-seed where once a quarter, the founders get in the habit of doing some prep work and holding a meeting with us as Observers. When you take investment from Dynamo, the expectation is that we will lean in (but equally, we won't tell a founder what to do or force things). Apart from the above, this arrangement allows Founders to practically build a muscle around running Board meetings (Have you seen a bad Board meeting at Series A? It's not fun) and forces periodic reflection on the strategic direction of the company. Further to, we're also considering whether we ask for Observer rights as a startup graduates and a Board is constituted- something we've seen others do over the years.

It's not perfect but a framework we're iterating on.