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@ Krisztian
2024-09-17 17:42:41I have been watching the Bitcoin ecosystem grow up very quickly over the last few years. Personally, I agree with the statements that the Nostr protocol will only help enhance adoption. I find this all very exciting, but as a non-technologist it can often be challenging for me to fully comprehend all the nuances and to make meaningful contributions. Something I do understand well is corporate governance, and maybe this is where I can add some value.
On the surface, corporate governance sounds quite boring (and you’d be mostly right to think so), but from my background in private equity and as a company director, I can tell you that how you structure your company can absolutely make or break you. The board room can quickly become a battleground for conflicting interests, and so you need to be careful about who is invited in and how decisions are actually made.
If you believe that every company is eventually a bitcoin company, it might follow that the low time preference of current Bitcoiners offers their companies a strategic advantage over those yet to embrace the Bitcoin network. Beyond benefiting from price appreciation, many current Bitcoiners are already demonstrating the positives are switching their outlook from a quarterly view to a generational view. However, if the businesses Bitcoiners are building are to last for generations, they need to be purposefully structured to do so.
One a side note: The grownup sharks from the fiat world have also been waking up to Bitcoin, and they’ll eat you for lunch if you let them. So, this is in part a heads-up for the naive among us.
What do I mean by corporate governance?
Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Basically, it defines at a high level how the company will be run and how decisions will be made.
The simplest governance structure is the “one man show”. Leaving different legal forms aside, this is essentially a single individual running a business on his own. Freelancers, for example, are free to make every personal business decision on their own. They choose their clients, their hours, their location, etc. This arrangement is fine because there is no expectation of business continuity should the freelancer cease working. Where the “one man show” becomes problematic is when other people are introduced to the business (e.g. employees, investors, heirs) and the singe decision-maker becomes a single point of failure for the business.
Now, I am not suggesting that all small businesses need to go out and form a board of directors and bureaucracy on par with S&P 500 companies’. Measures should be proportional. However, a good starting point for all business owners is to consider their inevitable exit from the business. Do you want to pass down a family business? What happens if the kids don’t want the business? Do you want to take on outside capital and aim for an IPO? Every potential path has different implications for the long-term survival (and future value) of the business. So, it’s important to get the basics of governance right before adding more complexity to the organization.
The Basics
\ I will come at this section from the view of a small, family business with a few employees run by the head of the family. Personally, I thought of a pizza shop owner adding bitcoin to the business when working through this (Does he want to eventually sell the shop for his retirement? Does his kid want to take over the business? Does the family want to find investors and expand?). But, of course, think of this in a way that works for you.
Anyway, this list is not comprehensive, as plenty of PhDs can probably confirm, but from my experience, here are some of the fundamental practices of corporate governance that are pretty much non-negotiable for long-term survival.
- Identify and eliminate single points of failures
Like with your private keys, if your company is to survive you, you need a plan in place for continuity otherwise all could be lost. Sharing and delegating authority can often be difficult for business owners, but it is necessary for survival. Can basic operations continue without you? Do you have potential successors and are they adequately trained? It is better to build redundancy into processes as early as possible so that roles can be replaced, people can be promoted, and business can move forward as the landscape changes.
- Build checks and balances into decision-making
Business owners can often be bottlenecks. Operational authority can easily be delegated to individuals within the business. For example, you can set thresholds for basic procurement, so that owner approval is not needed for the tiny and insignificant purchases. Have routine checks to make sure there is policy compliance and no theft/fraud, but don’t get sucked into every tiny detail of day-to-day operations. It’s more important to focus on the bigger things, like performance and strategy. When it comes to making the big decisions, it is also worth having advisors to gain feedback and work through possible outcomes. This could be a board or just trusted individuals in a loose committee, but there should be clear roles for the participants, even if the final decision is unilateral, and push-back should be actively encouraged. Such a venue offers two primary benefits: (1) it ensures business owners have properly thought through important decisions and (2) it can serve as a useful training ground for succession planning.
- Formalize a vision and strategy
Traditionally, strategies have been thought about in five-year increments in order to achieve a longer-term vision for the company. Without getting into the business school woo, you need a rough idea of when it will be time for you to make your exit and what the company should be at that point in time. Then you backcast what would need to be done to achieve this vision and break that down into segments to be achieved over set time increments. Timelines and tactics will be different for every business, but it’s important that the goals are measurable and clearly communicated throughout the business. These are also clearly very big decisions, so make sure to include checks and balances like in Point 2 above.
- Review business performance and the strategy
It is simply not enough to have a vision and strategy. Performance needs to be measured. Things change, and you need to know when it’s time to pivot and change the strategy. But how do you know if things have truly changed? Does the strategy need amending or just the tactics? If performance is good, is it because your execution was good or because you got lucky with the business environment? Business owners should be asking themselves (and others) these questions routinely. An annual strategic review of business performance and the overall strategy is probably a sufficient starting point. You want to do it often enough where you can correct course, but not so often that you cause chaos internally. Hold yourself accountable for your stewardship of the business, include your checks and balances in the review process.
Getting the basics right should help business owners sleep at night. Like multi-sig and estate planning, you can rest a little easier knowing that structures are in place to ensure continuity. It doesn’t need to all fall on you. You want to be replaceable.
Getting the basics right will also make your exit much easier. Clear records and processes make life much easier for any successor, especially if they were already active in the business and being trained for the leadership role. Buyers and investors will also demand basic corporate governance. Having it in place already will set your business apart from less “professionalized” businesses and thus make yours more attractive.
That being said, if attracting outside capital is a part of plan, there is some higher-level planning you should consider or at least be aware of.
Higher-level Planning
As with wedding planning, if you take money from others, they will want to influence decision-making. It’s completely understandable. Investors put capital at risk, and so they want to be involved in decision-making to protect that investment. Now, each one of the following points could be it’s own chapter in a LinkedIn influencer's book, but here are a few of the things investors will want from you in a Shareholders’ Agreement or other document.
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Reserved Matters List: a list of things that require special (shareholder) approval, usually designed to protect the interests of certain shareholders (e.g. minority shareholders).
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Board Seats: investors want a way to control performance, influence decision-making and steer the company. They often also want to limit the influence of others.
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Audits: this is an easy was to provide checks and balances on operations and finances.
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Preemptive Rights: if anyone wants to sell shares, investors often want a say in who gets to buy those shares.
None of these things is inherently good or bad. The devil is always in the detail. However, if terms are too one-sided for any party, it could compromise the long-term success of the company. So, make sure to vet your potential business partners. From my experience, how people behave in negotiations reveals a lot about how the partnership will be. If interests are truly aligned (e.g the business should last for generations), then all parties should naturally land on a fair arrangement.
Final Thoughts
No organization is perfect. Initiatives like @OpenSats are freshing because they are at least trying to be transparent and to set a high standard of conduct. However, transparency is not always enough. You need to actively practice the values. This is what is most important. There are plenty of examples in public markets where poor (and transparent) corporate governance is having a clear negative impact on the company. Private markets are frankly black boxes when it comes to corporate governance, but it is clear that private equity and venture cre now viewed as the new boogeymen of society. Probably not without reason.
I’m bullish on Bitcoiners, and I want to see them succeed the right way – generationally. Hopefully, this piece gets you thinking about how to lay the foundation of your citadel.
A few final random thoughts:\ Always keep your own legal counsel (separate from the business’s legal counsel). Going to church doesn’t make someone a good person; people seek power where they can find it. Be a good steward.
Disclaimer: This is food for thought, not advice.