Corporate Governance

2020_Corporate Governance and Executive Compensation

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Shearman & Sterling LLP Preparing for IPO Success: The Transition in the Founder's Role and Corporate Culture | 13 Preparing for IPO Success: The Transition in the Founder's Role and Corporate Culture Kristina L. Trauger, Judy Little, Cassandra Cuellar and Mark A. Dunham, Jr. Insights The decision to undertake an initial public offering (IPO) is an exciting milestone in a company's life cycle. Founders considering an IPO should weigh the significant differences between private and public company corporate culture, particularly as to the composition of the board, the depth of the management team and the realities of broad investor oversight. Founders should also be aware that a necessary, but sometimes difficult, part of going public is redefining the founder's role in the newly public company. Private, start-up companies are by necessity characterized by flexibility, innovation, close relationships between the founder and employees and a culture that reflects the founder's identity and management style. The early stage company is often a reflection of the founder's vision. Moreover, the founder may have significant control over decision making, particularly if the founder has largely bootstrapped the company, with accountability only to venture capital firms or angel investors that have provided outside funding. The talent, vision and enthusiasm required to take an idea and grow it into a viable business versus the skills ASSEMBLING THE TEAM AND SETTING THE TONE The transition from a private company to a public company involves not only a shift in culture and mindset, but also a shift in governance structure. As a public company, a considerable number of substantive governance and related disclosure requirements are mandated through federal legislation, rules promulgated by the U.S. Securities and Exchange Commission (SEC) and stock exchange listing standards. For new public companies, the broad array of compliance obligations can be daunting. In the immediate term, the post-IPO public company must comply with numerous governance requirements related to: its board composition; the formation and composition of the audit, compensation and nomination committees; the internal audit function; and corporate governance policies, including the board committee charters. The transition to the public company framework imposes a shift in necessary to direct a publicly traded company can differ significantly. Unlike independent private companies, public companies have myriad complex financial and other disclosure obligations. A broad spectrum of stakeholders expect management to oversee relationships with analysts and investors, and changing regulatory requirements and best practices. Investors in public companies want to know that the company they are investing in has directors and senior executives with public company experience. accountability. While the private company model may be led by a strong founder or founding team, the legal framework of the public company requires board- centered governance. The Board Shift A private company board is typically an assortment of founders, key members of management and designees of major investors. Founders typically have significant influence over who joins the board, whether through careful negotiation of board dynamics during fundraising rounds or outright control of a majority of the board seats. Private company boards are not required to make any determination of independence. Often, directors identified as "independent" are persons who have significant relationships with the founders or major investors. The

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