Need for tight budget control: There are several mechanisms in place to ensure proper delegation of money by young entrepreneurs. Money management starts with the annual budget which is prepared by the team. This budget includes major plans of the company and the money that they are planning to allot for the execution of their plans like capital expenditure, mergers and acquisitions, marketing and so on. All these factors are specified in the budget and then it is presented to the board for approval.
Once the budget gets approved, it is the responsibility of the CEO and the CFO of the company to make sure that the approved budget is followed by the team. Since the startup ecosystem is extremely dynamic with changes happening on a regular basis, there are chances that the approved budget may fail to be relevant at times. So in such a situation, the board does allow 10-15% of variations in the budget which does not require their approval. However if it exceeds the prescribed budget threshold limit then the company must bring that to the notice of the board. The investor on board enjoys affirmative right or majority right which gives them an upper hand while approving all variations and specifications.
Important to appoint a strong CFO: Though young entrepreneurs are ruling the startup ecosystem we cannot deny the fact that they are new to this industry and need proper guidance to know how this space works therefore it is very important that a company has a strong finance head. The CFO of the company should be an experienced person who has been in this industry and is aware about the technicalities of running a company. Appointing a strong CFO solves majority of the problem relating to money management. An investor always insists on monthly reports which talks about the variants, how close they are to the budget and what are the points that require approval from the
The CEO or the founder of the company is responsible for presenting these monthly reports and if there are any discrepancies in the report then immediate action has to be taken. Apart from this an investor can also call for quarterly meetings to ensure proper implementation of the budget.
Background check of entrepreneurs a must: There are enough clauses and remedies listed in the investor agreement or shareholder agreement to protect the interests of the investor. In case of fraud, the investor can call for a board meeting and fire the CEO and appoint a new CEO for the company. However if it’s a genuine mistake then they do get a chance to rectify their mistake and this period of rectification is called cure period. But in most of the cases the entrepreneurs are hardworking and very passionate about what they do, they give their life to the business and very rarely you see such cases where the investor is forced to take such steps. Moreover, investors also run a background check before they invest so it is very rare for such things to creep in.