Board Seats for Investors?

Dave Taylor, CEO and Founder of Growing Ventures has some tips for startups when dealing with investors.

Love them or hate them, most companies will need to bring in some investors at some point in their evolution! Of course, a few companies manage to grow to an IPO or a successful acquisition without bringing in outside investors to the company and if your company is one of these rarities, many congratulations!

For the rest of us mere mortals, if we have high hopes for our company we will, at some point, need to bring in outside investors whether in the form of angels, venture capitalists or corporate investors. And they’ll inevitably want to sit on your corporate board.

Control Issues

Most professional investors who invest at the seed and early stages require a significant voice in how the business is run. Much of the time this involves changes to the management team. Practically every time it will involve one or more representatives from the investors taking seats on the company’s board.

Many entrepreneurs hate this idea, as they’re concerned about retaining control of their company. Don’t fall into this trap! If you bring on outside investors, you need to accept that the only thing that really matters to them is making money and they will do what it takes to try and reach that goal.

Tip: If you are determined to bring on investors, just make sure you do it with your eyes wide open; at some point you will probably lose control of the company! On the other hand, however, remember that 20% of a $500 million company is worth quite a bit more than 80% of a $3 million company.

Venture Capitalists

Early stage venture capitalists almost always take one or two board seats in their portfolio companies. If there are two venture firms in your preferred round, it is likely that both will want a seat and you will most likely have to concede and add them to your board. On the other hand, if
there is only one venture firm you might be able to persuade them that, instead of taking two seats, they should have the second seat taken by an independent outside director.

Tip: When you accept an investment from a venture capital firm, try and insist that an experienced General Partner sits on the board and not a junior partner. You want to ensure that you take advantage of the expertise of the venture firm and having the direct involvement attention of the most senior partners will help you achieve that.

Other Professional Investors

Requests for board seats from other professional investors tend to vary a lot. If you are raising an angel round from a number of different angels, you are well advised to encourage the participation of one of the angels as a board member. The angel would effectively serve as the representative of the participants in that investment round.

A formal angel group is likely to require a board seat, much in the way that an early-stage venture capitalist will. In the case of an angel group, however, you will probably have more say in the identity of the board member. Try to get a member of the angel group who can really add strategic value and relevant industry experience to your company.

Many corporate investors have a policy of not accepting any board seats. This is a firm policy of Intel Corporation, for example, one of the largest corporate investors in private technology companies. As a general rule, you do not want a representative of a corporate investor on your board anyway. In most cases the corporate investor will have significant conflict issues with many of the issues that are discussed at the board meetings and this will also limit your ability to close deals with competitive companies.

Board Composition

When bringing on investors you should be prepared to include board composition as one of the key items you negotiate when putting together a term sheet. The degree to which you can negotiate will depend, to a large extent, on the amount of interest you have from investors. If you have more investors than you need, all wanting to invest in the growth of your firm, you will have more negotiating power.

A typical board profile following a first Preferred A round of financing might have 5 board members and is likely to look as follows:

Common Shareholders (Founders) 2 board seats

Preferred Shareholders (Investors) 1-2 board seats

Independent Outside Directors 1-2 seats

Tip: If you are in a strong position, leverage your power. The more negotiating power you have, the more you should be able to move in the direction of having a board that includes several independent outside directors.

In conclusion, it is a good idea to try and achieve a good balance on your board, with some representatives from the common shareholders, some from the preferred shareholders, and some independent directors.

****************************************

BoardSeat Views is published monthly by BoardSeat and available by email only. We welcome comments and contributions at comments@boardseat.com.

To subscribe to BoardSeat Views please send an email to
views@boardseat.com with SUBSCRIBE in the subject line.

Return to Library of Business Information