Should I allow investors to control 2 out of 3 seats on the board?
I'm a single founder of a startup and negotiating an investment with investors. We basically agreed on the monetary part of things. They are getting a minor part of equity.
Among other things they've proposed a structure of Board of Directors in which one seat goes to me and 2 to them (2 partners). This doesn't make sense to me since I'm the major shareholder, but there's another provision that requires 100% of votes on key decisions which (I guess) would be their reasoning for why I should be OK with this structure.
My understanding is that I shouldn't agree to this anyway, but I'm not sure what should I counter-propose? What should be the reasonable board composition/structure?
5 Answers
Why don't you try to negotiate with them... you keep 51% of the voting rights (since you are the major shareholder) and key decisions require 100% of the votes. If they say that the "100% of the votes requirement for key decisions" is good for you, then they should be happy with it too. The number of people in the board doesn't matter as long as it's written that you have 51% of the voting rights, so you can be in the board and have 2 seats for them without a problem. Also, i would suggest that "key decisions" are all specified in a document to avoid problems in the future on what a key decision is (if it needs 100% or 51% of the votes to be approved).
This way they rest assured that no key decisions are made without them (since they are investing their money too and it's understandable that they want to know where their money goes. I mean, you are the major shareholder but you need their money too or else you wouldn't need them) and you keep the control of the company.
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+1 because 49% of influence is still a lot. Good luck. – Bertrood 13 years ago
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Makes sense but... I don't know the laws elsewhere but over here the law doesn't say anything about a possibility to have voting rights other than 1 seat == 1 vote. – Alan Mendelevich 13 years ago
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Here in Portugal, you can do it by establishing the voting rules in the bylaws of the companies... I just checked Delaware, USA and it's also allowed if stated in the certificate of incorporation or by an initial bylaw. Check here 141 d) here http://delcode.delaware.gov/title8/c001/sc04/index.shtml . You can even create classes of stocks, for example A (yours) and B (theirs) and Stocks of class A gives you 3 votes per share, while Stocks B only give them 1 vote per share. I'm sure you're country must have something similar... Try to talk to a Corporate lawyer, i'm sure he will help you. – Rui 13 years ago
First of all, if you have the right kind of lawyer who is familiar with this kind of funding, your lawyer should be advising you on this based on your exact situation.
It mostly comes down to your negotiation strength... how many other alternatives do you have? What is your best alternative if you can't reach a deal with these investors?
For example, in my situation, we had two investors both willing to do the full round, so we were able to insist on (and get) a five-seat board with 2 investors and 3 representatives of the common stock, so I still control the board.
As for what you want... you definitely want control of the board if you can get it!
This article over on Venture Hacks is a great source. It says, among other things:
Create a board of directors that reflects the ownership of the company and don’t let your investors control the board through an independent board seat.
It's respectful to be a single founder. I think you're thinking in the right direction. This is an article from Fred Wilson on the purpose of boards:
Board or No Board? Fred, the VC (genuine through and through) advocates for a company where the board of directors have final say (not entrepreneur), from there commenters (most highly respected as experienced entrepreneurs) dissent in fruitful discussion. The "comments" is where you may find some applicable insights.
This looks like a really bad deal for you.
In Silicon Valley, a standard for VC investments above $1M is to have a board with 3 people: you, the VC, and an independent board member, chosen jointly. Below $1M in investment, investors are even ok with no board representation yet (often using convertible debt instead of preferred equity).
I would be cautious about an agreement that needed 100% unanimous decisions on key issues. The fact is that you will not always agree about the best direction of the company and with this provision a non-executive director that has little involvement in the business could potentially stymie important decisions for no good reason.
The structure Alain proposed with 3 members: you, one representative of the investors and an independent person jointly chosen with decisions being made by majority vote sounds most reasonable. You should have the most votes since you are the majority shareholder.
Get some good legal counsel on this one. Good luck.
