Key Control Terms: Board Seats
This post is a continuation of the discussion that covers everything a founder should know before raising their Series A. If you missed the first series of posts, you can find them here.
This next series will discuss the important control terms in a term sheet. This first post in the series will cover the board of directors provision.
Board of Directors:
When you raise your Series A, be prepared to give up at least one board seat to the investors. This is very common since investors at this stage will be investing a lot of money in your startup, and will want to ensure some level of control over the company.
This term in a term sheet is very straightforward with no real “tricks”. It states the size of the board and how its members are chosen. Generally, the board is composed of x amount chosen by the investors, x amount chosen by the founders, and x amount chosen by mutual consent. The typical board size for a venture backed startup is anywhere from 3-5 directors.
It is important to note that some investors will require that one board seat be filled by the current CEO. This can be a little tricky because if the CEO changes, then so does that board seat. While this isn’t inherently bad, it is important to realize that if an outside CEO is brought in, then you and your co-founders could be left with only 1 board seat. Finally, it is worth noting that some investors will require at least 1 board observer (which is normal). However, this observer can sometimes end up being the loudest person in the room, and may actually influence the decision making process of the board. Therefore it is prudent to try to negotiate expectations for the board observer; i.e. they are there to observe only.
As always, it is important that you discuss any terms in a term sheet with an attorney who handles these matters. In my next post, we will continue the conversation around important control terms in a term sheet by discussing protective provisions.