What is a Board of Directors (BOD)?
The BOD is the governing body of a company and approves (ratifies) all major decisions, including but not limited to selling the company, going public (IPO), debt financing, equity financing, and more. Basically, on all major “stuff” the Board will be involved and supportive.
Board members work for the company and the company is their job and responsibility. They must always act in the best interests of the company and its major stakeholders; the employees, the customers, the shareholders, the debtholders, and everyone else that is relying on the company to deliver.
Basically, the Board has a dual mandate:
- Advisory: consult with management regarding strategic and operational direction of the company.
- Oversight: monitor company performance.
The responsibilities of the board are separate and distinct from those of management. The board does not manage the company, that is the job of the CEO and the management team.
Under state corporate law (I’m not a lawyer, this is not legal advice), the duties of the board are embodied by the principle of fiduciary duty.
- The “duty of care” requires that directors make decisions with due deliberation.
- The “duty of loyalty” requires that directors act “in the interest of the corporation” (Delaware courts have interpreted this to mean “in the interest of shareholders”).
- The “duty of candor” requires that the board inform shareholders of all information that is important to their evaluation of the company.
Term Sheet: BOD Rights
Most preferred stock financing comes with changes to the composition to the Board of Directors – specifically who should control the Board? The board is a crucial governing body and term sheets will often include provisions on how it will be structured and who will control board votes. Controlling the board can mean controlling the corporation. Thus, the composition of the Board is an important issue.
Boards evolve over time, as they should, and the stage of the company make a difference in how much control a founder will maintain over the company and board. In the early stages, series seed, Founders typically maintain complete control and the board member who does have a BOD seat will typically be very engaged, supportive,and act as a good resource for the founder.
As with other terms we have discussed there are factors to consider. With each round of preferred financing a BOD member is typically added, more specifically the general partner leading the deal at the venture capital firm. But you will want to make sure who this person will be. You don’t want to end up with a Junior Associate from the firm on your Board. So, if your company continues to raise money, often the investors (as a group) will have more control than the founders.
The primary objective for founders is to make sure that board representation between VCs and founders/common shareholders stays equal. Under these circumstances, both sides have equal voting power. In a situation where the two sides disagree, neither side would be able to win without convincing the independent member to vote in their favor.
Accordingly, if you have the leverage, push hard to maintain control of your Board post-closing. The entrepreneur-friendly VCs know what’s happening in the marketplace and are likely to capitulate and agree to a provision in the term sheet akin to the following:
I am not a lawyer and I am not giving out legal advice on this topic.