Control is a one way street by Babak Nivi

Once board seats are given out to investors, control is diluted and it can be very hard, if at all possible for founders to gain it back. Founders can take some strategic measures to retain as much control of the board as possible.

  • How helpful? Scale of 1 to 5

5.

  • Topic Tags

Board control, board leverage, financing round leverage, ownership dilution, control dilution

  • Relevant questions addressed

Why are board seats important?

What does it mean to lose board seats?

  • Summary bullet points
  • Control of a startup is usually progressively lost by founders and progressively gained by investors as % ownership changes
  • Control
    • Investors: can either gain board representation % or maintain the status quo
    • Founders: can either maintain the status quo or lose board representation %
    • As more rounds are completed, more investors can get involved, each imposing their own provisions and restrictions
    • % of company owned by investors can either increase or remain stable with each financing round
  • Seed rounds and late-stage rounds can result in no board seats lost to investors.
  • The founders need to have leverage on investors to not give up too many board seats during each round
  • Leverage can be achieved by founders through a product that has traction in a large market (team and product quality also help) or through creating competition among investors
  • The % composition of the Board should reflect the % ownership of the company
  • Independent directors should be selected to be truly independent
  • A new CEO should not take one of the founders’ Board seat but have one created for them.
  • Follow-up links

What stockholder approval is necessary to complete a venture financing? - http://www.startupcompanylawyer.com/2007/08/07/what-stockholder-approval-is-necessary-to-complete-a-venture-financing/

What should I send investors? Part 3: Business Plans, NDAs, and Traction - https://venturehacks.com/plans-ndas-traction#traction

Term Sheet Hacks: Get a Great Deal - https://venturehacks.com/term-sheet-hacks#negotiation

Create a board that reflects the ownership of the company - https://venturehacks.com/board-structure

Make a new board seat for a new CEO - https://venturehacks.com/ceo-board-seat