Create a board that reflects the ownership of the company by Babak Nivi

Founders should be careful to the composition of the BoD. It should reflect actual % ownership of the company and not be controlled by investors through a series of mechanisms like an independent board member on the investors’ side.

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  • Topic Tags

Board of directors, investor control, founder control, board representation, independent directors

  • Relevant questions addressed

How can founders not lose control of the BoD?

  • Summary bullet points
  • The constitution of the BoD, which happens during the first investment rounds is paramount to the future direction (and existence) of the company, as well as to the founder’s success
  • % representation on the BoD should reflect % ownership to ensure owners’ interests are being protected proportionately
  • Common stockholders should elect Board members by common majority voting
  • Preferred stock is already safeguarded by protective provisions
  • If a % ownership board does not work for investors an investor-leaning board can be a solution
    • Equal number of board seats to each stock class, plus one or more independent parties.
    • For each new board seat for investors, one for common shareholders should be created
    • The independent Director should be a truly independent party. Big names are likely to have a good relationship with the VCs and thus are likely to side with them
      • Founders can fill the independent before the financing round with someone they trust but who has expertise
      • In case this is not possible, founders should still try to have a voice in the process by tying the nomination to the BoD’s unanimous approval, suggesting names and performing due diligence
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