Make a new board seat for a new CEO by Babak Nivi

When hiring a new CEO it is important that they do not take a common board seat, as they might be aligned with VCs and they do not represent common stockholders. A new board seat should be created for a non-founder CEO.

  • How helpful? Scale of 1 to 5

5.

  • Topic Tags

BoD, investor control, founder-leaning board, new executives

  • Relevant questions addressed

Why is it important that CEOs don’t take a common seat on the BoD?

  • Summary bullet points
  • A common term in term sheets if for the CEOs to hold a seat on the BoD. Usually, they take one of the common seats.
  • In a very early stage, since the CEO is likely to be one of the founders, this does not constitute much of a problem for founders.
  • However, if the CEO is replaced, the common shareholders will lose one seat to the new CEO, who might lean with investors on board matters
    • As the CEO is likely to come from the VC network, they are likely to be aligned with the VCs
  • A coalition of CEO+investors might damage the company because VCs can control the company, and indirectly, managerial decisions. This virtually affords them full control
  • New CEOs might become hostile to the founders and might seek more equity as contribution to their work, diluting founders
  • Common board seats should be elected by common shareholders, and CEOs should have their own seat.
  • Investors might argue a new CEO seat tips the board in favor of common stock
    • Independents also tend to hold common stock but VCs do not see them as common-leaning
    • The CEO is not representing the common stock but must create value for everyone (as the other directors do)
  • Follow-up links

How to bring in a new CEO for your startup - https://hbr.org/2016/02/how-to-bring-in-a-new-ceo-for-your-startup