Venture capitalists will almost always have at least some representation on the company's board of directors, usually the lead investor or investors of the round will receive a board seat as a result of their investment. This role within the company should be welcomed since a well-connected and experienced director from your venture fund can offer insight, industry knowledge and key contacts. However, depending on the size of the investment and the number of investors, the investors may control a majority of the Board following their investment. In the transaction, the parties will typically determine that the new series of preferred stock (or all of the preferred stock as a class) will have specific voting rights with respect to the election of directors that vary from the one-share-one-vote rule set forth in the Certificate or Articles of Incorporation.
What is negotiable related to board composition?
A key point of negotiation will center on issues on the overall board composition. For example, prior to a Series A investment, the company may have a three-director board that will be expanded to four or five directors (with one or two investor designees) following the closing of the transaction financing. In the event that management is concerned about a losing control over its board, the company may want to consider the size of the investment or insist on additional board members to be elected by the common stockholders.
How many boards will a typical venture capitalist serve on?
Expect the board representatives from the venture capital firm to be busy. According to the National Venture Capital Association, the average number of company boards that a venture capitalist sits on is four. Understand the limitations that a partner of a venture capital firm will have if he or she serves on multiple boards in addition to your company.
What are Board Observation Rights?
In the case where an investor does not hold a majority of a series of preferred stock, the investor will often receive board observer rights to permit the investor to designate an individual to observe the board meetings, but not hold a vote. Additionally, investors may also negotiate for certain informational rights, to receive financial statements and other company documentation on a monthly or quarterly basis.
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