Your board of directors is a governance body that gives strategic guidance, oversees management and operations, and represents all stakeholders. In other words, oversight of you and the company. That typically incudes participation in major company decisions like an acquisition or change in strategic direction, hiring and firing of key executives and employees, and continuous consideration for all company shareholders to maximize their share value.
1. Types of board seats
- Common Directors - You and any other employees appointed by a majority of common stockholders, which typically includes you, your co-founders, employees and advisors with shares.
- Preferred Directors - The lead investor from each of your financing rounds who are charged with representing all of the investors that participated in those financing rounds.
- Independent Directors - Subject matter experts or advisors that can provide additional insight to the company, recommended by the CEO and approved by the preferred directors. Compensated through cash and/or stock grants.
All directors have a fiduciary duty and can be sued for acting in bad faith or gross negligence. Serving on a board is serious business.
2. Board composition at each round
Every company is different, but a company’s board of directors typically will change with each financing event. New investors joining the cap table will want to make sure they are represented properly, and its also a good time for you to consider whether you’re getting what you want/need from your board.
- Pre-seed - 2 common
- Seed - 2 common plus 1 preferred (investor)
- Series A - 2 common, 1 preferred (series A), 1 preferred (seed investor), 1 independent
- Series B - 2 common, 1 preferred (series A), 1 preferred (series B), 1 independent (seed investor drops off board)
- Series C - 2 common, 1 preferred (Series A), 1 preferred (series B), 1 preferred (Series C), 2 independent
- Series D/Pre-IPO - 2 common, 1 preferred (Series A), 1 preferred (series B), 1 preferred (Series C), 1 preferred (Series D), 3 independents
Note: Its not uncommon for the Investor Rights Agreement/Voting Agreement to allow for the a board seat to remain vacant for some time. For example, a Series A company may operate for some time with only 4 directors (2 common, 2 preferred) until they have found the right independent director or have achieved a milestone that will enable them to attract a certain caliber of independent director.
3. Potential for competing interests
The board’s job is to manage you (representing company management) and do what is best for all stakeholders of the company. And in many cases, your board can, and should, be an incredibly valuable resource for you. That said, it’s equally important to recognize that the board is not your friend; they have obligations to all shareholders and not just you, and the investors also carry obligations to do what’s best for their own fund LPs, which can sometimes put them at odds with you. In other words, don’t neglect your board in a way that might give them reason to start doubting your leadership.
References
Sign up here to apply for a coaching engagement with Hilltop.