When forming a tech company, one of the key inputs in connection with the incorporation process is board size and composition. It is typical for multi-founder companies to throw each of the founders on the board out of the gate but it is also not unusual to have the lead founder serve on the board in their sole capacity. For sole founders, there may not be a choice.
In the case of a single member board, a common question from founders is how should one be thinking about board size and composition heading into the company’s first institutional raise. In most cases, once past the “friends and family round”, the first meaningful capital into the company will take the form of a Series Seed Preferred financing. So what can you expect from your lead seed round investor in terms of how they will think about the board make-up and what should you single board member founders do to set the stage appropriately for negotiating a board composition that shifts the balance of power into the hands of the founders?
As you would suspect there is no golden rule but here are a few bullets to get you thinking about the topic:
• A professional seed investor will require a board seat. In the cases they don’t, I think that might actually serve as a red flag around sophistication of investor/dedication to the investment (outside of unique circumstances).
• Depending on how close the company is to actually receiving a TS, it might not worth the exercise of extending the board pre-round. Many early stage companies are “preparing” for an equity round but in some cases it takes them another 6-12 months to see a TS (particularly in a tightening east coast seed market). If the founder thinks they have sufficient runway until they see that TS, I might say that exploring a board increase now by adding other common holders or founders might be a worthy chess move. In the alternative, if the company is moments from receipt of a TS, papering the increase pre-round might look hasty only to have the board completely renegotiated anyway in connection with the round. In the latter case, it probably makes sense to leave as a point of negotiation.
• Regardless, adding members to the board should not be taken lightly. It comes with fiduciary duties/decision making responsibility that doesn’t always make sense to give to your co-founders. Plus what happens if the round doesn’t come together in the near future? Then you’ve added two people that you didn’t think were initially worthy of such position out of the gate.
• Not always the case, but the advice I find myself usually giving is sit tight. Get your TS and mark it up to make the board size 3: 1 investor designee, 2 common seats. This is where things should really shake out at the series seed equity round. In fewer cases, I might see an investor push for 1 investor designee, 1 common seat, 1 independent but finding the right independent at this stage can be extremely difficult.
• But the fight will not be over there. Even in the 2 common vs 1 investor board construct, expect negotiation around who holds the power to vote in the common seats. Are those seats controlled by:
o “majority of common” (ie holders of common across the entire cap table)?
o “majority of common held by the Founders” (ie two named individuals)?
o “majority of common held by Key Holders” (ie common holders holding over a threshold of stock)?
o “majority of common held by Key Holders who are then providing services to the company” (so if you leave the company or are terminated no longer influence the vote)?
o A “CEO seat” (ie whoever serves in that role at any time)?
Lots to think through around board composition heading into your first institutional raise with consequences not only for operations following the round but also in the context of setting the stage for you’re A round….and just think…. that is only the board composition discussion!