Should Investors Get Board Seats?
The success or failure of a new startup depends heavily on its board of directors. Therefore, entrepreneurs must be selective about giving board seats to investors. Each board member has voting power and if shareholders form a voting block, they could reshape the entire course of the company. The founders could even be completely removed by vote.
Board Of Directors vs Advisory Board
The ability to make decisions on behalf of a company distinguishes a board of directors from an advisory board. An advisory board offers strategic (but not obligatory) counsel regarding a company’s management. A company’s Board of Directors has the power to decide on matters that are legally binding. Some investors could be content to sit on an advisory board and offer advice on the company’s course. Others might need to join the Board in order to make legally binding decisions. This is common when venture capital funding is involved as investors will try to protect their investment by remaining closely involved in the operation of the business.
Giving investors board seats carries some risk, but it can also be advantageous for the company’s founders. Finance experts will contribute their experience to the business as part of venture capital funding in order to protect their investment and help assure its success. This knowledge might be a valuable advantage to a young company. In a similar vein, a venture capitalist with a track record of successful startups in the same field could offer priceless counsel that aids a company through its most trying times.
How Many Board Seats Should Investors Have?
Any startup’s founders must exercise caution when allocating board seats to investors. The founders’ ability to run their own company decreases when more seats are given away. Therefore, board seats should be strategically assigned. Does the investor have the expertise to steer the company toward successful operations? Have the founders and investors discussed their goals for the business? Do your investors intend to have a more active investment with more say in management choices or do they prefer to have a more passive investment with less say? Understanding how many board seats should be offered to investors depends on all of these factors.