Board Composition

The allocation of board seats among founders, investors and independent directors.

Example

Two founder seats, one investor seat and one independent director.

Important

Whoever controls a board majority can make major decisions, including replacing the chief executive.

Related terms

• Protective Provisions — Terms requiring the consent of specified investors before a company takes certain actions, such as raising money, selling the company or changing share rights.
• Term Sheet — A short document setting out the main economic and control terms of a proposed investment before full legal agreements are drafted.

Lessons that explain it

• A board seat, an observer seat and information rights are three very different things — Board directors vote and carry legal duties. Observers attend without voting. Information rights give access to figures without any role in decisions. Knowing which you hold defines what you can do and what you owe. (9 min)
• A director appointed by an investor owes duties to the company, not to that investor — Board directors generally owe fiduciary duties to the company and its shareholders as a whole. An investor-appointed director who puts their fund's interests first can breach those duties, which is the central tension in startup governance. (12 min)
• Good board members ask the question nobody else will, then let management run the company — An effective board member prepares, focuses on the few decisions boards actually own, asks hard questions early, and resists the urge to manage the company from the boardroom. (10 min)
• Decisions that are not recorded are difficult to rely on later — Board minutes, written consents and maintained records are what prove a decision was properly made. They matter most in disputes, financings and sales, when everything is examined. (10 min)
• The hardest board decision, and the one most often made too late — Replacing a founder chief executive is rare, disruptive and sometimes necessary. Boards tend to delay it, and the cost of delay is usually larger than the cost of the decision. (12 min)
• A term sheet sets two things: who gets the money and who gets the say — Every clause in a term sheet affects either the economics - how proceeds are divided - or control - who can make or block decisions. Valuation is only one economic term among several. (10 min)

All 578 terms in the Investing glossary