How can a term sheet be structured to provide a board seat for the venture capitalist?

Whether a board seat is justified for an incoming VC investor comes down to several factors: 1) How much ownership is the VC getting in the round? If the VC is going to own a significant minority stake (i.e. 10%+), a Board seat can make sense, 2) Does the VC bring operational/commercial insight and/or industry network to the table? The more helpful the VC can be to the management team, the more the company should want them to join the board, and 3) What are the interpersonal dynamics of the existing board members? The last thing anyone wants is a dysfunctional board with misaligned objectives. Size is less important here than how effective the board can be in collectively steering the company while actively contributing as individuals.

In my experience, you want to be sensitive to board composition. Typically in very early companies you dont want to have large boards. You want to do what is required to set the company up for success. I would remind folks that board roles are much more governance centered, whereas much of the strategy takes place outside of board meetings.

To optimize the board's composition for the company's benefit, term sheets could mandate specific requirements for board members, such as minimum qualifications or an in-depth assessment process. This strategy aims to prioritize appointments based on merit and expertise rather than convenience or personal ties with founders. By focusing on criteria like industry experience, knowledge of governance, and strategic insight, startups can form a board composed of advisors who are not just overseers but active contributors to the company's growth and strategic direction.

Para otimizar a composi??o do conselho em benefício da empresa, os term sheets poderiam estabelecer requisitos específicos para os conselheiros, como qualifica??es mínimas ou um processo de avalia??o detalhado. Esta estratégia visa priorizar as nomea??es com base no mérito e na expertise, em vez de conveniência ou la?os pessoais com os fundadores. Focando em critérios como experiência na indústria, conhecimento em governan?a e vis?o estratégica, as startups podem formar um conselho composto por conselheiros que n?o apenas fiscalizam, mas contribuem ativamente para o crescimento e dire??o estratégica da empresa.

A board with a representative from a venture capital firm who brings a strategic and dynamic perspective that is in line with the organization's vision and mission is highly valued. Simply having a seat on the board as a VC representative is insufficient without providing a sustainable and well-informed perspective on the operational strategy.

Na defini??o dos direitos do conselho de administra??o em um term sheet, é essencial detalhar as responsabilidades e prerrogativas dos membros, incluindo regras de vota??o, quórum necessário, periodicidade das reuni?es e acesso a informa??es. Como capitalista de risco, é prudente assegurar direitos de prote??o, permitindo vetar decis?es críticas que possam impactar seu investimento, como a emiss?o de novas a??es, mudan?as significativas no plano de negócios ou a venda da empresa. Contudo, é igualmente importante equilibrar esses direitos com o respeito à autonomia dos fundadores, evitando uma gest?o excessivamente intrusiva que possa comprometer a confian?a e a eficácia operacional da startup.

VC-appointed board members in the US are rarely compensated for their services, aside from being reimbursed for incidental expenses related to attending meetings. As companies grow into their later stages, when they may be trying to attract high-value independent directors, compensation in the form of equity can be more common. It is important to get advice from advisors familiar with market norms in your market and at your stage of development.

Ao abordar a remunera??o do conselho de administra??o em um term sheet, é importante considerar as formas de compensa??o que reconhe?am o tempo, o esfor?o e a expertise dos conselheiros, alinhando-os também com os objetivos de longo prazo da empresa. Para membros vindos do capital de risco, é comum a oferta de op??es de a??es ou warrants, que n?o só servem como recompensa, mas também como um meio de alinhar seus interesses com o crescimento e o sucesso sustentável da startup. Essa participa??o acionária adicional incentiva uma vis?o de longo prazo e um compromisso mais profundo com a empresa.

The term sheet can be a powerful tool for fostering positive board dynamics in Web3 ventures. Consider a DAO structure: establishing a communication cadence for board meetings & information sharing (project updates, KPIs, community engagement) builds trust & aligns everyone on the DAO's goals. This transparency is core to Web3 & empowers the community. Additionally, the term sheet can encourage collaboration by acknowledging diverse expertise. For instance, a Web3 gaming company's board might leverage a VC's gaming industry experience alongside a founder's deep blockchain knowledge for strategic decisions. Highlighting these strengths in the term sheet fosters a collaborative environment where everyone contributes to the company's success.

A board seat is usually and should be tied to a certain ownership threshold. 10-20% stake per board seat is common in a 6 member board, with independents brought on by investors for their expertise value add, but still in line with shareholding. In the term sheet, clauses to negotiate are 'board composition', 'board quorum', 'board appointment and dismissal', and 'board reserved matters' (nomenclatures vary), as these determine who joins the board, what powers they have and how can they be changed or dismissed. A good strategy is to keep a fallback (another clause you want in your favor in return for not taking a board seat) in case a board directorship or observorship is not available - this could be veto rights on certain decisions.

Anti-dilution provisions can be incorporated into the term sheet to protect the venture capitalist's ownership stake in the event of subsequent financing rounds or equity issuances. This safeguard reinforces the investor's influence and bargaining power regarding board representation. In a biopharmaceutical startup I supported, the term sheet included anti-dilution protection for the venture capitalist, ensuring that their ownership percentage remained intact and proportional to their initial investment, thereby upholding their entitlement to a board seat. The term sheet can align the provision of a board seat with the investor's exit strategy objectives, such as IPO or acquisition milestones.

As an investor it’s important to consider why you might want a board seat, typically it’s common for the lead investor to have a board seat (ie it might not be in the term sheet for each VC investor in a round). It might make sense to discuss/ negotiate one if it’s tied to a large equity stake or if you are a strategic investor or are sector specialist investor bringing significant strategic strengths that’s helping the company meet its funding milestones. Board members are fiduciaries of the shareholders ie not just investors so it’s important to weigh the outcomes an investor might be looking to achieve by having a board seat vs emphasising information clause or special majority voting events in a term sheet.