Do I have to give seed investors a seat on the board? I agreed to this but want to find a way out.
Maynard Webb
Founder, Webb Investment Network; Author ‘Dear Founder’; Board member Visa and Salesforce.
Q: We are raising $4 million in a seed round. We signed a term sheet for a $1 million investment and a board seat. Now someone wants to invest $3 million and they also want a board seat. I wasn’t expecting to have a board at this stage. What do I do?
-Founder of a seed stage company
Dear Founder,
There’s lot of good news to celebrate here. Congrats on having so much interest in funding your company and on getting a term sheet.
In my opinion, it would be best to have no external board members at this seed stage. I’m concerned about having two board members now. When you raise a Series A you will have to assign a board seat and if you already have two board members there will be too many investors with board seats. ?It will be imbalanced.
More so, small boards are better than big boards. Less is more. At the seed stage, I prefer to have advisors who may operate as a board but without the voting authority and the power to hire and fire and set direction of the company.
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First, figure out if you can have a discussion about why you are uncomfortable with the situation and if there’s a way to come to resolution. You signed the term sheet, so I'm not sure what’s possible at this point, but can you find a way out? Can the seed investor agree to be a board “observer” rather than a full board member? At a minimum, I would see if they will step down at the time of the Series A if they are not the lead funder in the Series A. Having said that, you have signed a term sheet, so this is not easy.
Regarding the other offer, don’t agree to the board seat on the $3 million term sheet. ?I understand they might not go for that. It’s possible you may need to find a different investor. But the good news is that it sounds like there’s interest in your company. That’s a signal that others will be interested in giving money on good terms, and possibly without a board seat.
When fundraising, getting the money you desire is important. But who you are doing the deal with and the terms you are agreeing to are even more important. Founders with a strong and compelling value proposition likely have their pick of investors. If you have confidence in your company and product you will be able to make wise choices. Select investment partners who are committed to helping and have a track record of doing so.?There should be a personal rapport and an affinity towards one another and your board member should want to be of service. Consider this as you move beyond the seed round. Creating a board is one of the most pivotal decisions you will make in your entire career.
Every week I respond to a new question. Ask me your question in the comments section.
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This is fantastic Maynard Webb and look forward to future posts. As one of our early investors, I always appreciated your insight. From what I've learned at this early stage, what early investors want is visibility to protect their investment and not necessarily to control the business. In lieu of a board or observer seat, it's easier to commit to monthly or quarterly reporting and updates on how the business is doing. This also allows you to build a stronger relationship with your investor and gain the advisory support you may need without the obligation of managing a board.
Principal at Bravin Management Consulting
2 年Maynard Webb - Wise man!
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