Should I Give Board Seats to Investors?

AdobeStock_239826817-300x200The Board of Directors is a critical factor in the success – or failure – of any new startup company. Entrepreneurs must therefore be strategic about if and when they give Board seats to investors. Entrepreneurs must also be cautious of the total number of seats that are given away. Board seats represent voting power, and if investors create a voting block, they could change the entire direction of the company. They could even vote the founders out entirely.

The Difference Between the Board Of Directors and an Advisory Board

The key difference between a board of directors and an advisory board is the authority to make binding decisions on behalf of the company. An advisory board provides strategic – but non-binding – advice about the management of a company. The Board of Directors has the authority to make binding decisions of a company. Some investors may be satisfied to receive a seat on an advisory board and simply consult about the direction of the company. Others may require a seat on the Board in order to retain the authority to make binding decisions. This is especially common in when financing from venture capitals. Because venture capitals usually involve a larger investment than angel or seed money, finance professionals want to protect their investment by staying directly resolved in the management of the startups.

Giving board seats to investors comes with risks, but it can also bring benefits to the company’s founders. Venture capital is provided by experienced finance professionals. As part of a venture capital financing, these professionals will bring their expertise to the business and help ensure its success to protect their investment. This experience can be a great asset to a new business in a vulnerable state of development. Similarly, a venture capitalist who has a track record of successful startups in the same industry could provide invaluable advice that helps a business survive its most difficult years.

How Many Board Seats To Give To Investors

The founders of any startup must be careful about how many board seats they give to investors. The more seats are given, the more control the founders lose over their own business. Board seats should therefore be used strategically. Does the investor have experience that will help direct the business toward profitable operations? Have the founders discussed their vision for the company with their investors? Do your investors want to be actively involved in the management of your business, or do they plan to have a more passive investment with less input about management decisions? All of these considerations are critical to an understanding of how many board seats should be given to investors.

The Right Startup Lawyers For All California Business Investment Issues

Starting a business, raising capital, and planning the management structure of your new company can be daunting tasks for any entrepreneur. The experienced California corporate lawyers at Structure Law Group can help develop your new business effectively. Call (408) 441-7500 to schedule a consultation.