As I'm reading this article and nodding my head, I realized that I don't understand what controlling a board actually means.
It sounds like its written in the term sheet somewhere--what does that look like? Joe Startup will maintain control of the board...? Would it be correct for a founder to say "I have control of the board so..." or is it more of a perceived power as a result of other negotiated terms?
Usually, important decisions in a company require a majority vote of the board of directors to approve them.
Control of the board is then defined as a majority voting ability for an individual or aligned group of individuals. For example, 2 founders with equal equity stake will usually have the same incentives. Therefore, a board that has 2 founders and 1 investor is "founder controlled".
Between being completely founder controlled and completely investor controlled, there is a "split board". That means equal number of founders to investors, and one mutually agreed upon independent party that could technically vote either way -- often times a person previously very successful in business with insight into the startup's market.
In practice, a split board usually means investor-controlled, for a couple reasons:
- The independent board member is usually suggested by the investor
- The independent board member usually has a stronger incentive to side with a powerful investor
It sounds like its written in the term sheet somewhere--what does that look like? Joe Startup will maintain control of the board...? Would it be correct for a founder to say "I have control of the board so..." or is it more of a perceived power as a result of other negotiated terms?