How can you negotiate board composition in a term sheet?

At a high level, there are three communities that will be assets to be on a start-up board: 1.. The founders with the vision. 2.. The investors with the money. 3.. Independent directors with execution experience and strong ecosystem network. Each one add value... Founders might be reluctant to give up their power, if they want the new venture to succeed they need to understand the necessity of all three. The investors will not invest if they don't have the voting power.. It is in the mutual interest of both the investors and the founders to bring in 1-2 grey hair with the right execution experience and network.

As an executive or founder it is extremely difficult to be good at everything and frankly not realistic to think you can be. Being intentional with board construction and putting people in place who have expertise, experience, or relationships that you can learn from or leverage significantly increases the likelihood of success of an early stage company. Starting and running a business is hard so having a strong support and accountability system is important.

I'm on board of 6 startups, 3 things to do: 1) Choose your board members based on what stages your startup need, what skills you need from board, and check the track record of your candidate 2) You can deal the Board Member the benefit based on the equity (around 0.5-1% equity with seed stages) or millions USD valuation equity with the public list company

It's important to have a balanced board at the same time, a start up needs unique set of competencies as well. Hence it's a balancing act between diversity, skills needed and investor interests.

More than 6 members will be more difficult to manage and group dynamics becomes more challenging. 4-5 members is quite effective according to my experience. If there over time are (too) many investors having board appointment rights, the boards will, accordingly become too crowded and ineffective. I would recommend using board observers more, as that facilitates information sharing, but does not slow down decision making. From observers you can also get valuable views, without losing efficiency.

Recently had a founder recently say they wanted 12 board members. Shook my head - do you realise how hard that will be? Smaller boards are often more nimble and able to move quickly - essential in the early stages… 🌱

As mention in the description, i think its important to balance the composition of the board between independent directors and executives or representatives from management to ensure independent oversight and constructive challenge while maintaining alignment with organizational goals

In my experience, a board composed solely of founders and investors rapidly becomes an echo-chamber. Ideally a five person board should have maximum two founders, one investor and two independent members.

If the founder / CEO is serious about building a business that will outlive her, then the best way is to "shoot yourself in the foot" and invite 2-3 independent board directors with diverse backgrounds. That's how you create trust with the capital markets / future investors.

Board composition is critical for a healthy successful startup. Savvy entrepreneurs will know this and hence will want to limit the board in size and quality/adequacy of the board members. If you are lead investor and you are acquiring a significant chunk of the company it is customary to expect a board a minimum,7.5-10% could give you access to a board. However, a % does not guarantee a seat. In a follower situation, you could find yourself in a situation with more than 10% of the company and still no access to a board. This is because the entrepreneur may want to limit it to one seat per round. If this is the case, negotiate a temporary board until the next round with discretion given to the CEO, if you add value he will want to keep you

Although it may seem overly bureaucratic for a start-up, it is worth spending some time drawing up a scheme of delegation. This would mean the board and the CEO have a written agreement about the decision-making process and the limits of the CEO's discretion.

Yes for " diversity of thought " around the board room table. As diversity increases, there is a risk that a deep understanding of the global ecosystem where a business operates declines. Thus in a truly diverse board there may be increased pressure to ensure that the chairperson ( independent ideally ) and at least one other member of the board has that skill set. How did I become an advocate of diversity? Former Finnish President Martti Ahtisaari ( 1937 - 2023 ) and Nobel Peace Prize recipient ( 2008, think Namibia, Serbia /Kosovo and Aceh / Indonesia ) was a strong advocate of bringing women to peace mediation - the inclusion of even one woman in a team of negotiators may be a breakthrough, as the agenda suddenly changes!

Al seleccionar miembros de la junta se debe considerar la dignidad de la persona, el bien común, la solidaridad y la subsidiaridad. Los miembros deben tener no solo experiencia y redes relevantes, sino también integridad moral y compromiso con el bienestar de todos los interesados. La diversidad debe promover el bien común y las decisiones deben beneficiar a la sociedad en general. La subsidiaridad asegura que las responsabilidades se deleguen de manera justa. El acuerdo formal debe reflejar no solo responsabilidades empresariales, sino también obligaciones morales y justicia en la compensación.

Aim for ‘diversity of thought’ around the boardroom table - that goes beyond usual criteria like age, gender, profession, ethnicity etc… 🌱

I would add to look for a strong background in the VC industry, startup experience, entrepreneurship, finance, and relevant sectors such as technology, healthcare, or consumer goods. To have in mind people who have extensive networks within the startup ecosystem, including founders, investors, and industry experts, as they can provide valuable connections and insights.

The first thing to do is write a board member role description. The second thing to do is to draw up the skills the start-up needs at this point in its existence. Then audit the current board members' skill set against the needs. Identify the gaps. Use these analyses to create person specifications for the board members. Undertake a formal recruitment process exactly as would be done for a senior employee. Check references and do the necessary due diligence before making appointments.

A helpful tool is a ‘Board Charter’ which sets out expectations of those joining a board - roles, how often they meet, remits - it helps set the culture and tone of the board … 🌱

The key discussion between founders and investors ( who may have entered the cap table at very, very different times and expectations ) is to have a crisp, clear and concise understanding of the next funding round and / or exit. I try to have this discussion outside of my board meetings on a regular basis - depending on the situation quarterly or at least once a year.

In my experience, communication is vital. Communication between the Chair and the CEO, between the Chair and the board members, and between the board members themselves. These conversations should take place regularly and should not be restricted solely to the formal board meetings. An active engaged Chair is essential for this to work.

It is important for founders to always ensure they have majority on the Board. While investors have rights such as veto rights to ensure they can influence important decisions, the only way founders can do this is through majority on the Board.

Having served on 100+ VC backed boards in 10 countries I recommend two independent directors on the board and in Europe, one of them as a Chairperson. Last but not least in early stage companies there has to be someone with skill sets to take on dedicated responsibility of corporate governance education. Last but not least, strategy ( go to market, ICP etc. ) and finance ( next funding round / exit ) are the main responsibilities of the board, in addition to continuous support to the CEO and management team.

Having served on the boards of 100+ VC backed companies in 10 countries my recommendation is to have two independendent director´s on the board - both with an understanding of the companies global ecosystem - and have one of them be chairperson. The key job of the board is strategy, finance and corporate governance.

It is important to have two independent directors on the board and one of them as Chairperson. Be clear who gets to appoint them. Both should be able to contribute to strategy and finance, perhaps corporate governance, too. One of them could have a dual role as a mentor to the founder / CEO.

Yes, it is a win win to add independent directors on the board and have one of them as a Chairperson - persons with a deep understanding of the respective companies global ecosystem, so they are able to contribute to strategy. Depending on the board and management team, someone needs to have dedicated responsibility on corporate governance. Finance should be covered at least by the VC. So, they jobs of the board are strategy / finance / corporate governance.

The stage of the company can influence board composition negotiations. In early-stage companies, founders may prefer a more hands-on, operational board. As the company matures, a shift towards a more strategic and governance-focused board may be desired. Understand the current needs and future trajectory of the company to propose a board composition that aligns with its growth stage.

When I started my company, I emphasized the importance of establishing a professional board, recognizing that many entrepreneurs choose to go without one and try to navigate their journey alone. However, we took a different approach, creating a professional board that included: Regular Meetings: We held scheduled board meetings for performance reviews and strategic discussions. Effective Communication: Maintaining open communication channels outside of meetings was crucial. Governance Practices: We followed corporate governance standards and ethical conduct. This decision to have a board significantly contributed to our company's growth and success, setting us apart from those who opt to go it alone.

While the board members are expected to provide their guidance and advice, the founder /CEO should also seek board members' assistance in reaching out to their networks of experts, investors, media, authorities etc. Broadening company's network of support and influence is a strategic leverage that board members bring to the table.

The Board Member must have time to spare for the company and take part in the meetings regularly. The board seat must be considered as a responsibility and the accepted duties should be dispensed as such. However, it will be better to avoid unwanted interferences in the running the affairs of the company.