How many Board Seats Would an Investor Want?

Some investors, particularly individual investors, don’t want board seats because it exposes them to some legal risks. However, most private equity firms (including early stage venture capital firms) would seek at least one board seat so that they can protect their economic interests.

The number of seats required by a VC/PE firm depends on the size of their investment, the total number of seats in the company’s board, the presence of other investors, and the rights enshrined in the company’s shareholders’ agreements and memorandum of association. If the company already has a large board, then a VC may feel that only one seat would not provide veto power to block certain decisions, such as raising more money from banks or investors. On the other hand, the presence of another friendly VC/PE firm on the board may obviate the need for another board seat. Alternatively, certain decisions of the board may require unanimity according to the shareholders’ agreement; this too would reduce the need for more than one board seat.

Another reason to have multiple board seats is to allow for flexibility in case one board member is unable to attend a meeting. This problem can also be handled through the concept of a board alternate, whose role is to act only as a substitute when required.

In a VC/PE transaction, the number of board seats required by an investor will be a matter of negotiation. One must consider the issue in the context of a broader negotiation with regard to control and economics, and be prepared for some give and take.

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