Hot Seat

Chapter 38. The Board of Directors: Your Peers, Your Obligation, Your Bosses

As CEO, you are both accountable for and accountable to your board of directors. This can get complicated.

To start with, a board of directors typically has five types of members: common, CEO, investor, observer, and independent.

Common Seats

A “common seat” is a position on the board that is filled by a vote of the common shareholders, usually on a one-vote-per-share basis. Because founders generally have common shares (and a lot of them), these are usually the seats that they control. Of course, founders can lose control of these seats if a lot of shares get issued to others, like employees—although note that if the employees get options, then they don’t get to vote them unless they pay the money to exercise them, and this rarely happens.

Be aware that preferred shareholders (i.e., investors) can generally choose, at any time, to convert their preferred shares to common. However, doing so is almost never in their interest before the company is sold in an exit. There have been a few power grabs that started with an investor converting some shares to common in order to seize control of a board seat, but this is rare as they can’t easily convert the shares back to preferred after the coup is complete.

Common seats are powerful—absent provisions to the contrary, the founders can use them however and whenever they see fit to influence the board by appointing themselves or those sympathetic to their position. ...