Startup Boards, 2nd Edition

Chapter 23Financings

The dynamics around a financing vary dramatically, but your board always plays a role in the process. While board members, especially VCs, play an active role in raising money, finding new investors, and negotiating terms, they also have an essential governance role.

Every financing has a formality around it. Legal documents must be negotiated, including a stock purchase agreement. The board approves formal resolutions associated with the financing and signs multiple documents.

As with any transaction, it's critical to have an experienced lawyer involved. Your brother-in-law, who specializes in divorce law, isn't the right choice. Make sure you have experience on your team.

We aren't going to go into financings in-depth—for that, read Venture Deals (Feld and Mendelson, 2019). However, we'll explore several different situations and the unique responsibilities of the board in each.

New Investor-Led Round

The easiest financing transaction happens when a new investor leads the round. In this case, the board's duties are straightforward. The conflicts are limited because an outsider, who has no prior interests in the company, drives the terms. There will be a long list of resolutions associated with the financing, but these are standard and rarely controversial.

As with any transaction, there's value to formality. Hold a board meeting, take attendance, discuss fiduciary duties, propose motions, and take votes. Then, memorialize the resolutions in the minutes. ...