The terms we discussed in the preceding chapter define the economics of a deal; the next batch of terms define the control parameters of a deal. Venture capitalists (VCs) care about control provisions in order to keep an eye on their investments as well as comply with certain federal tax statutes that are a result of the types of investors that invest in VC funds. Some control provisions are necessary to prevent VCs from running afoul of the fiduciary duties they owe to both their investors and the companies they invest in. While VCs often have less than 50% ownership of a company, they usually have a variety of control terms that effectively give them control of many activities of the company.
In this chapter we discuss the following terms: board of directors, protective provisions, drag-along rights, and conversion.
Board of Directors
One of the key control mechanisms is the process for electing the board of directors. The entrepreneur should think carefully about what the proper balance should be among investor, company, founder, and outside representation on the board.
A typical board of directors clause follows:
Board of ...