Control Terms of the Term Sheet
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. VCs care about control provisions in order to keep an eye on their investment as well as comply with certain federal tax statutes that are a result of the types of investors that invest in VC funds. While VCs often have less than 50 percent 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.
The Entrepreneur's Perspective
Electing a board of directors is an important, and delicate, point. Your board is your inner sanctum, your strategic planning department, and your judge, jury, and executioner all at once. Some VCs are terrible board members, even if they're good investors and nice people.
A typical board of directors clause follows:
Board of Directors: The size of the Company's Board of Directors shall be set at [X]. The Board shall initially ...
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