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‘The VC Series’ is a series of articles aimed at founders who are thinking of raising funds from VCs. Further information about The VC Series can be found here.
In this article we will look at the sort of protections that venture capital investors will expect to see when it comes to the composition of the board of directors and the practicalities of holding board meetings.
Board Meetings
Venture capital investors will expect board meetings to be held once a month or once every other month. VC investors will then expect that an agenda and accompanying papers are provided to each director in advance of any such meeting.
Our experience is that prior to investment, founder teams often don’t hold board meetings in a formal way or with such regularity, so this can often be a bit of a culture shock!
The articles of association will also set out the number of directors that are required to attend a board meeting for it to be quorate. Often this will be structured in such a way that a meeting requires a founder director and an investor director to be in attendance, with the meeting adjourned if a quorum isn’t present. For the adjourned meeting, you would expect any director present to constitute a quorum, as you wouldn’t want a particular director to be able to frustrate business by not attending.
Investor Representation
A venture capital investor will typically require the right to appoint at least one non-executive director to the board, and this will be enshrined in the investment documentation.
Whether the investor then appoints a director will be a decision for them bearing in mind potential conflicts of interest and the taking on of fiduciary duties – this is why, where an investor does not take up its right to appoint a director, they will instead require the right to appoint an observer to the board.
What is an Observer?
An observer is an investor representative who is entitled to receive notice of, and participate in, board meetings, but are crucially not able to vote on any decision.
Non-Executive Directors
A crucial part of a venture capital investor’s due diligence process will be assessing the strengths and weaknesses of the key leadership roles within the company and considering whether the company’s management team and board of directors have the necessary experience and capabilities to make a success of the business and their investment.
Where gaps are identified, the investor may require that the company appoint at least one other non-executive director to the board, who will typically have experience advising companies in a similar sector and on a similar growth trajectory. It is obviously important that this person is the right fit, so we would recommend that founders be as involved as possible in the process of identifying the right candidate.
Committees
Venture capital investors might also require that the company set up committees to help oversee certain functions of the business. The most common examples are:
- a remuneration committee, which is tasked with deciding on compensation for senior management and granting share options; and
- an audit committee, which is responsible for overseeing financial reporting and signing off the accounts.
The composition of the committees will be a matter for negotiation, but you would normally expect a majority of the members to be non-executive directors.
Final Thoughts
This has been quite a general overview of board minutes and some related provisions to bear in mind, At Michelmores we pride ourselves on being approachable and are lucky enough to have acted for numerous great founders in their investment journey so feel free to reach out to a member of the team if you have any questions or concerns about your investment/board meetings after entering into investment documents and we will be more than happy to help guide you through the process.
The VC Series – Next Article
The next article in The VC Series will deal with vesting of founder shares and leaver provisions.
You can find details of all the different articles in the VC Series here.
If there is anything that we have not covered which you would find useful, then please let us know.
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