paramount. It is therefore critical to focus early on issues of corporate governance, especially on how the board is constituted. This can help stack the cards in your favor before any later financing rounds when there may be far more investor interest in these issues. Failure to think ahead about corporate governance can be calamitous; for once you lose control of your board, you are unlikely to regain it.
Generally, a new investor board seat is added to the board with each new material round of funding. New investors will want representation on the board, and, ideally, their participation will add value to the company. It is essential for founders to understand thatboard seats may also be added during any round of funding. These seats do not need to be filled--the CEO or other founders can simply control them. This is vital and frequently misunderstood.
The best early-stage venture capitalists understand this key point and therefore prefer to work with founders/startups to minimize separate voting blocks. Accordingly, companies can request that all series of preferred stock act as a single class for voting, control and approval purposes, to mitigate risks relating to potential minority investor blocks with future financings or exit transactions.Companies can be structured with multiple voting classes.
The strategies mentioned here can also be combined. Continuing with the Facebook example, in addition to holding over 50% control of the voting shares via proxy, Zuckerberg also created a 10x super-voting class for himself, providing him with ultimate control of Facebook’s corporate governance. Whatever the founders’ preferred strategy, the key is to act early on these corporate governance issues.
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