Seed Investments: Equity, Board Seats, And Why Not?

When negotiating funding deals, investors often ask for a board seat, known as an Investor Director position. Founders must then decide whether to allocate investors a seat on the board. The board of directors agrees and signs off on strategic company decisions, including the long-term vision, hiring and firing of key personnel, and major business changes. There are several factors to consider when deciding whether to offer an investor a board seat, including the size of the investment, the type of investor, and the expertise and experience they can bring to the board. In smaller funding rounds, founders may not need to offer a board seat, while in larger rounds, it may be more common to do so. Ultimately, founders should carefully consider the value the investor can bring to the board and push for what they believe is the best outcome for the company.

Smaller funding rounds may not require giving up equity and a board seat

However, it's important to note that investors will often ask for a board seat, especially if they are investing a significant amount of money. This is because they want to have a say in company decisions and strategic direction. As the investment amount increases, so does the likelihood of the investor requesting a board seat.

In the case of smaller funding rounds, founders can consider offering an observer seat instead of a full board seat. This allows the investor to attend board meetings and provide input without having voting rights. Ultimately, the decision to offer a board seat depends on various factors, including the type of investor, the size of the investment, and the value they can bring to the company.

Investors who are friends and family may not demand a board seat

When it comes to seed investments, there are various factors to consider when deciding whether to offer equity and a board seat to investors. Friends and family are common investors in the early stages of a company's life cycle, often investing in the pre-seed or seed round. While their financial contributions are typically smaller in scale, ranging from $10,000 to $150,000, their support can be crucial for startup founders.

However, when it comes to board seats, friends and family investors may not demand or expect the same level of involvement as other types of investors. Here are a few reasons why investors who are friends and family may not demand a board seat:

• Lack of Industry Knowledge: Friends and family investors often invest based on their personal relationship with the founding team rather than strategic industry knowledge. They may not have the financial or technical expertise to contribute significantly to the board's decision-making process.
• Close Relationships: Due to the close personal relationships involved, founders might want to avoid potential conflicts or interference in daily operations. While keeping them informed is essential, friends and family investors should not influence business decisions through peer pressure.
• Time and Commitment: Friends and family investors are typically not actively involved in the oversight of the business. They may have other commitments and may not have the time or inclination to take on the responsibilities and time demands of a board member.
• Investment Structure: Friends and family investments are often structured as loans, convertible debt, or straight equity. These investment structures may not come with the same level of involvement or decision-making power as other types of investments.
• Informal Agreements: Friends and family investments are sometimes based on informal agreements or personal trust. They may not feel the need to formalize their role through a board seat, especially if they are confident in the founding team's capabilities.

It is important to note that each investment situation is unique, and friends and family investors may occasionally demand a board seat, especially if they have relevant expertise or a significant investment. In such cases, founders should carefully consider the potential value-add, shareholder weight, and alignment of goals before making a decision.

Investors with smaller stakes may not have the time to be on the board

Angel investors are high-net-worth individuals who invest their own money in emerging businesses. They are often current or former entrepreneurs themselves. They tend to invest in early funding rounds, including seed rounds, and their investments are typically structured as either convertible debt or equity. Angel investors often bring strategic industry knowledge to the company and take an active role as a director or advisory board member. However, angel investors will often make several investments per year, and may not have the time to be a board member for all of them. Some angel investors are passive investors, but many will be interested in the business and will have valuable perspectives to bring. They represent a collective force that can help the business in terms of expertise and network as investors or entrepreneurs themselves. They often have a significant weight in the company collectively, at 20-30%, and will often be an ally on the board because of their natural alignment.

Angel investors tend to syndicate and invest across multiple companies, pooling their resources. In 2022, angel investors put over $22 billion into early-stage companies. Their investments tend to be smaller than those of venture capital (VC) funds, with angels investing between $200,000 and $400,000 per deal.

VC funds, on the other hand, typically invest larger amounts and seek more control over a company's decisions. They usually demand a seat on the board. VC investors have a duty of care over their investors' money and must take reasonable steps to 'look after' their money and ensure maximum returns on their investment, even if this means steering the company in another direction.

Therefore, while angel investors with smaller stakes may not have the time to be on the board, they can still be valuable assets to the company and its founders. They can provide expertise and network connections, and their natural alignment with the company's goals means they can serve as allies on the board.

Giving up a board seat means having another opinion to consider

When negotiating funding deals, investors often ask for a board seat, known as an Investor Director position. Founders must then decide whether to allocate investors a seat on the board or not. The board of directors agrees and signs off on strategic company decisions, including the long-term vision, hiring and firing of key personnel, and major business changes. Therefore, it is an important decision for the founding team to make.

There are several factors to consider when deciding whether to give up a board seat:

• Value Add: Whether investors and directors can add value in terms of financial or technical expertise.
• Shareholder Weight: Whether the board reflects the various constituents of the shareholder base.
• Alignment: Whether the directors' goals are fully aligned with the founders and there is no conflict of interest.

Founders should carefully consider who belongs on their board. A board of directors usually has a diverse set of skills, expertise, and industry knowledge relevant to the startup. Typically, a startup will have a board consisting exclusively of founders prior to the seed round. However, as the size of seed rounds has increased, it has become more common for investors to request a seat on the board, especially if they are investing a large amount of money.

If founders do not want to give up a board seat, they can offer an Observer seat instead. This allows the investor to attend board meetings and have their say without having the right to vote.

Ultimately, giving up a board seat means having another opinion to consider. While this can provide valuable input and expertise, it may also lead to conflicts or slow down decision-making. Founders need to carefully weigh the benefits and drawbacks of giving up a board seat and ensure that they maintain control over their company.

Founders should push for what they believe is best for the company

There are several factors that usually influence the composition of the board, including the value the new members would bring, whether the board reflects the various constituents of the shareholder base, and whether the directors' goals are fully aligned with the founders without any conflict of interest.

Founders should also be aware that as the company grows, they may need to make a "rich" versus "king" trade-off, maximising either their wealth or their control over the company. This is known as the Founder's Dilemma. Founders who want to remain in control would do well to restrict themselves to businesses where large amounts of capital aren't required and where they already have the skills and contacts they need. On the other hand, founders who understand that their goal is to amass wealth will not view themselves as failures when they step down from the top job.

In the case of seed investments, it is not uncommon for investors to want a board seat, especially if they are investing a lot of money. This is more likely to be the case with larger funding rounds, where investors are putting in seven figures. However, this does not mean that founders should automatically agree to give up a board seat. They should carefully consider whether the investor will add value to the board and whether they are comfortable with the level of control and influence the investor will have.

If founders are hesitant to give up a board seat, they can propose an intermediate position, such as a board observer, who can attend board meetings and have their say but does not have the right to vote. This option provides a balance between the founder's desire for control and the investor's interest in monitoring their investment.

Ultimately, the decision of whether to give up equity and a board seat in seed investments rests with the founder, and they should push for what they believe is best for the company while also being open to compromise and bringing in new perspectives that can help the company grow and succeed.

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