How do startups decide who sits on the board?
A company’s board of directors is technically elected by the company’s shareholders. So before a startup receives outside funding, the board is “elected” by—and usually consists of—the founders (although it may exist in name only.)
Once a company receives its initial seed, angel or venture funding, the documents prepared for the investment will include a Shareholders Agreement that gets signed by everyone. This agreement includes, among other things, specific procedures for determining who gets to pick the members of the board.
In a small startup with a small seed round, the board might consist of three people, with one (usually the CEO) selected by the founder(s), one selected by the investors, and one “outside” or independent director agreed upon by both parties.
In a larger startup post Series A or B, the board might be expanded to five people, with two directors chosen by the Common stock holders (the founders), two by the investors (often one by each of two VC funds), and one independent director agreed to by everyone.
If at this point the company has a non-founder CEO, that position might get a board seat (with one for the founders), and if there’s only one major investor, they may choose to fill one of their two seats with an industry expert.
But typically, the Common seats will be filled by the founder(s); the investor seats by the lead angel (for an angel deal) or the VC partner and/or an associate (for a venture-led deal); and the independent seat(s) by someone experienced and knowledgeable acceptable to all parties.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.