The board – structuring control and decision-making

read time: 5 mins

15.01.25

Sam Brown

In venture capital deals, the composition and powers of the board of directors plays a pivotal role in shaping the governance of the company. The board is the strategic decision-making body, responsible for overseeing the company’s management and ensuring its long-term success.

For both founders and investors, structuring the board’s composition and control mechanisms is a critical aspect of the term sheet negotiation.

This article in the ‘Anatomy of a term sheet’ series explores the key considerations around board structure in venture capital deals, the typical terms found in a term sheet, and how these provisions influence governance and decision-making.

The role of the board in a venture-backed business

The board of directors provides oversight, strategic guidance, and accountability. In a venture-backed company, the board has additional importance because it balances the interests of founders, investors, and other stakeholders.

Key responsibilities of the board include:

Setting strategic objectives and approving key decisions.
Monitoring financial performance and ensuring accountability.
Appointing and managing the CEO and senior leadership team.
Approving significant transactions such as fundraising, acquisitions, or exits.

In venture-backed businesses, the board often serves as a mechanism for investors to monitor their investment and exercise control over critical decisions.

Key board-related terms in a term sheet

Board composition

The term sheet will typically specify the number of directors and how seats are allocated between founders, investors, and independents.

Common structures include:

Balanced board: equal representation for founders and investors, with independent directors to break ties.
Investor-majority board: investors hold a majority, often seen in later-stage or distressed situations.
Founder-majority board: founders retain control, common in early-stage deals.

Board observer rights

In addition to formal board seats, investors may request observer rights, allowing them to attend meetings without voting rights. This provides investors with visibility while minimising their influence on decision-making.

Decision-making and reserved matters

The term sheet will define which decisions require board approval versus those requiring shareholder approval.

Certain critical decisions such as issuing new shares, approving budgets, or exiting the company, may require unanimous or supermajority approval.

Founder protections

Founders often negotiate veto rights over certain decisions to protect their vision and control during the company’s growth phase.

Practical considerations for structuring the board

Balancing control

The board’s composition and powers should reflect the relative stakes and contributions of founders and investors. For example:

Early-stage deals: founders often retain board control, as their vision and operational input are crucial to the company’s success.
Later-stage deals: investors may seek a greater voice on the board to manage risk and protect their investment.

Independent directors

Independent directors can act as neutral arbiters, breaking deadlocks and providing expertise. However, both founders and investors should agree on the criteria for selecting independent directors to avoid conflicts.

Flexibility for growth

Board structures should remain adaptable to accommodate changes in governance as the company grows and raises additional funding.

Examples of board-related provisions in term sheets

Balanced board with independent director

"the board shall consist of five directors, including two appointed by the founders, two appointed by Series A investors, and one independent director mutually agreed upon by the founders and Series A investors."

Investor control in later stages

"the board shall consist of five directors: three appointed by the series b investors and two appointed by the founders. Investor director consent is required for all reserved matters."

Observer rights

"Series A investors shall have the right to appoint one board observer, who shall have the right to attend all board meetings and receive board materials but shall not have voting rights."

Analysis: founders’ perspective vs. Investors’ perspective

	Founders’ perspective	Investors’ perspective
Motivations	Founders aim to retain as much control as possible to protect their vision and ensure flexibility in decision-making. They value balanced board structures or founder-majority boards.	Investors want oversight and influence to protect their investment and ensure the company is managed effectively. They seek mechanisms to prevent decisions that could harm their returns.
Preferred position	A balanced or founder-majority board in early stages. Veto rights on decisions that could fundamentally alter the company’s strategy or ownership (e.g. changes to share capital, M&A transactions). Agreement on independent directors to ensure alignment with the company’s goals.	Investor-majority boards or veto rights over critical decisions in later-stage deals. Observer rights to stay informed without taking on fiduciary duties. Reserved matters requiring supermajority approval for significant actions like issuing new shares or exiting the company.
Risks	Losing board control too early can limit the founders’ ability to execute their vision or make rapid decisions in the company’s best interest.	Over-controlling governance structures can demotivate founders and hinder the company’s agility.
Where they align	Both founders and investors benefit from a board structure that balances oversight with operational freedom. A balanced board with independent directors is often the best solution, providing strategic input and reducing the likelihood of deadlocks.

In summary

The board is the cornerstone of governance in venture-backed businesses, balancing control between founders and investors while overseeing the company’s growth. Structuring the board in a way that reflects the needs and contributions of both parties is essential for building trust and ensuring long-term success.

Read the next article in Ashfords’ ‘Anatomy of a term sheet’ series, where we explore founder vesting, a critical term for aligning incentives and protecting the company’s equity structure.

If you're navigating the complexities of venture capital term sheets or preparing your business for investment, our experienced team is here to help. Get in touch today to discuss how we can support you in securing the right deal for your business.

Our anatomy of a term sheet series

Our 'Anatomy of a term sheet' series breaks down each critical section of a venture capital term sheet, offering technical insights and practical real-world examples to help founders with their fundraising journey.

Our aim is to demystify term sheets and empower founders and their advisors to navigate negotiations with clarity and confidence.