When hiring a new CEO it is important that they do not take a common board seat, as they might be aligned with VCs and they do not represent common stockholders. A new board seat should be created for a non-founder CEO.
- How helpful? Scale of 1 to 5
BoD, investor control, founder-leaning board, new executives
- Relevant questions addressed
Why is it important that CEOs don’t take a common seat on the BoD?
- Summary bullet points
- A common term in term sheets if for the CEOs to hold a seat on the BoD. Usually, they take one of the common seats.
- In a very early stage, since the CEO is likely to be one of the founders, this does not constitute much of a problem for founders.
- However, if the CEO is replaced, the common shareholders will lose one seat to the new CEO, who might lean with investors on board matters
- As the CEO is likely to come from the VC network, they are likely to be aligned with the VCs
- A coalition of CEO+investors might damage the company because VCs can control the company, and indirectly, managerial decisions. This virtually affords them full control
- New CEOs might become hostile to the founders and might seek more equity as contribution to their work, diluting founders
- Common board seats should be elected by common shareholders, and CEOs should have their own seat.
- Investors might argue a new CEO seat tips the board in favor of common stock
- Independents also tend to hold common stock but VCs do not see them as common-leaning
- The CEO is not representing the common stock but must create value for everyone (as the other directors do)
- Follow-up links
What are protective provisions? - http://www.startupcompanylawyer.com/2007/08/05/what-are-protective-provisions/
How to bring in a new CEO for your startup - https://hbr.org/2016/02/how-to-bring-in-a-new-ceo-for-your-startup