What should the composition of the board be like and how are the board seats allocated?
Takeaway: Board composition is a negotiated outcome of a financing round that evolves over time, typically starting with a founder-controlled board and transitioning to a board balanced between founders, investors, and independent directors.
The composition of your company's Board of Directors is one of the most important control terms that is negotiated during a financing round. The allocation of board seats is a direct reflection of the power dynamics of the company, and it determines who has the ultimate authority to make the most critical strategic decisions. The structure of your board will evolve as your company grows and raises more capital.
Stage 1: The Initial Founder-Controlled Board
At the moment of incorporation, the board is typically composed of just the founders. For a two-founder company, this might be a two-person board. This gives the founders complete control over the company in its earliest days.
Stage 2: The Series A Board (The "2-2-1" or "1-1-1" Structure)
After a company raises its first institutional round of financing (the Series A), the lead investor will demand representation on the board. This is a standard and reasonable request. The negotiation will then focus on the size and balance of this new board.
The Three-Person Board: For very early-stage companies, a common structure is a three-person board. A typical allocation would be:
One seat for the lead investor.
Two seats for the founders.
In this structure, the founders maintain control of the Board.
The Five-Person Board: Less common (though more often seen in early distressed deals) is a five-person board. A standard "2-2-1" structure is often used:
Two seats for the investors.
Two seats for the founders/management.
One independent seat.
This also creates a balanced structure where no single faction has majority control.
How Seats are Formally Allocated: The Voting Agreement
The board composition is not a handshake deal. It is legally codified in the Voting Agreement that is signed as part of the financing. This contract specifies exactly which stockholder group has the right to elect which director. For example, it will state that the holders of Series A Preferred Stock, voting as a separate class, have the right to elect one director, while the holders of Common Stock have the right to elect two directors.
The Crucial Role of the Independent Director
The independent director seat is often critically important because they are the tie breaker between the competing economic interests of the founders and investors. This individual should be a respected industry veteran or experienced operator who is not affiliated with either the company or the investors. Their role is to provide an objective, unbiased perspective and to act as a potential tie-breaker on difficult issues, ensuring that the board always acts in the best interest of the company as a whole.
The goal of building a board is to create a small, effective governing body that brings a diverse set of skills and perspectives to the table, with a structure that appropriately balances the control rights of the founders and their investor partners.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.