Venture Deals, 4th Edition

CHAPTER 6Control Terms of the Term Sheet

The terms we discussed in the preceding chapter define the economics of a deal. The next set of terms define the control provisions of a deal. Control provisions are important to venture capitalists, since they aren’t at the company on a daily basis (if they are, you have a different issue) and they want a say in actions that could materially affect their investment. Additionally, some control provisions are necessary to prevent VCs from running afoul of the fiduciary duties they owe both to their investors (their limited partners) and to the company. While VCs often have less than 50% ownership of a company, they usually have a variety of control terms that effectively give them control of many activities of the company.

In this chapter we discuss the following terms: board of directors, protective provisions, drag-along, and conversion.

Board of Directors

One of the key control mechanisms is the process for electing the board of directors. The board of directors is the most powerful element of a company’s management structure and almost always has the power to fire the CEO. The board has to approve many important actions that the company takes, including budgets, option plans, mergers, IPOs, new offices, significant expenditures, financings, and hiring of C-level executives. Entrepreneurs should think carefully about the proper balance among investor, company, founder, and outside representation on the board.

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