When Does a Seed Stage Company Need a Board with More Than Just the Founder?

I recently engaged in a conversation (over a few days) about the need for a seed stage company to have a board member other than the founder.  There is not a “right” answer to this, but the positions are worth exploring.  For clarity, a company with one founder can have a one member board (assuming a corporation).  Might be kind of lonely, but completely legal.

There are many angel investors that rarely take or want a board seat.  It is not their operating model.  Dave McClure (500 Startups) and David Lee (SV Angels) are 2 examples, but there are many many others.  Their model is invest relatively small amounts in ($50K to $200K) in lots and lots of companies.  No way to be actively engaged with all of them day in and day out with board seats.

And there are some angel investors that know that even with “light” preferred stock terms (sometimes called Series Seed), there is enough control built into the terms of the preferred stock that the company is still mostly restricted when it comes to making key decisions.  So why need a board seat when the control already exists? Fair point.

My subjective view is that once a company raises money from a few institutional investors over $400K – $500K in total that the company should have an investor representative on the board.  This is particularly true if the founding team is new in terms of “running a company” experience.  I think that the founders will benefit from the oversight and hopeful board partnership and I think that the investor board member benefits by being more engaged and learning more about the business.

This can be a tricky line.  The decision to have an investor on the board is really one for the founder.  If the investor insists, the founder can turn them down (if other investors are waiting in the wings).  And the other investors not taking a board seat should defer to the founder’s desires too.  If the founder is ok with an investor board member that is the what counts.

One final thought – what about the VC’s fiduciary duties to its own investors (called limited partners).  We are investing other people’s money.  Let’s say a seed stage company raises $600K from a group of seed stage VCs.  It is reasonable to think that the limited partners would expect their money managers (i.e., the VCs) to have a board representative to better oversee the investment and hopefully help build value at the company?  I think many limited partners would answer “yes”.

Love to hear your thoughts on this.  Happy holidays too!

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