Do I need to worry about voting rights on my Board?
(This was first published on Linkedin Pulse on 19 Aug 2015.)
What are voting rights? These are normally contained within your Shareholder agreement, and they outline who is on your Board, what decisions your Board (vs shareholders) get involved in, and how many votes that Board members carries on behalf of the shareholders, should an issue come to a vote.
I go to a lot of Board meetings, and I can count on one hand the number of times something was put to a vote. It does happen if it is impossible to reach consensus on an issue, if that’s the case then that means Board members are unaligned on the future direction of the company, and there is no other way to move forward.
I have seen savvy Chairpersons’ use an “unofficial” vote (ie: everyone gives their opinion however it’s not a formal vote, thus not documented that way in the minutes) to ensure a decision is reached.
Do votes happen? Of course they do, otherwise it wouldn’t be in Shareholder agreements. Normally it’s a sign that there is dissension between shareholders, sometimes also with the founder.
One of the terms venture capital (VC) and private equity (PE) firms will often demand as part of their investment is to ensure that they carry a substantial vote on the Board. They see this as a protection around their potential exit. The exit is often the point of disagreement which may trigger a vote in the first place. The other is around the role the founder plays at a later stage.
Do voting rights matter at an early stage?
If you have just founded your company, you have an incubator and perhaps founding, seed or angel investors involved, they are meant to be part of your team to maximise your chance of success. They are investing in you, as the founder, and your vision. If you’re getting into issues with them which need a vote, then you’ve got a serious relationship problem on your hands.
You should always have a clear view in mind of what you want to achieve and what exit options will help you achieve that, however for founders, seed and angel investors this is a long term investment.
Your discussions at the early stages should be around how to build go to market strategies, what the product roadmap should look like, what alliance partnerships are going to help you build traction, who’s your next key hire, who’s your next strategic investor. If your exit strategy is about selling IP only, then that would roll into the partnership discussions as your potential buyer, otherwise exits are not a high priority for Board level discussions at this stage.
Once a VC or PE firm comes in, then the exit strategy and the role of the founder will be front and centre and voting rights will really count. At that stage the founding and angel investors are your ally in maximising the control you retain of your business – you will be far more successful if you’ve been collaborating to date, rather than getting into issues that require a vote.
Pay attention to voting rights in any shareholders agreement a new investor puts in front of you. If they are demanding a controlling vote from day 1 that’s a good indication they may not have the alignment you need for a long haul journey. However, if you complete your capital raise with a good sense of partnership, that will be far, far more important than the voting rights in the shareholders agreement in terms of your chances of success.