The myth of the Common Director (who must always be the CEO)

“Model” term sheets don’t always make it easy to tell which deal terms are most important for an investor, or for a founder, or for the company as a whole.  The substance may be driven by investors, companies, founders and the market, but the structure is usually driven by lawyers, for lawyers.  The NVCA model term sheet – a term sheet built by lots of lawyers – is organized primarily based on where those terms appear in the legal documents that will be prepared next, after the term sheet gets signed, to close the deal.  This lets lawyers be more efficient after the term sheet gets signed.  But it doesn’t help a founder understand what matters most: valuation and control.  That’s yet another reason why a high-growth technology company needs to be represented by lawyers that do deals for high-growth technology companies all the time.  

The NVCA model term sheet puts the Board of Directors composition several pages in.  One of the board designees in the template is “the person then serving as the Chief Executive Officer.”  At the earliest stages of a company, a founder will usually be the CEO.  But founders should not view this seat as “theirs” for the long haul.  There are many reasons that a founder might no longer serve as the company’s CEO at some point in the future.  If an outside CEO is brought in later, that CEO should have a seat on the Board.  That’s why the language is there, and why is makes long term sense for the company; it ensures that the future CEO can join the Board without having to renegotiate Board structure.  But a founder working on a deal today needs to view this seat as entirely distinct from the founder’s own board seats.  Founders shouldn’t get sidetracked in a term sheet negotiation by thinking that having, say, two Common board seats (one of whom is always the CEO) means that the founders will control two board seats forever.

By Jeremy Raphael

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