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My seed-round lead investor is demanding a board seat -- do we agree?

We're a small team of three co-founders, just raised our seed round. Our lead investor had expressed interest in taking a board seat, but it was never discussed in detail or agreed to prior to closing. I do realize that we should have made this concrete beforehand. But here we are.

Now that the round is closed, we've had the discussion and decided not to offer a seat, as he is a "bullish" character to say the very least, and would dominate and dramatically change the dynamic of the team, likely not for the better.

However, unfortunately he isn't accepting that decision, and in fact is threatening to take legal action to have his investment returned if we don't comply, and we'll "never be able to raise our Series A" if we don't agree to put him on the board. The former threat is probably empty, the latter not.

So, damned if we do, damned if we don't? Is there an optimal outcome to this situation? I really appreciate all advice!

26 Replies

Brian McConnell
13
0
Brian McConnell Entrepreneur
Head of Localization at Medium.com
Fuck him. He will destroy your company if he gets entrenched on the board. I've dealt with personalities like this. They repel professional investors and will damage future fundraising (to the point where the damage exceeds the money he put in). If you can afford it, you maybe better off to give him his money back and move on. If he is threatening legal action now, it will only get worse when there is real money at stake. Ugh. Sent from my mobile phone. Please excuse any typos or discombobulations.
Mitchell Portnoy
3
0
Mitchell Portnoy Entrepreneur
Healthcare Information Executive
You're damned all right. You have to get rid of him now. No matter what happens in the future with him there will now always be bad blood. Do what you have to do to but GOING FORWARD WITH THIS GUY ON YOUR BOARD does not seem particularly welcoming. This is a bad marriage that you've just begun. Don't make it worse by prolonging it. Typos courtesy of my iPhone
Jacob Kojfman
1
0
Jacob Kojfman Entrepreneur • Advisor
Experienced technology and corporate lawyer, focusing on SAAS
Hi, I'm curious to know why you won't be able to raise an "A" round if you don't put him on your board?

If you have a strong enough team and product, you'd still be able to raise money, no?

In any event, there's a few things to consider. 1. The dynamics of your current board. 2. How active your board is. Remember, the board should not be concerning themselves with the day-to-day operations of the company but rather focus on the strategy, etc. 3. How the other board members feel about this. If enough of them are in sync, then there's always the possibility that they could mute him and his ways.

You may want to consider returning his investment to him too in exchange for a full and final release. You don't want the company value to increase a lot and then he sues you guys for forcing him out (although I wonder if you have a shareholders agreement in place with him as a party to it).


John Seiffer
3
0
John Seiffer Advisor
Business Advisor to growing companies
Give him his money back if you have to. You don't want him sucking your time or energy. If he wasn't being a dick you could give him an observer position, but he is so don't.
Stephen Williams
0
1
CTO & cofounder at Change My Path
It is often a condition of angel investors to have at least one board seat. As long as you have a majority, it doesn't seem like it will be a huge problem. Plus, he could be bumped with later investment. They don't use the term "smart money" for nothing: Be careful who you accept money from, when possible. After the deal's done, you should try to deal with the situation gracefully.
Diego Basch
6
0
Diego Basch Entrepreneur
Holder of Self-Referential Title
First off, whether there will be a board or not (and if there is one, who will be on) it is normally part of the term sheet. If the term sheet did not warrant a board seat to investors, your investor has no right to complain.

That said, a lead investor suing the company (regardless of the merit of the lawsuit) is bad news. It would almost certainly kill the company. You would have to use significant funds to litigate against the investor, who would almost certainly recover only a fraction of the investment when all is said and done. If he knows what he's doing, he knows that the threat makes no sense. If he doesn't, you picked a bad investor.

It sounds like you made a significant mistake by taking money from this person. If your description is accurate he does not know how to lead a round in a startup (otherwise the board seat would have been in writing). Now you have to make the best of the situation, that is: either try to appease him and live with him, or return his money on good terms if that's an option. Under no circumstances you want a lead investor who is openly adversarial to the founders.
Michael Brill
2
0
Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Dude, you need to create a Google Now for dick investors.

I assume your issue is that replacing his $$$ isn't easy and you could see other investors back out if the lead investor goes... and so you want to keep the money.

What's the chance that he actually had a reasonable expectation of a board seat? Maybe you were nodding a bit too much and he assumed that was a done deal... then, once you have his money, you come back and tell him you've changed your mind. If you were to be honest with yourself, can you see that? I'm going to hazard a yes guess. And, if so, can you see why he would freak out and feel like he's been had? Maybe he's not the anti-christ.

OTOH, maybe he is. But unless it's a trivial amount of money for him, he has no incentive to pursue low-probability legal action or attempt to scuttle a future financing - both are self-defeating. If you really have a solid case why he shouldn't expect a board seat, then put your head down and get back to work. The most important thing you can do for him and everyone else is to execute.



Michael Barnathan
1
0
Michael Barnathan Entrepreneur • Advisor
Co-Founder of The Mountaintop Program, Google Alum
First of all, you don't want him on your board. He sounds like a pathological personality, and nothing will sink the company quicker than giving people like that control. Ask what he really wants? Is it truly control?

So either way, you'll need to acknowledge the terms aren't compatible, give him his money back, and try to part ways as amicably as possible. (Bill is right that you can also technically ride it if you still maintain majority control, but that would wear you down from the constant arguing and probably make you feel sleazy at leading him on).

The difference is that you should apologize and make things right if it was in the term sheet. If it was not, politely tell him that it wasn't part of the original deal, but you're willing to give his money back because he's not getting what he wanted from the investment.

How you approach the communication could have legal significance if he tries to take action against you (not very likely, as it's considered extremely bad etiquette for an investor to sue a company they funded), but might also prevent you from burning bridges with your other investors.

As for those investors, be transparent. Explain what's going on. If they want to back out, so be it, but I bet they won't when they hear the circumstances.

Even better if you can find a new lead.
Alex Littlewood
0
0
Alex Littlewood Entrepreneur • Advisor
Founder & CEO at Motoroso
Based on what you've described, I would do everything I could to get out of this relationship with this investor and give him his money back. If he's so irrational as to demand something after the deal is done, then you do not want to deal with this person for the next 5-10 years.

One other option would be to issue him "Board Observer" rights. You tell him that "because the board seat was not in the term sheet it's irrational for him to demand a board seat after the deal is done". The Board Observer rights would not have voting rights, but it meets him half-way.

I've not successfully raised a round yet, but in most of my conversations with experienced high profile investors like Greylock, Trinity, Khosla, Upfront, and many others.... they have said that a granting a board seat at a Seed round is not a wise move, and contrary to what he's saying, can actually hurt your Series A.

This guy sounds like a very inexperienced investors, and an unstable individual. How much was the Seed Round? Is it even worth keeping to deal with his shit. If it's less than $250k, then I'd say get him out ASAP. If more than that, then find a way to make it work but proceed with extreme caution.
Rob Gropper
2
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
rough spot. If you really feel HIS money is critical then consider: 1) he can have a board seat, but he cannot be the one to occupy the seat - he, with your agreement, can find someone else to represent his interests on the board. 2) expand the board with another 1 or 2 personalities who not only handle him, but neutralize him and if he gets too far out of hand then push him out.
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