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Who can be on the board of directors?

Are there any laws/rules/conventions regarding the board positions (specifically for a private LLC company, if that matters)?
I once heard that you need to be a shareholder with at least 10% of the company to be on the board. Is this true?
I also recently encountered an investor who required that a board must have representatives from more than one country before he'd consider investing. What kind of unusual requirements have you seen investors (or someone else) making in this regard?

Also, is it always true that each director has exactly one vote on the board (not counting tie-breaking votes and such)? No proportional voting based on the stake in the company, for example (that might help lowering requirement for board members, I'd think)?

10 Replies

Isaiah D. Cooper
1
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Isaiah D. Cooper Entrepreneur
Principal - Cooper Law LLC, providing practical solutions for complex business transactions in New York & Connecticut.
Dimitry,

LLC's have almost unlimited flexibility in structure. They can be managed by their members (owners), though I don't recommend that unless the members adopt a set of rules for how decisions will be made. Most of the LLC statutes provide for the possibility of having managers without providing any specific information about how managers will function. In contrast, most corporate statutes provide clear guidance on the role of directors and the authority and responsibilities which directors will have. I usually import some structure from the corporate model and specify that the LLC will be managed by a board of managers which will have the same rights, authority and responsibility that directors would have under the corporate statute in the jurisidiction where the LLC is being formed. Like in corporations, where the shareholders elect the directors, I provide for the members of the LLC to elect the board of managers and to set the number of managers. I have the board of managers function like a board of directors and engage the executive officers who will have responsibility for the day to day operations of the company.

Most LLC and corporate statutes do not require an ownership interest for serving as a manager or director. However, the members might want to require that.

Generally, when I form LLCs, I provide for an odd number of managers and for each manager to have a single vote. In privately owned LLCs (most of them), as in privately owned corporations, the members, managers and the executive officers are the same people. When a company (whether an LLC or a corporation) is obtaining investment capital from VCs, they generally want a right to appoint/elect at least one manager or director. If an LLC or corporation is held 75% by one individual with the balance spread in much smaller percentages among a number of other individuals, the majority owner may want (or insist upon) the right to elect a majority of the managers or directors.

I think in an LLC one could provide for some form of proportional voting if it was desired.

I think having a requirement that the board (of directors or managers) have members from more than one country might make sense where the company has operationsand owners inin certain countries.
Rob Gropper
2
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Dimitry; no such limits on boards, especially private companies. I'm not an attorney so this is just coming from experience. You could have your cat as a board member, though future investors might wonder. The 'rules' should be spelled out in your articles of incorporation and bylaws which, if drafted by a competent attorney in your state of incorporation should provide for the 'typical" rules that investors are used to seeing in that state. That's one reason Delaware is common for incorporation - investors know what to expect. No % ownership limitations - imagine if a Google or Apple board member quit or is voted out or dies, having to purchase 10% of the company would be a very heavy lift for all but the very wealthiest and shareholders would not stand for giving away 10% to a board member. Not sure where that came from, but my guess is that 10% ownership comment likely came from an investor - wanting to be sure that new investors (after he got his seat) had to step up with a significant investment before they could expect a board seat. Pick a number that works for you - often 5 on the low end and 9 on the high end, but no hard and fast laws that i know of. odd numbers are good for obvious reasons. i've been on boards of 1, 2 and 11 members - IMO 11 was too much. regarding investors from more than 1 country, again investors can demand whatever they want and the current board could adopt that as an amendment to the bylaws if they choose. re voting authority, look at a company like Facebook where Zuck owns less than a majority shares, but retains greater voting control that his ownership % (majority if i'm not mistaken), even as a public company. It's whatever you bake into your articles and bylaws as long as they don't conflict with your state requirements. I have a Social Purpose Corp and one item in our articles states that it takes a 2/3rd majority to change our social purpose - that happens to be a state requirement in WA for SPCs. If you will be brining on investors i would encourage you to work with an attorney who has experience working with VC/angel funded companies to be sure to get the early details right. As is often the case it's a balancing act between your desire for control and not scaring off investors with odd or draconian articles and bylaws.
Michael Brill
1
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Do not... I repeat... do not put your cat on your board. Cats make *horrible* board members. PM me for more info.
Steve Everhard
0
0
Steve Everhard Advisor
All Things Startup
If you are convened as an LLC you are a partnership with limited liability. You do not have directors in the accepted corporate sense and the managing partners usually form the board. In professional services firms they may be referred to as 'equity partners'. Within your partnership agreement you may decide to co-opt advisors onto your board but they have very limited constitutional power or legal liability.the fiduciary obligations do not apply as LLC's operate pass-thru taxation arrangements that fall on the individual partners rather than as a Federal company tax.


Isaiah D. Cooper
0
0
Isaiah D. Cooper Entrepreneur
Principal - Cooper Law LLC, providing practical solutions for complex business transactions in New York & Connecticut.
Michael,

I agree, absolutely. Cats usually sleep through board meetings . . . .
Dmitri Tcherbadji
0
0
Creative & Tech Entrepreneur
In my experience, it was drafted in the contract: certain percentage in the company gets you a seat.
Jaswant Pujari
0
0
Jaswant Pujari Entrepreneur
Entrepreneur
Lets say you are a new Founder/CEO
Do not be in a hurry to get a board of directors.
Their job is to oversee you and fire you if needed.

Instead get a board of advisors whose primary focus is to help you
build a better company with their experience, contacts and time.

If you get funded and take money from someone, you will probably have to put a board of directors in place to protect the investors interest (not yours)
which means you will need some board members on your side to maintain the balance of voting power. It is usually based on the ownership. So it is important to determine how much ownership you want to give up without losing control of the company through the board of directors.

Dimitry Rotstein
0
0
Dimitry Rotstein Entrepreneur
Head of R&D at SafeZone
>Do not be in a hurry to get a board of directors...
>Instead get a board of advisors whose primary focus is to help you

That's just the thing. We have the advisory board, and are looking for investors. One potential investor said that we need a board of directors before he takes us seriously. Or maybe the advisors said that. I'm not sure - our CEO deals with that. So the CEO wants to take a couple of advisors and make them directors. I have serious doubts that this is a goof idea, but here I'm asking a somewhat narrower question - can an advisor (who has maybe 1-2% of stock) be appointed a director, and if not, who can? Like I said, I thought that there are some standard restrictions, but apparently, there is a lot of flexibility on this issue.
Shane Boudreau
0
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Shane Boudreau Advisor
CEO at VestIn
There are no such limitations, you have the ability to place anyone on your board. I have had clients use outsiders many times that had no vested interest in the company.
Jaswant Pujari
0
0
Jaswant Pujari Entrepreneur
Entrepreneur
If the purpose of the board of directors is to raise money
then I would add someone that has a track record and is respected in the investor community.
If you are having trouble marketing yourself, to raise money,
you will probably not be able to market a board of directors, to raise money.

Turn the table around and get a board that can market you, to raise money.
A good board member can make a few phone calls and help you raise money based on their credibility. The money/equity you compensate them with will be worth it. They will be able to do something you could not do on your own.
Good luck

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