Why you need a Board, where Investor Director and Investor Consent comes in, and when you need shareholder approval.
Occasionally we get contacted by founders asking why our funding round documents refer to the company having a Board, and is it possible to not have one. So, we thought it worth writing a quick article on company governance, and how our funding round documents are carefully designed to pick the right balance between allowing the founders to run the company efficiently on a day-to-day basis, but to also give the investors the look-in and protections that they need.
So, let's start with the Board.
Your company can't not have a board. And actually it already has a board. Every company has a board, because the director or directors acting together are the board.
The next question then is which decisions can be made by the CEO, which by the board, and which need investor or shareholder approval.
Taking a step back, corporate governance can be thought of as being split into a number of 'layers':
LEVEL 1
CEO
The CEO can buy a new coffee machine, hire a new team member whatever, without needing to ask anyone else. It’s prudent and good governance to set an upper threshold of course; a Ferrari, for example, might be pushing things a bit far.
LEVEL 2
BOARD
The larger operational decisions, typically ones that can have a significant effect on the company's cash reserves or have a wider legal impact on the other directors (HS&E for example), those decisions get escalated to the board. This is a good thing, because it protects the CEO by providing shared responsibility, and showing people that key decisions were taken after due thought and process.
or
BOARD WITH INDEPENDENT DIRECTORS
Sometimes the founders or the investors will want to beef up the board by adding some non-executive directors (NEDs). Unlike Investor Directors (see below), these independent directors won't have any special veto rights, they are completely impartial but they will have a vote and their votes will count just like any other director on the board. On SeedLegals, if you select that you want one or more independent directors, then the Shareholders Agreement will have wording that has the founders and the investors collectively agree and appoint those directors, and remove them later if they wish.
or
BOARD WITH INVESTOR DIRECTOR CONSENT
One step above that is to have Investor Director Consent.
LEVEL 3
INVESTOR CONSENT
Some things - like issuing new shares, or selling the company, or doing anything that will cause the investors to lose their SEIS or EIS, are things the investors are going to want some say over. And so there are a set of reserved matters, as they're usually called, where investor consent is needed.
The idea here is to not have to go back to investors for things that the board should handle - investors will hate it if you have to get their written consent for any number of trivial company decisions, and you will be unable to run the company effectively if you have to wait for an investor majority consent each time you need to e.g. hire someone new.
And it's for this reason that we split the company governance (Schedule 6 of the Shareholders Agreement) into 'big picture' things that need investor consent, and 'day to day' things which need board approval. That's not a SeedLegals construct, that's the ways it's evolved over tens of thousands of companies and their funding rounds.
LEVEL 4
SHAREHOLDER APPROVAL
The final seal of approval often comes from the shareholders (providing their shares give them the right to vote).There are certain actions set out in the Companies Act which must have a properly documented shareholder vote.
Some of these action require a General Resolution, a minimum 50% shareholder majority and others, a Special Resolution, a majority of at least 75%. These include actions such as creating a new class of shares which would wipe out the benefits or value of the existing shareholders and changing the articles of association.
Just be mindful that if you do want to take any of these actions, whilst the law might permit it through shareholder voting rights, you may still need to obtain the consent of the board, investor director or investor majority consent before seeking shareholder approval, in keeping with your contractual and governance obligations under the Shareholders Agreement and your articles of association.
At Seedlegals we've taken a lot of complexity and packaged it into a set of options that allow you and your investors to quickly and efficiently reach agreement on the right company governance and investor inputs that are appropriate to your company, taking into account founder experience, stage of growth, size of team and raise amount whilst at the same time meeting your investors’ expectations.