The Voting Rights Agreement is the pivotal document that defines the Board of Directors for the company as of the time of the closing of an investment. The Corporate Charter (typically) and Stock Purchase Agreement will reflect this Board organization. The normal structure of a Board for the Series A preferred investment is one member from the Common share class, one member from the Series A share class, the CEO, and two individuals that are independent. Often the Series A investor gets two seats to ensure balance with the Founders, who will typically comprise the Common and CEO seats. In this case, an independent Director is identified to be the tie breaker. It is quite normal for a Series B investor to expect two seats as well, which typically takes the Board from five seats to seven.I can tell you from personal experience, that five members is an optimal Board size. Three is too few and typically slanted to the Founders. Seven is too many to herd in one direction to reach a conclusion. The optimal configuration for a Series B investment is Common, CEO, Series A, Series B, Independent. NEVER go beyond seven members. Typically, we cease investing a company once it reaches a Series C investment because the valuation is beyond our appetite. At that point Angels stop investing, typically they lose control of the Board of their seats on the Board.

The Agreement specifies the following:

  • The size of the Board
  • Board Compensation – typically, investor Directors to not receive compensation for early stage private equity companies. Only independent Directors to and at a rate of between 0.025% and 0.05% of the company per year of service.
  • Board composition – typically one from the Common share class, one or from the Series A share class, the CEO, and one or two independents (independent directors are hard to find!).
  • It specifies the process for removing a Director and limits the liability for electing duly nominated/elected Directors.
  • The other important detail in this agreeing is the ability to authorize stock pending approval of the Shareholders, who must vote as a class and have 51% of each class voting affirmatively.
  • The agreement specifies “Drag-Along Rights,” which are the rights of the majority of shareholders to cause the company to be liquidated (acquired typically). This means a vocal minority may not stall or stop an acquisition that 51% of all shareholders who believe is in the best interests of the company and shareholders.
  • The agreement ensures that all parties have the right to liquidate their shares if the majority of shareholders vote to do so. None may be left behind.
  • The agreement defines the actions and steps that are to be taken at the time of a liquidation event.
  • The agreement specifies how new shares, options, warrants, etc are treated, essentially binding them to these terms.
  • The agreement specifies that any disputes will be subject to a specific court in a specific state and shall waive rights to a jury trial for expedience and cost. Further, any unresolved claims shall be subject to binding arbitration for the same reasons. And, typically, the prevailing party’s bills are paid by the looser. This prevents both parties from stone-walling and filing frivolous lawsuits.

For more information:

This is published under the Appalachian Regional Commission POWER Grant, PW-1835-M.

Copyright Appalachian Investors Alliance, Inc. 2018
@angelcapitalgr | @appalachianinvestors | | |

%d bloggers like this: