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

February 20th, 2015

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!

Brian McConnell

February 20th, 2015

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.

Diego Basch Holder of Self-Referential Title

February 20th, 2015

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.

Bruce Leban Software developer, inventor, innovator

February 21st, 2015

I'm going to be a bit more blunt than most of the other responders. Seed funding is personal. You shouldn't raise money from someone you don't want to have a relationship with. And since the lead investor represents the other investors during the funding, it's not at all unusual for them to continue that role and take a seat on the board.

Blaming him for the problem isn't constructive. Unilaterally rejecting him could be an issue to future investors. While VC funding isn't personal, VCs want a seat on the board too. Why? It's not because they just want to attend meetings. It's because they want to be engaged with the companies they invest in. And you're telling them you just wanted this guy's money, and not any other help.

You need to find a compromise. Would he accept full access to information provided to the board without actually attending meetings? Was there another major investor that you could offer a seat on the board to, to represent the seed investors?

Brian McConnell

February 21st, 2015

Expanding on my previous point now that I have a proper keyboard. It is important for you to understand what this kind of toxic personality can do. They can, and will, destroy your business, and by coincidence, you. The fact that he is threatening legal action at such an early stage is everything you need to know, and the only thing you can do is RUN, and do whatever you can to separate yourself from him. I had an "angel" investor like this in my third business. We had a solid product concept around group communication for companies (think twitter for your business), and this was back in 2006. We had a working product, engineers, etc. We took on an $100,000 investment from this person, which in telecom is basically toilet paper. It helped us pay contractors to polish the product's appearance, but none of the principals saw a dime of this. Within two or three months, I started receiving daily calls about "my fucking money", where it became clear he thought of this as a "Guido & Guido Associates" loan shark type of investment. He did _absolutely nothing_ to help us bring in the expected follow on round. It just deteriorated from there, with him badgering staff and contractors (he caused my best engineer to walk off the job, and that alone basically fucked the company). We got so disgusted with the whole situation that we just wanted out, and ended up in an IP fire sale, and guess what, the "investment banker" was in our angel investor's pocket. He negotiated a shitty deal where the angel got a fraction on his dollar, and the rest of us? We got thrown under the bus. I ended up in personal bankruptcy and foreclosure, and lost a half decade of my life. So I cannot overstate the importance of avoiding toxic people in your business. Your angel investor sounds like absolutely bad news. At this stage in your business, you want someone who will back you, even if things go south. If he's threatening legal action before you've even gotten past seed stage, you just need to cut them loose. As painful as that may be now, it's better than having your life completely destroyed.

Michael Brill Technology startup exec focused on AI-driven products

February 21st, 2015

Ongoing devil's advocacy... what if the post was this:

"I recently made a significant investment in a startup. I took a chance and acted as the lead investor such that the company was able to attract others and fill out the round. In my discussions with the CEO, we talked about a board seat for me. I didn't feel like it needed to be documented in the financing materials as I trusted the CEO. Now, after the financing is done, the CEO tells me that he changed his mind and does not want me on the board and that we never had a firm agreement. As you can imagine I am really, really upset and feel like I was taken. Frankly, I would not have made this investment without the board seat and the CEO's behavior just cements this. So I have requested and then demanded the return of my capital. He told me no - now that he has my money, he doesn't need me. So I have had no choice but to threaten legal action because I've run out of options. Please help me as I don't know what to do."

Mitchell Portnoy Healthcare Information Executive

February 20th, 2015

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

John Seiffer Business Advisor to growing companies

February 20th, 2015

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.

William Pilar Fantasy Sports Entrepreneur, Pioneer, Executive ♦ Business Development ♦ Consultant ♦ Writer ► Open to New Opportunities

February 23rd, 2015

Playing Devils Advocate here, I have always believed most of us know the answer to our dilemmas and seek validation in the form of others.

You stated,"...but it was never discussed in detail" and then went on to state,"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."

People w/money who invest in others rarely tend to hide the personalities they have. I would suspect his personality was there from the get go. You stated you never discussed, "in detail," but it's obvious per your post something was discussed or it was brought up. Once you got his money you discussed with your fellow founders about having him as a board member and decided not to have him.

Would this have been the answer before receiving the funding? What would the answer have been in that scenario? If no, then return the money and move on. Only you know the answer to that and I'm playing devil's advocate here.

I believe there are three sides to a story. Each party has their versions and the truth is somewhere in the middle. I say that because it's easy to word it as you did but Michael Brill worded it from the would-be board member if if he was here. Again, my point is merely to have you look at it from other perspectives.

Board members want to make sure the powers that be - management - are doing their jobs. The fear from the founders is that board members will be meddling and not let management do their jobs. There's no doubt some board members have their own agendas and that can result in hurting the company's growth and that fear is legitimate. However, when you accept investor dollars you must accept the fact you will lose some control.

Some things to consider that echoes the group:

1. Give him back his money.

2. Do due diligence and find out how he has been on other boards or run his own businesses, etc. Not just a cursory look but dig into it. It may turn out that "bullish" behaviour may be what you need to convince others to invest? Who knows?

3. Potential "Advisor" roles are also beneficial but Diego Basch has legit points on that as well.

Finally, this is a learning experience and you now realize board discussions or the "investor's" role in the company after the investment must be part of the discussion.

Good luck and we all understand the fear because raising money is never easy.

Michael Brill Technology startup exec focused on AI-driven products

February 20th, 2015

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.

Jacob Kojfman Experienced technology and corporate lawyer, focusing on SAAS

February 20th, 2015

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).

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