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Understanding Management Rights for startups

What does management of company mean?

Legally, the Board of Directors of the company are vested with the judiciary responsibility for the management of the company. The Board of Directors are appointed by the Shareholders. 

At the time of a fund raise, investors prefer negotiating the composition of the Board of Directors of the company with the Founders.

Composition of the Board

Under the shareholder’s agreement, investor may wish to impose a maximum number of people who shall constitute the Board of Directors. In certain cases, along with the number of directors, the investor may also define the composition of the Board i.e. the investor may ask that 50% of the members of the Board of Directors shall be represented by the investor. Usually, the composition of the Board is influenced by the investors only when they a become significant minority (49%) shareholder of the company.

Appointment of Observer to the Board 

When investors do not intend to hold a large stake in the company, they may tend to appoint a Board Observer. A Board Observer does not have a voting right but is present in each and every meeting of the Board of Directors.

The appointment of Board Observer is usually limited by stake held by the investor in the company on a fully diluted basis. Which means, that the Investor may agree that the power to appoint a Board Observer shall vest with the Invest till the time the investor holds at least 10% in the company on a fully-diluted basis. Thereafter, the investor will not have any right to appoint a Board Observer.  

Board Meetings

Apart from the statutory requirements to hold board meetings, the investors through the shareholders’ agreement require that the board shall hold meetings at least ‘X’ number of times each year. 

Specifying such number of board meetings help the investors to keep regular track of the progress and business operations of the company.

This post is part of our Founder’s handbook – “Negotiating Shareholder’s Agreement”, a comprehensive handbook for founders to negotiate shareholder’s agreement. Click here to download the complete handbook.

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