Board Observer Rights & Dedicated Board Seats - Term Sheet Provisions
What are Board Observer Rights? What are Reserved Board Seats
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What are Board Observer Rights?
Board observer rights, as the name states, allows investors to observe board meetings. This allows non-directors to be a part and presence in the corporate meetings. This includes taking part in discussions and committee meetings. The limitation is when attorney-client privilege is required. These rights are often reserved in the bylaws or in information agreements with investors.
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What are Dedicated Board Seat Provisions?
The default rule upon a financing is that common shares vote for election of directors. If preferred shares receive voting rights, the conversion to common shares ratio is used to determine the number of votes held by the preferred shareholders. As discussed in the voting rights section, investors generally negotiate the right to vote for and elect directors. More specifically, however, they may demand the ability to elect a certain number of board seats.
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The number of directors on the board generally corresponds to the stage of financing. In early-stage companies, there may only be one director representing common shareholders and one director representing the issued class of preferred shares. The parties often negotiation for the election of a third director that must be agreed upon or elected by both common and preferred holders. Follow-on financings will generally lead to board expansion and a change in the sitting directors. This can be a point of contention between early and later-stage investors.
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