☕️How to F--- Over a Founder (as a VC)

+ how to protect yourself (as a founder)

Author

Morgan Barrett
June 12, 2024

👋 Hi, Breakfast Club Members!

So great seeing a ton of you at New York Tech Week!

For those who are new (a lot of you) or those who don’t know - I’m Morgan Barrett, creator of Tech Breakfast Club. I host breakfast meetups in NYC, LA, SF, (and occasionally Austin, Miami, Boston) that bring together the best founders and investors.

I’m also a lawyer for early stage companies (at Optimal) and handle everything from formation to acquisition.

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Legal Stuff
How to F*** Over a Founder (as a VC)

Welcome to the new series for the Tech Breakfast Club Newsletter where I breakdown ways for VC’s to F--- Over Founders... legally.

In each iteration, I’ll explain a different trick VC’s can use to wreak havoc on a founder.

The hope here, though, is not to make VC’s even better at tormenting founders – I’m not sure they need help – it’s to educate founders on how to better protect themselves and their companies.

Common Director Service Provider Maneuver

As a founder, you should be concerned if your investors insist on including language in your financing documents (and term sheet) that says 1) common directors (meaning directors voted in by the common stock) must be employed by the company and/or 2) to vote on common directors, common stockholders must be employees.

This might seem innocuous. You might, as a founder, never envision leaving your company. But maybe, years from now, you depart the company because it’s become too big and you’re excited about solving a new problem. This is actually quite common.

You’d like to still have influence and oversight over the company as one of the largest stockholders, and most likely the largest common stockholder, but (if VCs are given these provisions) no – you’re no longer allowed to vote your shares and serve as an outside common director. You’re not even allowed to listen in on Board meetings.

You’ve been outmaneuvered by your investors, who have now ensured that any common directors will not speak for the earliest common stockholders of the company (you and your earliest employees).

To prevent this, you should seek to delete the service provider status requirement. You should also ensure at the term sheet stage in your financing that it’s clear no service provider requirement will be included in the docs. Be explicit about it.

At the very least, if VCs won’t “give” on this very material issue, ensure founders always have a board observer position if they’re no longer working for the company and no longer serving as a Board director. The earliest common stockholders are not “aligned” with later-stage common stockholders, who bought into the cap table at a much higher price. Letting the “early common” have a voice (and visibility) is important for balanced startup governance.

About Morgan
Morgan, besides running Tech Breakfast Club, is a Startup Lawyer at Optimal, an elite lean boutique startup law firm repping clients funded by a16z, Sequoia, Kleiner, Accel, and countless other VCs. He works with clients from formation to exit, in collaboration with Optimal’s partners.