VC Portfolio Company Governance
“Governance isn’t what happens in the boardroom once a quarter. It’s the framework that determines who makes decisions, how information flows, and what happens when the founder and the investors disagree. Most governance problems I see trace back to documents that were drafted in haste and never revisited.” — John Montague
Once a venture-backed company closes its first institutional round, it has a governance structure—whether the founder thought about it that way or not. The certificate of incorporation, the investors’ rights agreement, the voting agreement, and the board composition collectively determine how the company is managed, who approves major decisions, and what rights each class of stockholder holds. Getting this architecture right is as important as getting the economics right, and it’s the area where I see the most preventable mistakes.
I advise both portfolio companies and their investors on governance matters—drawing on more than 15 years of experience with technology companies, including venture capital and private equity work at Locke Lord LLP (now Troutman Pepper Locke), an AM Law 200 firm. I’ve also seen governance from the academic side: as a visiting professor of Entrepreneurial Law at the University of Florida’s College of Business, I teach how governance structures evolve from founding through exit, and why the decisions made at Series A compound through every subsequent stage of the company’s life.
What I Handle in Portfolio Company Governance
Board composition and structure. The standard post-Series A board consists of three to five directors: one or two founder/management seats, one or two investor-designated seats, and often one independent director. The balance of the board determines who controls day-to-day decisions versus strategic decisions. I advise on board composition that maintains founder operational control while giving investors appropriate oversight—and I negotiate the terms that lock this structure in place through the voting agreement.
Protective provisions and consent rights. Preferred stockholders typically hold veto rights over certain corporate actions: issuing new equity, taking on debt, selling the company, changing the charter, making acquisitions above a threshold, or hiring/firing key executives. The scope of these provisions varies deal-by-deal, and the drafting matters enormously. Overly broad protective provisions give a minority investor effective control over the company. I negotiate provisions that protect investors without paralyzing the founder’s ability to run the business.
Information rights and reporting obligations. Investors’ rights agreements typically require the company to deliver monthly or quarterly financial statements, annual budgets, and cap table updates. Institutional investors—particularly those with board seats—expect timely, accurate reporting. I advise companies on structuring their information rights obligations to be manageable and clear, and I counsel investors on what level of information access is reasonable at each stage.
Conflict of interest and fiduciary duty guidance. Venture-backed boards routinely face conflicts: a director affiliated with the lead investor votes on a transaction that benefits that investor’s fund; the founder-CEO participates in board discussions about their own compensation; the board evaluates an acquisition offer that benefits preferred and common stockholders differently. Delaware law provides a framework for managing these conflicts—including the business judgment rule, entire fairness review, and the role of independent directors—but the application is fact-specific. I advise boards on proper process and documentation to protect against fiduciary duty claims.
D&O insurance and indemnification. Directors and officers of venture-backed companies face personal liability exposure. I advise companies on securing appropriate D&O insurance coverage and drafting indemnification agreements that protect directors and officers to the fullest extent permitted by Delaware law (or the applicable jurisdiction). This protection is important for attracting qualified independent directors and for ensuring that investor-designated directors have the coverage their funds require.
Governance Evolves with the Company
A company’s governance needs change as it grows. At the seed stage, the founder often controls the board (if there is a formal board at all). After a Series A, the board typically expands to include an investor director. By Series B or C, the board may have five or seven members, multiple investor designees, one or more independent directors, and a complex web of protective provisions from different preferred stockholder classes.
The challenge is that governance terms are negotiated round-by-round but experienced cumulatively. A protective provision that seemed reasonable in isolation at Series A can conflict with or compound against a provision added at Series B. I review the full governance stack—charter, investors’ rights agreement, voting agreement, and any side letters—as an integrated system, not as isolated documents.
For companies approaching exit, governance mechanics become critical. Drag-along rights (which allow a specified majority to force all stockholders to participate in a sale), tag-along rights (which allow minority holders to participate on the same terms as a selling majority), and the liquidation waterfall (the order in which proceeds are distributed) all determine who gets what in a sale or IPO. I advise companies and investors on how these mechanics work in practice—and how to structure them to facilitate rather than obstruct exit transactions.
John’s Tip: Schedule a governance review once a year—not just when you’re raising a new round. Pull out every governing document, confirm that the board composition matches what the voting agreement requires, verify that protective provision consents have been properly obtained for any major decisions made during the year, and update your stockholder ledger. Most companies don’t do this until a buyer or IPO underwriter asks, and by then, the gaps are expensive to clean up.
Frequently Asked Questions
How many board seats should a founder have after a Series A?
In a typical Series A, the board consists of three seats: one for the founder/CEO, one for the lead investor, and one independent or mutually agreed-upon director. This structure gives neither party unilateral control. Some founders negotiate for a five-member board with two founder seats, one investor seat, and two independents—giving the founder effective control through Series A. The composition is negotiated as part of the term sheet and locked in through the voting agreement. I advise founders to treat board composition as one of the most important governance terms—more important than many economic terms that get more attention.
What are drag-along rights and how do they work?
Drag-along rights allow a specified majority of stockholders (typically a majority of preferred and common, or sometimes just a majority of preferred) to force all stockholders to participate in a sale of the company on the same terms. The purpose is to prevent minority stockholders from blocking a sale that the majority supports. Drag-along provisions typically include protections for minority holders—such as requiring that common stockholders receive at least a specified minimum consideration—but the threshold and terms are negotiated. Founders should understand the drag-along threshold in their charter, because it determines whether they can be forced to sell even if they disagree with the decision.
What is the business judgment rule?
The business judgment rule is a legal presumption under Delaware law that directors’ decisions are made in good faith, with due care, and in the best interests of the corporation and its stockholders. When the rule applies, courts generally will not second-guess the board’s substantive decisions. However, the rule can be overcome if a plaintiff shows that directors had a conflict of interest, acted in bad faith, or failed to inform themselves adequately before making a decision. For venture-backed company boards—where conflicts are common—understanding when the business judgment rule applies and when it doesn’t is critical to proper governance.
Do we need an independent director on our board?
There’s no legal requirement for private companies to have independent directors, but it’s increasingly considered best practice for venture-backed companies, particularly after Series A. An independent director—someone with no economic relationship to either the founder or the investors—can break deadlocks, provide disinterested oversight of conflicted transactions, and bring operational or industry expertise that complements the board’s existing skill set. Many term sheets now include an independent director seat as a standard governance term.
About John Montague
John Montague advises venture-backed technology companies, founders, and investors on corporate governance, board structure, and stockholder rights. With over 15 years of experience—including structuring governance frameworks for portfolio companies at Locke Lord LLP (now Troutman Pepper Locke), an AM Law 200 firm—John brings institutional-grade governance expertise to companies at every stage. He holds a J.D. from the University of Florida’s Fredric G. Levin College of Law and teaches Entrepreneurial Law at UF’s College of Business. Montague Law has offices in Fernandina Beach and Coral Gables (Miami), Florida.
Contact: 904-234-5653 | Schedule a Consultation