Control and Governance

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Updated August 29, 2023
Angel Investing

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Control and governance refers to how the company is controlled (hiring and firing officers, issuing equity, M&A transaction approval) and who controls it. The primary control mechanism is the board of directors and protective provisions. We covered a number of protective provisions within our discussion of preferred stock. Drag-along agreements are worth mentioning because they impact who is not in control of a transaction (potentially you).

Board Seats

If you are a significant investor, you may want to negotiate a board seat. We cover boards of directors and boards of advisors in detail in Boards and Advisory Roles.

If you do take a board seat, as part of the term sheet, you may want to insist that the company obtain directors and officers insurance to protect you in the event of a lawsuit. In addition, it is always a good idea to have a lawyer who is familiar with these insurance policies to work with company management and the company’s broker to make sure that you are getting a policy with the coverages you want and without exclusions that might leave you unprotected.

Drag Along

A drag-along agreement (or take-along agreement) requires those who sign it, ideally all of the company’s stockholders, to vote in favor of change of control transactions—to go along with the sale of the company or a sale of all of the interests in the company, including yours, even if you do not agree with the proposed sale and would otherwise refuse to go along or vote for it.

cautionLarger investors like drag-along agreements; as an angel investor, you would prefer not to be subject to a drag-along agreement. If you are presented with a drag-along agreement, make sure it has some checks and balances in it. You can see a drag-along provision with the appropriate investor protection in the Series Seed Stock Investment Agreement.

Information and Access

What if you made an investment in an early-stage company and never heard from them again; or only received documents to sign when they wanted to authorize more stock? Many investors like to know what is going on with their investments, and the rights described in this section make sure that you as an investor can get regular updates and access to management if you want that.

Information Rights

Information rights are the rights to receive certain information about the company at specified times—for example, the right to receive quarterly and annual financial statements, the right to receive an updated capitalization table from time to time, and the right to receive the company’s annual budget. Sometimes, information rights are only made available to investors who invest a certain amount in a financing (typically referred to in the investment documents as a “major investor”).

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