Term Sheet(3) Board of Director｜Board Observer｜Board Advisory

When VCs invest, they usually focus on two aspects: one is the value, including the price and return after investment, and the second is the control, i.e. how to protect the investor to supervise the operation of the company after investment, so the terms in the list of Term Sheet can be divided into two major categories accordingly, one is "value" and the other is "control", or in common parlance, one is "money" and the other is "power".

The "board" clause is undoubtedly one of the most important clauses in the "control function". A popular saying in Silicon Valley is: "Good boards don't create good companies, but a bad board will kill a company every time.

Here, you will find that I have taken the control function and the value function as the vertical and horizontal coordinates, respectively, to classify the terms in the list of Term Sheet, in which you will also find that the terms of the board are the strongest in the control function, followed by the Drag-along and Co-sale,which is what we will talk about in the next issue.

The typical "Board of Directors" clause in the Term Sheet is as follows:

Board of Directors: The board of the Company will consist of three members, two designated by the Common Shareholders and one of which must be the Company's Board of Directors: The board of the Company will consist of three members, two designated by the Common Shareholders and one of which must be the Company's CEO; and one designated by the Investor.

For founders, forming a board of directors is even more important in Series A financing than the valuation portion of the business, because the loss of valuation is temporary, while board control affects the entire life of the business. However, many founders often do not realize this and focus primarily on economic terms such as the valuation of the business.

1. Board of Director/Board Observer/Board Advisor

When it comes to the board of directors, it is important to clarify the relationship between the board of directors, the board observer, and the board advisor, which is confusing to many people.

A. Board of Directors

First of all, the Board of Directors is the one with real power among the three positions, not an honorary position.

At the same time, we need to distinguish between the rights of the Board of Directors and those of the Shareholders' Meeting. Under Chinese law, the power of the shareholders' meeting is not only large but also broad, so almost everything is done by the shareholders' meeting, but in the United States, the power of the shareholders' meeting is large but narrow, and only a few things are managed by the shareholders' meeting, while the rest are managed by the board of directors. That's why the biggest problem in Chinese corporate governance is that the major shareholders encroach on the interests of minority shareholders, while the biggest problem in American corporate governance is the arbitrary power of the board of directors. Therefore, it should be said that the board of directors is the most important decision-making body in American companies. Definitely not a board of directors is a mascot, honorary title as many people imagine.

For Guo Jing founded the North Warrior Technology, Hong Qi Gong, playing a pivotal role in Guo Jing's several key nodes, is definitely deserved one of the board members. For example, When the Eastern Heretic Apothecary Huang held a match process, director Hong Qi Gong was sitting as the GP of Beggar Capital, one of the five top venture capitals, and was in the same position with Ouyang Feng, the GP of West Posion Capital, one of the five top venture capitals. Secondly, in the process of the first level of the match, Hong Qi Gong versus Ouyang Ke, Ouyang Feng versus Guo Jing, Hong Qi Gong also used fewer moves to defeat Ouyang Ke, in essence, helped Guo Jing to win. The presence of Hong Qi Gong helped Guo Jing consolidate the relationship with co-founder Huang Rong, and pulled together five top venture capitalists from the Middle East Evil Capital, basically establishing Guo Jing's position as a star company in the venture capital circle at the time. Imagine if Ouyang Ke had won this competition, it would not only lead to Guo Jing losing his powerful co-founder Huang Rong, but also lead to Metaq gaining the resources of East Evil Capital, and the whole entrepreneurial landscape would be different afterwards.

B. Board Observer

A little lower than the board seats is the Board Observer, who has no decision-making power, but has a very important right, that is, as long as he wants to come to the board meeting, then he can come to participate, other directors can not stop him, that is, "uninvited". In other words, he can come without being invited. This is in fact the right to know,and if he does not bother to come to participate, then no one cares. As you can imagine, if a matter can be monitored by the board of directors' observers at any time and anywhere, then the rest of the board usually does not dare to take any action.

For Guo Jing's North Warrior Technology, the Eastern Heretic Apothecary Huang, the GP of East Evil Capital, can be said to be a board observer. When co-founder Huang Rong first joined Guo Jing's team, the Eastern Heretic Apothecary Huang tested Guo Jing's martial arts skills at Lu Chengfeng's home, and later the match was an important test. So the board observer seat should not be underestimated, after all, this person can always want to intervene when it comes to intervene. So in real life many companies do not set up board observers, especially for the startup company.

C. Board Advisor

The Board Advisor role is the one which is most easily confused with the Board of Directors. However the Board Advisor is the seat of honor, the mascot, and can only appear when the Board of Directors needs him compared to the first two roles, that is purely "by invitation". You cannot come if you are not allowed to. So this role is often given to busy industry leaders who have resources, ability and ideas, but are not interested in managing the specific affairs of the startup and would prefer to be a free agent outside the company. You don't expect the Board Advisor to be able to contribute to the company in a long-term, continuous and stable manner.

For Guo Jing's North Warrior Technology, the old urchin Zhou Botong is the Board Advisor. Although he is not a serious investor, he taught Guo Jing essential martial skills, and when Qiu Qian Ren nearly put Guo Jing and Huang Rong, the founders of North Warrior Technology, to their death, Zhou Botong was able to help them turn it around.

2. The Best Structure of the Board of Directors

After understanding the difference between a Board of Director, a Board Observer, and a Board Advisor, we return to our focus on the Board of Directors.

Although there is no legal requirement for an even or odd number of board seats, in real life it is best to have an odd number, i.e., one, three, or five.

Usually a company is started with one founder as a director.

Next, when a larger investor enters the company, a founder director and an investor director are added respectively, forming a 2:1 pattern of founder and investor.

Then when the next larger investment is made, another founder director and another investor director will be added respectively, forming a 3:2 pattern of founders and investors.

Let's take a look at the board structure of North Warrior Technology. The board structure was not very reasonable at the beginning, and it was only through gradual correction that a healthy board structure was formed. At the beginning, in addition to Guo Jing, there are two investors directors in North Warrior Technology, one is the angel investor, Mongolian inside Genghis Khan, and the other is the A round of investors Jiangnan Seven Monsters. Therefore, at the beginning they have to let Princess Huazheng be a co-creator in the North Warrior Technology. That is to say, the North Warrior Technology build VIE structure and formed The "Mongolian Concept Stock". We all know that the Central China Securities Regulatory Commission strongly crackdown on the"Mongolian Concept Stock". Most of them have been on the verge of delisting when the "Huashandaq" fell below a dollar, not to mention the companies that didn't go public on "Huashandaq". Later on, when the Whole Truth Capital withdraw from the Wan Yan AI and transfer to the North Warrior Technology, GP Qiu Douji became the director of the North Warrior Technology, and set up Mu Nianci as the co-founder of the North Warrior Technology, which was also a mess. Until later, the GP of Beggar Capital, Hong Qi Gong, joined and consolidate the partnership between the founder, Guo Jing, and the co-founder, Huang Rong. Until this time, a healthy structure of two founders (Guo Jing, Huang Rong) and an investor director (Hong Qi Gong) has been formed.