Do venture capitalists need to have board control of the companies they fund? This was a question that I came across on Quora. My response follows. You can read the full Quora string here.
Control of the board generally is a business issue depending on many factors including the size of the investment and the life cycle of the company (among many others). Most VC funds will want at least one board seat and, in some cases, a VC fund may feel it needs at least one board seat. Specifically, VC funds with a ERISA investors must take certain steps to qualify the fund as a “venture capital operating company” or “VCOC” so as not to become an ERISA plan administrator (which would not be viable). One of the requirements of a VCOC is that the fund actively manage its portfolio companies. Often, a VC fund will take a board seat as well as require the company to issue a management rights letter otherwise granting the VC access to company management and business records. In so doing, the VC fund usually can be comfortably compliant with the VCOC rules. I often write about these types of issues at www.theventurealley.com.