Preferred stock is usually structured so that, at least initially, no burdensome dividend payments must be satisfied. Typically, the initial conversion price is equal to the price paid for the preferred stock so that one share of preferred can be converted into one share of common. Standard anti-dilution terms mandate a proportionate reduction in the conversion price in the event of stock splits or dividends and are not controversial. Representation on the Board of Directors Venture capitalists almost always want representation on the Board of Directors. Venture capital groups are managing the money of their own investors, and have a fiduciary obligation to monitor the money they invest.
Board representation is sensitive for both parties.
Some input is inevitable, and can be very valuable if thoughtfully structured, but entrepreneurs should be careful with respect to how much control venture capitalists will have in the management of the business through the Board and any special voting rights of the preferred stock. Experienced Managers Venture capitalists often insist that the emerging business recruit additional managers with expertise in key areas. The need for additional management expertise is a sensitive issue for entrepreneurs who fear surrendering too much control. From a negotiating perspective, entrepreneurs who convince investors that they appreciate that additional management resources will be needed as the company grows are better positioned to deflect investors from demanding premature expansion of the management team. Because this new technology or knowledge is the basis of the firm's competitive opportunity, it must be protected.