Private Equity Hub turned to Manatt’s Craig D. Miller, co-chair of the firm’s Financial Services & Banking Practice, for insight into determining the appropriate time for a venture capitalist board member to give up a board seat during a company’s initial public offering (IPO).
Private Equity Hub reports that Facebook had three venture investors on its seven-member board at the time of its IPO. They had all chosen to remain on the board during the offering, and two of the three sold shares. Though these are relatively common behaviors, conflicts of interest (or the appearance of them) can arise when VCs seek to exit stakes and serve out board terms at the same time. Staying on the board also means a VC may be named in lawsuits filed following the IPO. All three of Facebook’s venture investors are now named as individual defendants in at least one class action lawsuit filed in federal court in New York.
Miller offered the publication several suggestions for VCs in determining the appropriate time to give up a board seat.
“I would recommend that the venture fund investors step down from the board prior to the public offering,” Miller said. This doesn’t need to be done as soon as the company files to go public, since not all filings culminate in an IPO. However, he said, the VC board member should be ready to step down when the registration statement is effective, and it’s pretty clear the IPO is a go.
For VCs who stay on the board, it’s key to keep in mind that they have fiduciary duties to two parties: the portfolio company and limited partners in their fund. Those duties consist of three parts: a duty of care, a duty of loyalty, and a duty of good faith. More often than not, Miller adds, fiduciary duties to limited partners and portfolio companies are aligned. Both, after all, want to maximize shareholder value by building a successful company. But there are situations where they may conflict. For instance, if a company is seeking outside funding at terms that could impact prior venture investors, the VC board member should generally step aside in that decision-making process.