Counsel Corner: The Art of Balancing Board Dynamics in Private Companies

As a general counsel in the boardroom, you often find yourself at the intersection of competing priorities. While some decisions receive unanimous support, others can expose deep divisions — investors focused on exits, founders invested in legacy, and operational leaders eyeing efficiency. These moments call for finesse, diplomacy, and a firm grasp of governance principles.

To shed light on these dynamics, we sat down with three seasoned legal experts: Amy Simmerman, Corporate Partner at Wilson Sonsini Goodrich & Rosati, Meredith Fuchs, CLO and GC at Plaid, and Vik Varma, GC at Blackhawk Network.

In this Q&A, they share actionable strategies for balancing investor influence with board independence, managing fiduciary duties amid diverging priorities, and structuring governance to support growth, exits, and IPO readiness.

Read on for insights to help you navigate complex boardroom situations with confidence.

Key Takeaways:

• Establishing board independence can be a useful tool for balancing competing priorities among founders, investors, and management. Independent directors can bring objectivity and expertise, and their involvement in key committees, where committees are used, helps ensure fair and impartial decision-making.
• Effective tools such as clear policies, recusals, special committees, and robust documentation help GCs address inevitable conflicts of interest.
• Boards must understand their obligations, especially when investor priorities diverge. GCs help navigate these complexities, particularly under Delaware law, which often prioritizes common stockholders’ interests.
• As companies grow, governance must align with investor expectations and readiness for exits. Recruiting independent directors, appropriately using board committees, and updating governance documents can ensure a smoother path to growth.

What strategies are essential for maintaining board independence in venture-backed versus PE-backed companies, particularly when investor interests and founder roles might conflict?

Simmerman: One fundamental question for founders and boards in either type of company is how much independence they want to have on the board — meaning directors who are not members of management and who are not employees or principals of investors.

Independent directors can add value in at least two ways. First, they may add differentiated outside experience or expertise. Second, there are scenarios in which, from a governance standpoint, directors may be viewed as having a conflict of interest — typically when the directors or their affiliates may be viewed as receiving a benefit different or divergent from stockholders as a whole, especially sometimes common stockholders.

Keep in mind that Delaware law — under which most companies are incorporated and which therefore governs such companies’ corporate affairs — also takes a fact-intensive approach to independence, taking into account for example whether directors have disabling personal or economic relationships to parties benefiting from a board decision.

Where a conflict exists, independent directors may be able to provide additional perspective on the decision or help establish decision-making processes in the boardroom that could “cleanse” or address the conflict.

Fuchs: Bringing in independent directors — people without deep ties to the founders or heavy financial stakes in the company — can create a healthy, neutral perspective. Experienced independents bring not only objectivity but also potentially a wealth of insight and advice that’s invaluable in navigating tough decisions and staying growth-focused. Think of these directors as strategic “free agents” who aren’t pulling for either side but have the company’s long-term game plan as their priority.

Setting up independent-led committees to handle matters such as executive compensation, financial oversight, and board member nominations injects objectivity into the most sensitive decisions. By having these committees chaired by neutral directors, the board can tackle critical business areas with less friction — decisions on executive compensation are less likely to turn into power plays.

Another key control is voting rights, which can be managed so that no one interest has a controlling stake in the outcome of important matters. For example, investors with large equity stakes may have the right to board seats, but their voting power could be limited on matters directly affecting board independence, like executive compensation or key management changes.

Placing investors in advisory or board observer seats rather than formal board seats offers another layer of protection. By keeping them close but not central to board decision-making, you give them a voice in the business without allowing them to compromise the board’s independence.

How should GCs guide boards on managing fiduciary obligations, especially when balancing diverging investor interests?

Simmerman: A key starting point for GCs is to help boards understand their fiduciary duties in the first place — what those fiduciary duties are, whose interests those duties serve, and when conflicts of interest might exist.

GCs will also want to help guide directors through complex situations as they arise. For example, under Delaware corporate law, there are many situations in which the rights of preferred stockholders are viewed as only contractual in nature, and directors and officers are expected to focus on the best interests of common stockholders where possible from a fiduciary duty standpoint.

Directors can also have conflicts when they have personal or economic relationships to parties benefiting from a decision — or where directors could be viewed as engaging in inappropriate competitive behavior. Importantly, stockholder litigation risks become heightened where half or more of the board could have a conflict compared to stockholders as a whole, particularly common stockholders; where funds may become viewed as controlling stockholders; or where fiduciaries have a “hidden” or unaddressed conflict of interest. GCs can help boards identify and understand these situations, which is itself a critical step.

From there, GCs can also help guide boards in addressing the conflict. This can include basic but crucial steps such as having good board minutes and materials and holding robust board discussions, as well as more elaborate steps such as undertaking board recusals, forming board committees, and properly engaging with stockholders, depending on the situation.

Varma: The GC is the advisor to the entirety of the board, and when counseling on fiduciary duties, the focus should be on the interests of the corporation and the stockholders. Directors owe both a duty of care, or a duty to be fully and adequately informed and act with care in making decisions, and a duty of loyalty, which requires them to make decisions in the best interests of the corporation rather than in their personal interest.

When diverging investor interests come into play, the duty of loyalty is often tested. Some best practices in counseling boards in this context are to keep board members fully appraised of the rights of specific investors in governance documents and stockholder agreements, including advanced waivers of potential fiduciary claims, and to establish special committees of a subset of the board if there is the potential for one or more members to be conflicted in their decision making.

Fuchs: Investor priorities can diverge dramatically — think short-term exits vs. long-term growth, or industry-specific goals that don’t align with broader company strategy. A GC’s role is to help the board spot these misalignments early.

Transparency is key, and directors should disclose any financial or strategic ties that could color their judgment. A good conflict-of-interest policy will lay out when directors should step back — whether recusing themselves from discussions or votes on issues where they’re not entirely objective.

When the stakes are high or decisions controversial, thorough documentation, such as through board minutes and board slides, is essential. By recording the rationale behind key decisions, the board not only protects itself legally but also builds a record that shows it acted in good faith and with care for the company’s future.

Sometimes it may also make sense to bring in independent advisors to offer unbiased perspectives or guidance or form a special committee with a mandate to seek outside advice and assess the transaction independently — this signals to stakeholders that potential conflicts were taken seriously. These topics are usually covered when a director is onboarded, but regular refresher training keeps them sharp and aware of potential pitfalls as company priorities evolve.

What are best practices for managing the influence of investor representatives on the board, especially when they have goals that may not align with company growth or stability?

Fuchs: Founders need to anticipate and manage investor influence from the start to avoid strategic tug-of-wars down the road. The main risk? Investors can focus on quick returns, which may clash with the company’s long-term growth and stability.

Effective management starts by defining the responsibilities of all board members to reinforce that they must act in the best interests of the company and typically stockholders as a whole, rather than specific stakeholders. This can be accomplished through conflict of interest policies, regular disclosures, and training.

Then, by adding independent directors who are not affiliated with investors, the board can have more neutrality to counterbalance investor perspectives. Independent-led committees (e.g., Compensation, Audit, and Governance Committees) can be delegated the handling of sensitive matters such as executive compensation, corporate strategy, and financial decisions, reducing the direct influence of investor-aligned directors in these areas.

In addition, structuring voting rights so that investor representatives have limited influence over specific issues, such as executive appointments or long-term strategic decisions, can prevent any one party from dominating critical choices.

Simmerman: Investor representatives can of course be helpful in a multitude of ways, although misalignment or a separate agenda can arise. A strong safeguard against such an issue is to have a well-composed board capable of having engaged and honest board conversations. Where that exists, other board members can bring a “wayward” board member around — or where honest differences in opinion occur, the board can work through it productively. If a board dynamic isn’t constructive or conducive in this way, and a GC can’t get through, then trustworthy outside counsel may be needed.

How should board governance evolve as the company moves from startup through different growth stages, particularly if it transitions from venture to private equity investment?

Simmerman: In general, as a company grows and its stockholder base expands, the company will want to be all the more thoughtful on governance issues. With each stage of growth, different investors may have expectations about how the company’s governance will be run and the particular rights they will have.

As the stockholder base expands, there is by definition a greater risk that a stockholder could question a board decision, even though outright stockholder litigation is much more limited for private companies than public companies. As the business becomes more complex, and depending on the nature of the business, the oversight obligations of the board and management may become more extensive and nuanced — and the company’s processes may need to grow and change in response to those circumstances.

What governance practices best support the board's role in M&A and exit readiness?

Simmerman: If a company engages in any fundamental transaction — including a financing round, an M&A event, or an IPO — the ultimate responsibility for that decision rests with the board, and the board, together with management, will drive that decision. Throughout the company’s existence, and to be ready for such events, the board will want to have a strong grasp on the company’s strategy, risks and potential, and direction.

This can occur through holding regular board meetings, having an engaged and attentive board, ensuring good dialogue between the board and management, and equipping the board with useful and sound information. That type of ongoing analysis and engagement in turn positions the board to make judgments about whether the company is ready for an exit or needs to undertake a transformative transaction.

Varma: Often there are stockholders’ agreements that provide significant investors in private companies with consent rights over M&A transactions and that also allow these investors to “drag” minority stockholders to participate in an M&A process. In counseling the board, good governance practices include understanding what rights stockholders have over an M&A process and ensuring that board members are fully informed about the prospects of the company and potential alternatives through presentations from both management and, if appropriate, external financial advisors.

GCs can also assist boards in planning for long-term goals alongside M&A by acting as a business advisor who can counsel on potential risks, including employee, customer and supplier retention, that impact the standalone prospects of the company. They can also help ensure that the company is adequately prepared to pursue long-term goals if the board views those as more beneficial to the company than near-term returns that may be achieved through an M&A process.

What steps should boards of venture-backed and PE-backed companies take now to ensure smooth adoption of public company governance standards, should they pursue an IPO or other exit?

Varma: PE-backed companies should recruit qualified independent directors to comply with any applicable requirements stemming from public company governance standards. Other important elements are ensuring that certain board members have any necessary qualifications, such as those related to financial expertise and cybersecurity, and establishing the required committees of the board and the associated charters.

In addition, it is helpful to carefully review the charter and bylaws to ensure that they operate effectively in the public markets given the potential disclosure or voting requirements that may make these governing documents difficult to amend in the public markets.

Simmerman: Public company governance by definition involves a high level of disclosure, scrutiny, and transparency in the market. Public company boards are expected and, in many ways, required to employ fairly significant and independent governance processes. As private companies mature, they often add independence and sophistication in their governance to address the complexity and needs of the business.

But the transformation to public company processes doesn’t happen overnight, and going-public events require significant planning and rigor, with the right processes and personnel. Accordingly, board members, with their in-house and outside counsel, can and should help evaluate the company’s governance over time and when and how governance processes and structures should be adjusted.

For GCs and CLOs looking to connect with other legal professionals and share governance best practices, The L Suite can offer helpful resources. Apply to join today.

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