Can founders be removed from the board, and if so, how?
This week’s question: Can founders be removed from the board and the company, and if so, how?
Our answer: Yes. A founder can be removed if the company’s governing documents and investor agreements permit it and if the proper stockholders follow the correct process. In a Delaware corporation, removal of a founder as a director is generally by the stockholders who elected that seat (not by the board), and whether removal can be “with or without cause” turns on the company’s governing documents and who holds rights to a particular seat (common vs. preferred designated). The practical levers are understanding (i) who elects the seat, (ii) whether removal requires cause, (iii) how vacancies get filled and (iv) whether written consents can be used.
Key Considerations
Start with the Company’s Documents. The governing documents and agreement are what actually controls. Pull the full stack of documents and read them together and holistically. Here are some governing documents and things to look for:
Certificate of Incorporation (aka. Charter): cover key information related to board size, board classification, if there are preferred stock director rights and if there is cumulative voting.
Bylaws: provides the governing rules for the company including removal standards, the use of consents, who can remove and elect directors, special meeting mechanics, transfer restrictions, preemptive rights and vacancy filling procedures.
Voting Agreement: this covers who is entitled to elect which seats, drag-along provisions, and so on.
Founder Agreements: this will provide information about founder-specific provision such as vesting schedules and lock-ups.
“With or Without Cause” vs. “For Cause.” The default rule under Delaware law is that stockholders may remove directors with or without cause, except if (i) the board is classified or (ii) the corporation has cumulative voting, in which case removal is typically for cause only, unless the charter provides otherwise. At-will termination of directors is otherwise the standard. However, even without these structures, your company’s governing documents may require “for cause” to terminate a director.
Board Size and Vacancies. After a director’s removal or resignation, who fills the vacancy is crucial. Many bylaws let the remaining directors fill any vacancy (including one created by removal), while voting agreements often require the same constituency that elected the seat to designate the replacement. Moreover, if investors can expand the board and then fill seats, they can change control without a removal fight so under.
Employment vs. Directorship. Firing a founder as a director does not by default automatically remove them as a CEO and employee (and vice versa). As a result, you must coordinate employment actions (e.g. severance) with board changes to avoid gaps.
Why It Matters
Founders are understandably concerned about their board positions because board control impacts key decisions such as who hires or fires the CEO, what deals get signed and when to sell the company or fundraise. Although removing a founder from the board is generally not a simple task, founders should understand exactly who can remove them, on what standard, and how vacancies are filled. Clarity and understanding on the mechanics today is the best defense against unwanted board changes tomorrow.
