When Kristina Bergman, the co-founder of Integris Software, started her company a year and a half ago, she took the unusual step of adding a voting agreement to the company's legal documents that forces investors to replace the director on her board if there is “reasonable probability” that sexual harassment occurred. Knowing how much the issue had become an open secret in the industry — and how hard it can be to oust a director for reasons other than “cause” like fraud or embezzlement, she said — she wanted more protection as a female founder.
“It felt like a good common-sense thing to get ahead of this,” said Bergman, who is chief executive officer of the Seattle-based provider of privacy intelligence software. “Just because there is an imbalance of power doesn’t mean that as a founder you have no power.”
Bergman's decision preceded the most recent outcry over sexual harassment that has shaken Silicon Valley, as hot startups like Uber and prominent venture capital firms like Binary Capital have faced public allegations over the behavior of their partners or the bro-driven cultures that have festered under their watch.
In response, the industry is trying to find a fix. LinkedIn co-founder Reid Hoffman started a #DecencyPledge hashtag and suggested the industry needed some kind of “industry-wide HR function.” A group of 30 venture capitalists drafted a “code of conduct” for members of the industry. An influential startup incubator launched an effort to create an app that could serve as something of a blacklist, providing Yelp-like reviews of financiers' behavior; another group is planning an online database that would let female entrepreneurs report inappropriate behavior.
Bergman believes her policy adds to that list of solutions and specifically addresses another issue: the relationship between directors and the founders and teams they advise. Though she knew her board members well and had no cause for concern, she did worry about what could happen in the future if she added further investors or if new directors came on board.
“If you think about employment agreements, employees are held to basic levels of conduct,” she said, with human resources departments in place to monitor them. But in most startups, the same doesn't apply when it comes to its board of directors. Among small privately held startups, board members are typically removed only if they breach their fiduciary duties or come under fire for fraud or other criminal activity, she learned.
Having been a venture capitalist herself, she felt confident that she could present an idea that would work for both sides. She and her lawyer, DLA Piper partner Trent Dykes, worked up an approach that included three key components she believes are essential for protecting herself, her co-founder and her employees -- while also protecting her investors. First, to help protect investors, the voting agreement doesn't require that the venture capital firm loses its board seats; it mandates only that they replace the offending partner on her board with someone else.
In addition, they stipulated that a special counsel would be appointed to investigate and report back to the board. “What that does is keep control at the board level,” Bergman said. “It allows the board to protect their investment in the company.”
But the special counsel would not have to prove guilt — a standard that in the “he-said, she-said” world of sexual harassment can be extremely hard to meet — only “reasonable probability” that inappropriate behavior occurred. “We didn’t want this to be a really burdensome process, where there was a burden of proof akin to what you would see in a courtroom,” she said. (That can also be expensive: Dykes said a court process could take months, and “if the director wanted to fight, it might tank the startup” financially.)
Dykes says he has "never seen" a voting agreement like Bergman's in a private startup, making it an unusual approach. Typically, if a director behaves badly, the way to remove them is "for cause," and "there's very little case law on what director cause means," he notes. "There are these areas that clearly, we all find as bad behavior, but [may not] rise to the level of 'cause.' "
Even if her policy will do little to address the sexual harassment that occurs between venture capitalists and entrepreneurs who aren't yet funded — if they're on the board already, one would hope investors are invested in their success — Dykes and one of Bergman's board members, Mike Dauber, say they could see the practice spreading. A venture capitalist with Amplify Partners, Dauber agrees the idea is novel, saying that “every founding team ought to be using something like this as a protection. As a V.C., I also want that protection from another board member who may be a bad actor."
Dykes, who says he does 30 to 50 seed and venture deals a year, could see other startups benefiting from adding similar language to their voting agreement. “I don’t see a downside” to including it, he said, especially because “everybody’s got to agree to it.”
If they don't, it could be a reason to think twice. “If the investors don't like it,” he said, “maybe that sends you a signal.”