Board Governance During Fundraising Rounds
Fundraising is the most governance-intensive activity a clinical-stage biopharma company undertakes, yet most boards treat it primarily as a management task. The CEO and CFO develop the pitch, identify investors, negotiate terms, and present the board with a financing proposal to approve. The board discusses the terms for thirty minutes, asks a few questions about valuation and dilution, and votes to approve.
This approach is inadequate. Fundraising in biopharma is not simply a financial transaction. It reshapes the company's governance structure, creates acute conflicts of interest among existing board members, imposes terms that constrain future decision-making, and sets the company's strategic trajectory for the next twelve to twenty-four months. A board that treats fundraising as a routine approval is failing in its governance role.
Why Fundraising Is a Governance Event
Every fundraising round in a venture-backed biopharma company is simultaneously a financial transaction and a governance transaction. The capital is necessary — without it, the company ceases to operate. But the terms under which that capital arrives have governance consequences that persist long after the check is deposited.
New investors may require board seats, shifting the balance of power on the board. Liquidation preferences determine who gets paid first in an exit, which affects how the board evaluates acquisition offers. Anti-dilution provisions protect some shareholders at the expense of others, creating asymmetries that influence future fundraising decisions. Pay-to-play provisions can force existing investors to participate or lose their governance rights. Protective provisions give investors veto power over specific corporate actions, effectively transferring certain governance decisions from the board to individual shareholders.
Each of these terms is negotiable. And each of them affects how the company will be governed after the round closes. A board that approves a financing without understanding these governance implications is approving a restructuring of its own authority without examining what it is giving away.
The Conflict of Interest Problem
Fundraising creates the most pervasive conflict of interest in venture-backed governance: the existing investor directors who sit on the board are often participants in the transaction the board is being asked to approve.
Consider the typical scenario. A biopharma company needs to raise a Series C round. The lead Series B investor — whose partner sits on the board — offers to lead the round at a specific valuation with specific terms. The board is asked to approve the financing. But the board member who represents the lead investor is simultaneously the person negotiating the terms on the investor side and the person whose fiduciary duty requires them to ensure the terms are fair to the company.
This conflict cannot be wished away with disclosure. It requires structural governance protections. At minimum, conflicted investor directors should recuse themselves from the final vote on financing terms. Ideally, the independent directors should engage independent legal and financial advisors to evaluate the proposed terms and to negotiate on behalf of the company and its non-participating shareholders.
In practice, this rarely happens. Many biopharma companies treat investor-led rounds as uncomplicated — the existing investors know the company, they are offering capital the company needs, and the terms are "market." Independent directors, who may owe their board seats to the very investors leading the round, often feel uncomfortable challenging the terms or insisting on an independent process.
This is exactly the situation where independent directors earn their governance role. If you cannot advocate for a fair process when your company is raising money from the people sitting across the table from you, your independence is theoretical.
What the Board Should Do Before Fundraising Begins
Effective governance of the fundraising process begins long before a term sheet arrives.
Establish the Fundraising Framework
The board should discuss and approve the fundraising strategy before management begins approaching investors. This discussion should cover the amount to be raised, the target use of proceeds, the acceptable range of dilution, the desired investor profile, and the timeline. Management should not be pitching investors without board-level agreement on the parameters.
This framework serves two purposes. It gives management clear guidance, which makes the fundraising process more efficient. And it establishes the governance baseline against which any specific proposal will be evaluated. If management returns with a term sheet that deviates significantly from the approved framework — a lower valuation, more aggressive terms, a different investor than anticipated — the board has a standard against which to assess the deviation.
Identify and Plan for Conflicts
The board should identify which directors will be conflicted in the financing and how those conflicts will be managed. If existing investors are expected to participate, the board should decide in advance whether conflicted directors will recuse from discussions, from the vote, or from both. If the financing is large enough or complex enough to warrant it, the independent directors should engage independent counsel and possibly an independent financial advisor.
This planning is easier and less contentious when done before any specific proposal is on the table. Asking an investor director to recuse in the abstract is a governance process discussion. Asking them to recuse when they are sitting across the table with a term sheet they negotiated is a confrontation.
Understand the Capital Landscape
The board should have a current understanding of the financing environment for biopharma companies at the company's stage. What valuations are comparable companies achieving? What terms are market? Which investors are active in the space? This context allows the board to evaluate any specific proposal against a realistic benchmark rather than relying on management's or the investors' characterization of what is reasonable.
Governance During the Process
Keep the Full Board Informed
Even if certain directors are conflicted and will recuse from the final decision, the full board should receive regular updates on the fundraising process. Surprises during fundraising — a failed process, a significantly lower valuation than expected, a change in lead investor — are governance events that all directors need to understand.
The exception is if the board has specifically delegated the fundraising process to a committee of unconflicted directors. In that case, the committee should keep detailed records of its work and report to the full board at appropriate intervals.
Evaluate Alternatives
A board's negotiating position is only as strong as its alternatives. Before approving any specific financing proposal, the board should understand what other options exist. Has management approached multiple potential investors? Are there alternative structures — bridge financing, non-dilutive funding, partnership deals with upfront payments — that could meet the company's capital needs on better terms?
If the company's only option is a single investor offering a take-it-or-leave-it term sheet, the board may have no choice but to accept. But it should make that decision with full awareness that the terms reflect the company's weak negotiating position, not the inherent fairness of the proposal.
Scrutinize Non-Financial Terms
Boards tend to focus on valuation and dilution — the headline numbers. But the non-financial terms of a financing can have more lasting governance impact.
Board composition changes. Who gets a board seat? Who loses one? How does the new board composition affect the balance between investor and independent directors?
Protective provisions. What corporate actions will require investor consent? Is the company giving away the ability to raise a bridge round, issue options, or enter into a partnership without investor approval?
Information rights. What information will the new investors be entitled to? Will they have observer rights at board meetings?
Founder and management terms. Are there changes to vesting schedules, employment agreements, or management incentive plans tied to the financing?
Each of these provisions affects how the company will be governed for years after the round closes. A board that approves a financing based on valuation alone may be making a governance decision it does not fully understand.
After the Round Closes
The board's governance responsibility does not end when the financing closes. The post-closing period is when the governance changes take effect, and the board should actively manage the transition.
If new directors join the board, invest in their onboarding. Ensure they receive the same information as existing directors. Integrate them into the board's communication rhythms and decision-making processes.
If the financing changed the balance of power on the board — for example, by giving a new investor effective veto power over certain decisions — the board should discuss how this change affects its governance practices. It may be appropriate to update committee structures, revise the board's information-sharing protocols, or establish new conflict-of-interest policies.
And if the financing included milestone-based tranches — capital that is released when the company achieves specific objectives — the board should establish clear governance processes for monitoring progress toward those milestones and for managing the consequences if they are not met.
The Independent Director's Obligation
Fundraising is where independent directors matter most. You are the directors whose judgment is not colored by a fund's return requirements, who do not have a financial interest in the specific terms of the round, and who can evaluate whether the transaction serves the company's interests rather than any individual shareholder's interests.
This obligation requires you to engage, to ask hard questions, and to insist on fair process. It may require you to push back against terms that your investor colleagues consider reasonable. It may require you to engage advisors whose fees the company would rather not pay. It may require you to slow down a process that management and the investors want to close quickly.
None of this makes you popular. All of it makes you effective. The independent director who approves every financing without scrutiny is not governing. They are attending meetings.