Last Friday, the SEC approved a rule proposed by Nasdaq that requires public companies to have at least two diverse board members, including at least one woman and at least one member of an underrepresented minority. Companies that fail to meet these targets will be required to provide details as to why they have not met the proposed board diversity objectives.
This new order is just one of many changes geared towards increasing diversity within companies. We’ve written extensively about the perks of increased diversity at the board level (here’s one article with a good snapshot). But there are significant calls for increased investor diversity too.
Increased investor diversity opens doors for investors from underrepresented communities to access the wealth and opportunities that have historically been (largely) reserved for their white male counterparts.
Yet, the significant systemic issues that perpetuate the diversity disparity in investment can make it seem unassailable to those looking for investment opportunities. Diversity riders are a tool startups and investors alike can use to promote and encourage diversity in a meaningful way.
Diversity Riders: The Background
The Diversity Term Sheet Rider for Representation at the Cap Table (the Rider) is an initiative that launched in August 2020, led by Alejandro Guerrero of Act One Ventures. The provision calls for VC firms to include at least one diverse investor in the financing round, and provides for a minimum percentage or dollar sum for the diverse co-investor in the round. You can view it here.
The Rider has been widely adopted, with Greycroft, Harlem Capital, Maveron, and Lerer Hippeau amongst the firms currently using the Rider in deals.
For VC firms and other investors, adopting the Diversity Rider is fairly straightforward. You can sign up on the Diversity Rider webpage. To take your commitment to Diversity and Inclusion further, you might consider the Diversity VC Standard certification. (Read our recent article about the business considerations behind business certifications here).
If you are a startup looking to encourage investors to adopt the diversity rider, you will need to find a way to promote investor buy-in. One way of doing so is by making diversity, equity and inclusion (DEI) an essential part of your brand. We’ve written previously about embedding workplace policies that promote diversity and tips for increasing diversity in your supply chain.
From that foundation, founders can highlight the importance of diversity to the company and seek investors who are willing to commit to strong DEI policies. This would not only ensure that investors possess similar values, but may also serve as a competitive advantage in a corporate environment that’s increasingly alert to the benefits of diversity.
If you need assistance promoting diversity in your deals, get in touch. We’re here to help!
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