Perspectives on entrepreneurship, startups and venture capital from K9 Ventures.

Watch out for the Board Observer request

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Ah, I love it when someone cancels a meeting with me at the last minute. It’s like found time. So liberating to have an unscheduled hour that I can use for whatever I like. Anyways…

I wanted to use some of this time to briefly make a point that I’ve made very often to K9 Founders: “Watch out for the Board Observer request!” On the surface the request by a minor investor, or sometimes even from a lead investor to have another person participate in the board meeting as an observer, can feel fairly inane and an easy give. However, adding a Board Observer to your board in not a decision to be taken lightly.

If the Board Observer position was truly an observer — someone who could come and listen, observe, but not participate in the discussion, then it would be fine.  However, in practice a board observer is almost equivalent to a board member. This is because when someone comes to a board meeting, they are not just listening and observing, but they are invariably participating in the discussion as if they were a board member.

In early stage companies, most board decisions are typically unanimous. If you ever need to actually take a vote on something (other than administrative stuff like issuing options), then your board is probably already messed up.

Since the board observer is an active participant in the discussion, his/her opinion matters. It matters because once voice the opinion will be heard by others in the room and it will impact their thinking. In most cases it may not be sufficient impact to sway a decision, but in some cases it can (and that can be good and bad)

I have been a board observer in many of my early investments through K9 ventures. And I certainly don’t keep my opinion to myself. So I too am guilty of being a board observer who isn’t only observing. Ever since I’ve realized this, I’ve taken to telling founders upfront that if I become an observer on their board they they should expect me to be an active participant in the board discussions and that that will have an influence on other members of the board.

There are cases when having a board observer make a lot of sense. So to be clear, I’m not arguing against board observer seats in general, but just making the point that it’s not to be taken lightly. My advice to founders is that don’t accept anyone as an observer that you wouldn’t accept as a board member, i.e. don’t treat the board observer position as a freebie or a easy give away to appease your investors.

Sometimes you may want someone to be an observer because you genuinely value their input. In other cases someone you would really like to have on your board, may not want to take on an actual board role as it comes with a fiduciary duty and potential liability. In such a situation, having that person join as an observer can provide all the benefits of having the person’s opinion and insight counted, while not saddling them with the responsibility and the liability that comes with being on a board.

Either way, when you’re faced with the request for a board observer seat, just think it through to make sure you assess the impact it would have on your board dynamics. If this post causes you to think about it for even a minute longer, then it’s done its job.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

  • Roman

    Came across this post today as I was hunting for material on pros and cons of having observers on boards. While founders should indeed be wary and take on observers only if they are the kids of people they would have as directors. I wonder about the other board members representing minorities. Surely not an ideal situation to have someone as an observer be able to influence and lobby from within while being, to some extent, absolved of the duties and responsibilities that come with directorship proper, not to mention that the observer can also avoid some of the costs and obligations of the shareholder to exercise the directorship right.

  • Good post – founders should think through who they are leveraging to run their company… your title is misleading though. You aren’t saying don’t accept board observers – just that founders should treat them carefully. The same is true for any role in an early stage company. Any employee, mentor, advisor, and so on should be thought through. Their opinions can be incredibly valuable and incredibly dangerous.

    Perhaps re-title… “Board observers have more control than you think”