Board observers have long participated in startup governance, initially as a way for investors to observe their investments without formal voting power. Over time, their presence has increased, with roughly 20-30% of company boards including observers. This percentage is even higher for private firms that rely on enterprise capital.
A well-rounded board can make the difference between climbing the next unicorn or remaining in the land of mediocrity, so let’s look at the burning query of whether your startup’s board ought to be limited to regular (voting) board members or allow observers board (without voting rights) to affix.
Advantages of getting observers on board
Allowing observers on board has several advantages, including:
Access to expertise and diverse perspectives: Board observers can bring invaluable insights and fresh perspectives, especially if they have deep industry knowledge.
Additional source of sales leads and investments: Followers often have a network that could be leveraged to discover latest business opportunities and potential investors.
Step to regular board seat: For emerging leaders, serving as an observer is a great approach to gain experience before moving on to turn into a full board member.
Disadvantages of getting observers on board
This approach also has disadvantages. These include:
Access to confidential information: The more people have access to sensitive information, the tougher it is to take care of control.
Potential undue influence: Even without voting, observers can influence management decisions, sometimes unduly.
Unclear roles: A scarcity of clarity about what observers should and shouldn’t do can result in confusion and inefficiency.
Complications during crises: Having observers in high-stress situations can decelerate the decision-making process or create an awkward dynamic when difficult conversations are needed.
What experts think
Not surprisingly, there is significant disagreement among legal and finance professionals about the value of getting an observer on the board. The most important argument of supporters is the objectivity that an independent observer brings to the discussion:
Supporters like the law professor Nizan Geslevich Packin and lawyer Crazy Stan they imagine in the value of the expertise and networking that observers bring without the burden of voting responsibilities.
However, critics including Brad Fieldco-founder Foundry GroupAND Marek Sisterpartner in Preliminary undertakingsthey are fearful about potentially too many votes on the boardresulting in chaotic decision-making process and limited responsibility.
When an array observer is likely to be right (and some alternatives)
Acquiring latest investors: If having a follower is a key factor in attracting a latest investor, it could be price doing so, but consider whether creating a regular seat for them on the board could be a higher solution.
Demand for specialized knowledge or potential customers: If their expertise or network is key, this will likely be cost-effective, but consider hiring them as advisors or consultants as a viable alternative.
Training of future partners: While it is helpful for VCs to coach their partners, if you select to do so, attempt to be sure that adding an observer seat on the board does not reduce the overall effectiveness of the board.
Application
While board observers can provide invaluable insights, most startups may find that the risks outweigh the advantages. An efficient, unified board with clear accountability often results in simpler decision-making.