Why Board Observer Seats Are Better Than Actual Board Seats
In the early days of Zelkova, we made a decision to take board observer seats over voting board seats whenever possible. The initial decision was made as a way to mitigate risk, given that our first fund was a hybrid between an angel investor and a venture fund, today termed a seed fund.
As we gained more experience, we came to the conclusion that the board observer seat is an optimal way for us to add value to our companies while maintaining a firm grasp of where each is at — which ultimately makes it a lot easier to determine when to pull the trigger on follow-on investments and continuously add value.
What Does a Board Member Do, Anyway?
At the highest level, a board is legally responsible to govern a company in a way that looks out for the shareholders’ best interests. Lately, that view has expanded to include all stakeholders not just shareholders.
In theory, the board of a startup works with management to:
- Develop corporate strategy
- Provide execution support
- Ensure proper budgeting and financing
- Appoint the CEO, help recruit others
- Review and approve compensation
- Become a trusted advisor to management
- Provide perspective, being critical while supportive
- Analyze strategic options (e.g., when to IPO, when to sell, etc.)
- And hundreds of other things…
Over the years we’ve learned that we can provide as much input and value to a company with an observer seat as we could with a voting seat. The majority of the items above aren’t voted on by the board, yet as an observer, we get to weigh in on all topics without having to vote on what we think are mundane (but important) operational items — like voting on stock grants.We’ve also learned that board observer seats make it much easier to scale the venture model compared to traditional board seats.
Observer seats are typically easier to secure than voting seats as founders are much more willing to offer board observer seats. This makes sense, because founders usually try to limit the number of voting seats to anywhere from three to five members. There usually aren’t any limitations on the number of observer seats.
Observer Seats: The Pros
Board observers provide startups with additional perspective and strategy. There’s more brain power around the table. Since everyone has different experiences, the more talented minds that are in the room, the better (assuming the members understand what makes a good board member).
We’ve also found that making the follow on investment decision is much easier when you partipcate on the board (at any level) as we tend to me more informed and more engaged. This can be really beneficial to the company as future capital is needed.
Observer Seats: The Cons
While more minds mean more ideas, it also means more people to manage. Personalities will have to be juggled, and schedules will have to be coordinated. (Good observers will do their best to accommodate everyone else’s schedules and cover their own expenses.)
Though observers don’t have votes, they do have influence. They can impact the outcome of a vote — for better or worse.
Mark Suster wrote a great post about why he hates observer seats. Many of his points are valid, and it’s worth a read.
For example, Mark argues that adding too many investors to the board — even as observers — can shift the focus from entrepreneurialism to investor concerns.
We don’t have as visceral a view of the observer as Mark does. But to his point (which has since changed slightly), it’s critically important to have observers who thoroughly understand their roles — and how to add value, not detract from it.
How to Make Observers Work
We believe it’s incredibly important for board observers to participate in a positive manner. That starts with showing up and putting the laptop, ipad, phone away!
While it’s not always practical, we try to attend as many board meetings as we can in person; nothing trumps face-to-face. We call into meetings we can’t make.
Board observers should commit to this approach, and founders should make sure that’s the case. With the right recipe, board observers can strengthen any startup, helping them inch that much closer to success.
