How To Be a Board Observer
The norms in venture capital have changed a lot since I started in the business in the early 1990s: in those days, syndicates were typically smaller, and any investment by a professional venture firm usually was accompanied by a formal role on the startup’s board of directors.
30 years later: round sizes are larger, syndicates have more participants, entrepreneurs wield more power; and as a result, it’s not abnormal for professional venture capitalists to assume a relatively passive role in managing private company investments.
Although I’m a vocal proponent of actively managing venture investments, there is some merit to a slightly less hands-on approach. After all, the job of a director can be fundamentally antagonistic to the founding CEO. I worked closely on a private company board for many years with August Capital’s Dave Marquardt, who is one of the most experienced venture capitalists I know. Dave was an initial investor in Microsoft and has had a very successful investing career. He espouses a view shared by many, which is that the #1 job of the board of directors is to “hire and fire the CEO.” When the board’s role includes firing the CEO, there will always be some tension.
By serving as an observer instead of a director, it’s possible to avoid confrontation with a startup CEO; observers are simply less threatening and may have an easier time establishing a rapport of trust with founders. And because directorship carries fiduciary duties and legal liability, an observer role may be a lower stakes way for inexperienced venture capitalists to develop board room skills.
How to serve as an observer
So how should a first-time startup board observer approach the job?
For starters, avoid the mentality that you are “taking” a board observer seat. While that language is common in the venture industry, a board role is service, not an entitlement. Even if your firm has effectively purchased the right to participate in the board room, humility is usually more endearing to the rest of the board.
If you have a subject you’d like to discuss at the board meeting, ask the board chair and the CEO (if these are different people) to expand the agenda at least a week in advance. This will be much more effective than surprising everyone with a new topic in the middle of the meeting, during what will likely be an already full agenda.
Show up prepared, provided the management team has circulated materials sufficiently in advance. Remain focused, and avoid multi-tasking during the meeting. The board is owed your full attention.
While many observers are reluctant to speak during board meetings, this is unwarranted. Don’t be afraid to ask questions, and don’t be afraid to speak. But always speak from your expertise: if your strength is marketing, don’t wax rhapsodic about technical product development, and vice-versa.
In general, act like you have all the obligations of a board director but none of the rights or privileges. Even though you don’t have a fiduciary role as an observer, you should adopt a director mentality to “fit in” with the rest of the board — this also might create an opportunity to shift to a director role later.
As an aside, in certain European countries observers may be treated more like directors, where any presence in the board room may imply legal fiduciary duty and financial liability. Be aware that if not everyone involved is from the United States, the perception of board observer obligations may vary.
Be prepared to be recused from certain discussions, as this is normal for observers. In some situations there may be sensitive subjects, but it’s also the case that the presence of observers may void attorney-client privilege in certain discussions with legal implications. Do not take offense if you’re asked to step out.
Few startup boards make decisions by counting votes, so don’t be afraid to weigh in as though your opinion counts, because it probably does. On the board where I served with Dave Marquardt, I had previously been a director until August invested. When Dave joined, I became an observer instead at his request. But he and the other directors always treated me as an equal, because we were all working together to get the best outcome possible.
Perhaps most importantly, take every opportunity to build 1:1 relationships with the other directors outside the board room. This will make everything smoother inside the board room, and keep stresses under control when the startup hits a bump in the road.
What if you’re a corporate observer?
If your investment platform is a corporate venture capital fund, it’s possible that your parent company may have a prohibition against directorships. This is another reason why a board observer role may be the way to start.
For corporate observers on startup boards, here’s additional guidance to help avoid friction with entrepreneurs and institutional investors:
- Always remember that the role of the startup board is to focus on the success of the startup, not your parent company. This will be foremost in the mind of everyone else involved, but your observer role can help you align these interests with those of your employer. Being an observer gives you unique access to form relationships that can be mutually beneficial for all involved.
- Think about how you can add value, based on what your corporate parent would realistically be willing to do that could help the startup.
- As a corollary, recognize that your observer seat isn’t a platform to push your parent company’s agenda — this is probably best accomplished outside the board room and another reason to prioritize 1:1 connections. On the other hand, don’t promise anything that you aren’t sure that you can deliver, because you probably have hoops to jump through back at your day job.
- In this vein, don’t allow yourself to be “put on the spot” in a boardroom discussion. It’s fine for topics to be introduced and to listen to what other board representatives have to say, but you aren’t obligated to answer for your parent corporation in a formal board setting, especially if you don’t have a confident answer. It’s fine to say “I don’t know, let me discuss that internally and get back to you,” provided you follow up expediently.
- Again, be prepared to be recused from the board room. As an observer and as a strategic investor, your parent corporation may have real conflicts that requires confidential discussions without your presence. It’s useless to fight these recusals; ultimately, the board will meet another time without you if they perceive you to be difficult.
Gaining board experience is a fundamental venture capital skill that can have a big impact on startup success or failure. The relationships and insights gained from board roles can serve you throughout your entire career. Starting as an observer can be a productive way to set yourself on this journey.
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