Are Board Observers A Good Idea For A Startup?

By Kip Knight

Board observers have long been part of startup governance, initially as a way for investors to monitor their investments without formal voting power. Over time, their presence has increased, with approximately 20% to 30% of corporate boards including observers. The percentage is even higher for private companies that rely on venture capital.

A well-rounded board can be the difference between scaling the next unicorn and languishing in the land of mediocrity, so let’s tackle the burning question of if your startup’s board should be limited to regular board members (voting) or allow board observers (nonvoting) to join.

Pros of having board observers

There are several benefits to allowing board observers, including:

Access to expertise and diverse perspectives: Board observers can bring invaluable insights and a fresh perspective, especially if they have deep industry knowledge.

Additional source of sales leads and investments: Observers often have a network that can be used to identify new business opportunities and potential investors.

A stepping stone to a regular board seat: For emerging leaders, serving as an observer is a great way to gain experience before transitioning to a full board member role.

Cons of having board observers

There are also drawbacks to this approach. They include:

Access to confidential information: The more people have access to sensitive information, the harder it is to maintain control.

Potential over-influence: Even without a vote, observers can sway board decisions, sometimes unduly.

Unclear roles: The lack of clarity around what observers should and shouldn’t do can lead to confusion and inefficiency.

Complications during crises: Having observers in high-stress situations can slow decision-making or create awkward dynamics when tough calls are needed.

What the experts think

Not surprisingly, legal and financial professionals have substantial differences of opinion on the value of having a board observer. The most significant argument of those in favor is the objectivity an independent observer brings to the table:

Proponents like law professor Nizan Geslevich Packin and attorney Stan Doida believe in the value of expertise and network connections that observers bring without the burden of voting responsibilities.

However, critics including Brad Feld, co-founder of Foundry Group, and Mark Suster, partner at Upfront Ventures, are concerned about the potential for too many voices on a board, leading to disjointed decision-making and reduced accountability.

When a board observer might be right (and some alternatives)

Securing new investors: If having an observer is a critical factor in getting a new investor on board it might be worth doing, but consider whether creating a regular board seat for them might be a better solution.

Need for expertise or sales leads: If their expertise or network is crucial it could be worthwhile, but consider hiring them as advisers or consultants as a viable alternative.

Training up-and-coming partners: While it’s beneficial for VCs to train their partners, if you decide to do this try to ensure that adding a board observer seat doesn’t decrease your board’s overall effectiveness.

Conclusion

While board observers can offer valuable insights, most startups may find the risks outweigh the benefits. A streamlined, unified board with clear accountability often leads to more effective decision-making.

Kip Knight is the operating partner at Thomvest Ventures. He is also a board member at Netbase Quid and the founder of CMO Coaches, working with professionals who aspire to be world-class leaders.

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Illustration: OpenArt