The key is that they are engaging and actively seek to understand all potential alternative points of view in the decision-making process.
Board Observer Rights may be requested by angel groups, venture capital firms (VCs), or corporate VCs making an investment in your startup. Exactly what are these rights and how are they typically documented? These are the issues which will be discussed in this article. We will discuss them from the context of our approach through our angel investment group, The Angel Roundtable.
Many investors will request board observation rights, enabling the investor group the opportunity to participate in the periodic meetings of the company Board of Directors. As an example, the board of the angel group I lead, The Angel Roundtable, (ART) requires that the startup provide the group board observer rights and information rights. Our investment is contingent upon the founders agreeing to provide those rights. Without them, ART will not invest.
Board Observer Rights – What?
The board observer rights we request usually give us the right and opportunity to have a representative attend startup board meetings and quietly observe the meeting. Under this structure, we do not participate in the discussion. Should we be able to add value or have comments of significance, we address them with the leadership offline, after the meeting.
In a few cases, we may request the right to participate in the discussions during the board meeting. In others, the founders may request we participate. Although they have not granted the specific right, they believe we can add value and there is potential value on listening to alternative views during the meeting. In each of these cases, ART believes our active discussion in the board meetings is of a limited time horizon. As the company grows, as its management team develops, as they bring on additional investors such as VCs, and as members are added to the board, we believe it appropriate to step back to a strict observer role. This is because the ability of the board to conduct a dynamic discussion on issues will have been developed and the participating members will generally have the skills and experience to drive the company to its next, higher level. We do not want to become an impediment. None the less, we will maintain our quiet observer role.
Members of ART serving as observers on board meetings, like all observers, do not have the fiduciary duties of elected board members. As a result, we do not have, nor desire the ability to vote on board matters. Additionally, we understand that there may be segments of board meetings in which it is inappropriate for us to attend. These include:
- Segments in which we may have a perceived or real conflict of interest;
- Sessions of the board where sensitive personal matters or certain strategic issues are discussed; and
- Segments of the meetings enabling the founders and company attorneys to preserve attorney-client privileges, such as during discussions of litigation or potential litigation.
Board Observer Rights – Why?
ART typically invests in early stage startups. Usually, such startups have validated customer acceptance through sales revenue. Occasionally, the company may be at the late seed stage, without sales and occasionally it may be late in the early stage or early in the growth stage, with a solid revenue base and strong sales pipeline. Regardless, Art invests in the earlier stages of a startups life.
Typically, startup teams at these stages have minimal staffs and incomplete management teams. As a result, ART seeks out novel ideas with exceptional market potential. We also seek strong management teams with a demonstrated history of being able to execute. It is desirable that such teams are diverse in every sense of the word and open to input. They must be coachable, and willing to listen. The key is that they are engaging and actively seek to understand all potential alternative points of view in the decision-making process.
Our investors have absolutely no desire to manage the company, participate in the decision-making or impose our views on the management of the startup. We do however, have a strong desire to understand the issues on the table and to provide support and assistance to the management team in an effort to make sure they have the best information and resources available to address decisions they will face in their everyday management of the company. As such, another requirement we have is that the founders be willing to listen.
One of the means we utilize to remain relevant in the conversations is to obtain observer and information rights. These rights provide an opportunity to have a seat at the table and receive pertinent information regarding the major issues facing the company. It facilitates the development of relationships and enables us to support the startup through our networks and experience and to insure alternatives are thoroughly vetted. It also enables us to keep our investing members informed.
Board Observer Rights – How?
Board observer rights are not defined by statute. There is no common law right enabling investors the right to attend and observe board meetings, to receive board packets or information, to inspect the corporation’s books, records or the minutes of the board meetings or to attend committee meetings. These rights and the related role of the observer must be defined by contract.
The investors of ART believe that these are important rights. We believe they are important to both the investors, whose interests we ultimately represent and to the startup, which we are able to support to the benefit of all parties. We are, after all, all in it together!
NOTE: This article may discuss issues for which legal advice should be considered prior to a decision or agreement with a third party. It should be noted that the author is not an attorney, and FundingSage is not a law firm. FundingSage’s employees and affiliates do not provide legal advice. We recommend you seek the services of an attorney if legal advice is required.