Board Observer vs. Board Member

Venture capitalists generally participate in boards in one of two fashions – either as actual board members or as board observers (see Brad and Jason’s post on Term Sheets – Board of Directors -- for more information on how we take positions on boards). As an associate at Mobius I was not able to take actual board seats, so I took the board observer position in the companies I worked with (note that generally this isn’t an official designation - although I have seen board agreements that require the venture firms to specifically designate the board observer; more commonly its just a seat at the board table reserved for someone from the venture firm other than the board member). As an observer I am an active participant in board meetings, but I don’t vote on any board matters and in some cases need to step out of meetings (typically to protect attorney/client privilege, which covers board members but not board observers). The boards I am involved with have all welcomed me into all of the regular and executive sessions of their meetings. Different firms treat the distinction between board observers and board members differently. At Mobius I am encouraged to be an active participant in the businesses I work with and I have never been shy about voicing my opinions at meetings. Other firms have a similar philosophy, but some feel that observers are just that – people who can attend meetings but should not participate. I’m planning a series of posts with some of the CEOs that I work with, so you can get a sense of how the relationship dynamic plays out. Stay tuned for that.

One of the big changes from my recent promotion to principal is that I’m now able to take actual board seats. I’m going to take this leap very soon and am interested to see what the differences really are sitting on the other side of the table. I won’t attend my first meeting as a board member until February, so we’ll all have to wait until then for the answer, but I plan to write about it here as it strikes me as a very important step (and milestone) in my progress as a venture capitalist. More on the company that I’m stepping up my involvement with in a future post as well, but I wanted to clarify the distinction in roles before I get to that.

Comments

[Sparrow on a Branch]

I always detest the idea of a VC having a board seat AND an observer. Practically speaking, that is two seats. Small companies do not need "observers" on the board. Let the VC negotiate for--pay for--the privilege of two seats. The observer thing is a scam to get a second seat for free. Observers may not vote, but they opine, meddle, politic and interfere at least as much as a regular board member; maybe more because they are usually inexperienced. Startups are not in existence to educate trainee VCs. Nobody has that kind of time.

Nobody should be in the board meeting that is not of a caliber to be on the board. Observer seats should be given only in extreme cases. If VCs get observers, founders should too: that way, EVERYONE can have observers. No, you VCs say? Exactly. You know the real role of "observers", and it ain't just to observe.

Entrepreneurs: reject the proposal by your VCs to have an observer. If they get a board seat, the board member should be doing the observing. After all, if he is not attending and observing, then what the heck is he doing?

VCs often rebut this by saying that having an observer as well as a board member lets them add value. That is doubtful. The observer is usually a junior. Anyway, the whole firm should be helping (that's why you let them have your stock), but "helping" and a board seat are different animals.

On a side note, companies should be tough about board member expenses. Too often VCs travel and go to conferences etcetera on the tab of startups. Let them pay their own way. Travel to and from board meetings is one thing, but draw a hard line.