What are the common challenges and pitfalls of being a board observer vs a board member in VC deals?

As a board observer in VC deals, challenges include limited influence on decisions, exclusion from certain sensitive discussions, and potential misalignment with board members. Observers may struggle with information gaps and lack of authority. Board members face legal responsibilities, higher pressure for company success, and deeper involvement in strategic decisions. Both roles require balancing company interests, investor expectations, and maintaining valuable relationships.

First and foremost, please recognize that the separation of rights and duties as amongst board observers and board members is one area in which a bright line can and should exist. Simply put, observers are not board members, nor, depending on the law of the applicable state, do they have any of the rights or duties. An observer should only have rights with respect to meeting attendance, and the receipt of related meeting materials, in each case, subject to exclusion if needed to protect the company's confidential information and/or if observation by a third party would nullify the attorney-client privilege. Having observers is sometimes a necessity, and sometimes desirable. Either way, ensure all sides have adequate safeguards.

While holding a board member role is typically preferred by an investor, strategic investors with smaller investments can be useful in a board observer role. Angel investors typically assume the board observer role as they can provide value by bringing back information to the larger organization to help connect the startup to valuable resources and connections

Startup founders are often slow to realize the benefits of keeping investors fully informed. Having a Board Observer can help greatly in that process. Angel groups that have a decent number of members will often have someone conversant in the business that can add helpful strategic assistance in addition to aiding in the information process. A Board Observer doesn’t have to have a vote to really contribute to a startup’s success.

Startup founders are often slow to realize the benefits of keeping investors fully informed. Having a Board Observer can help greatly in that process. Angel groups that have a decent number of members will often have someone conversant in the business that can add helpful strategic assistance in addition to aiding in the information process. A Board Observer doesn’t have to have a vote to really contribute to a startup’s success.

In my experience, getting board observer experience is a great precedent to eventually becoming a more effective board member.

Help to gain deep insights into the company’s operations and strategies without the legal responsibilities of a board member. Provide valuable feedback, influence discussions, and expand your professional network.

Aside from unfiltered access to information, the greatest benefit of being a Board Observer is being able to engage in Board discussions unfettered by fiduciary responsibility.

One must be careful to not overstep and in doing so become a "shadow director". At this point you will have the liabilities of Directorship without the insurance protections afforded to appointed Board Members.

Board members in VC deals benefit from significant influence on strategic decisions, direct access to comprehensive company information, enhanced oversight capabilities, and the ability to drive company growth. They gain valuable industry experience, strengthen their professional network, and often receive compensation, such as stipends or stock options. Additionally, they contribute to shaping the company’s trajectory, which can lead to personal and financial rewards if the company succeeds.

As a Board Member you are able to influence strategy and share responsibility for the decisions that the Board takes. It is important to remember that you are not there to protect your interests as a shareholder but to serve all shareholders and to advise, support and hold management accountable.

If you do it properly being a Board Member can take a great deal of time, particularly when things are not going well. There is often an implicit assumption that you will provide continued financial support to the company in conjunction with your position, which is not necessarily the case. When you are no longer able to make a positive contribution or face unreconcilable conflicts you should step down.

Listen. It takes a minute to get up to speed. When you find a topic or area where you can add value then speak up. Get to know your fellow Directors. Read the papers so that you are prepared for Board discussions and can contribute. Read the minutes to check that they properly reflect what was said and decided. Be an advocate.

Being a board observer versus a board member comes with distinct advantages and challenges. Board Observers: Challenges: Limited voting rights, potential for feeling excluded from key decisions, and difficulty influencing strategic direction. Tips: Build strong relationships with board members, actively participate in discussions, and leverage your network to provide valuable insights. Board Members: Challenges: Increased liability, time commitment, and potential conflicts of interest. Tips: Clearly define your role and responsibilities, actively participate in decision-making, and seek mentorship from experienced board members.

While board observers can't vote, they can still contribute to the discussion. This is an additional way to add even more diversity to the discussion and open new options. It is also a great way to prepare future board members for their roles.

Board observers in my opinion can roughly be of two types: - The wise expert with no skin in the game. They're the most useful to the CEO and they're the "classical" example of a board observer - The up and coming future board member. They're here to learn But more often than not, being somewhat of an outsider can lead the future board member to be an excellent observer with a lot of insights to bring to the table. Ideally, if the company is large enough, warranting a "large" board, I'd would advise having each of these two type on board...