Dear SaaStr: What Are the Downsides To Giving a New VC Board Observer Rights?
If a VC is going to be buying especially more than 5% of your company, and they aren’t getting a board seat — they’ll likely ask for an observer seat.
And yes, many times, it might seem like an annoying ask. Who needs get another person hanging around the board, even if they aren’t technically a board member?
Having a board observer can be both a benefit and a challenge, depending on how you manage it and who the observer is. Here’s the breakdown:
The “Benefits” of a Board Observer
- Additional Perspective: Observers can bring valuable insights without the formal voting power of a board member. If they’re experienced or well-connected, they can help you see around corners and provide advice on strategy, hiring, or fundraising.
- Relationship Building: Including an investor as an observer can strengthen your relationship with them. It shows transparency and builds trust, which can be helpful if you need their support in future rounds or tough situations.
- Support Without Control: Observers don’t have voting rights, so they can’t formally block decisions. This allows you to benefit from their input without giving up control.
- Access to Their Network: Observers often want to prove their value, so they might go out of their way to make introductions, help with recruiting, or bring in other investors.
- It May Mean a Lot to Them. If so, it may create a pretty tight bond with that investor.
The Challenges of a Board Observer
- More Voices in the Room: Even though observers don’t vote, they’re still in the room during discussions. This can slow down decision-making or create noise, especially if they’re inexperienced or overly opinionated.
- Potential for Misalignment: If the observer’s priorities don’t align with yours (e.g., they’re pushing for aggressive growth when you’re focused on profitability), their input can become a distraction.
- Confidentiality Risks: Observers are privy to sensitive information. If they’re not fully aligned with your vision or have competing interests, this could create risks.
- Pressure to Include Them: Once you give someone observer rights, it can be hard to exclude them later. If they’re not adding value, it might feel awkward to ask them to step back.
When Does a Board Observer Make Sense?
- Early Stages: If you’re in the seed or Series A stage, having an observer can be a good way to involve a key investor without overloading your board.
- Strategic Investors: If the observer is from a strategic fund or has deep expertise in your space, their input can be incredibly valuable.
- Building Relationships: If you’re planning to raise more capital from the same investor, giving them observer rights can help build trust and alignment.
How to Manage a Board Observer Effectively
- Set Clear Expectations: Be explicit about their role. Observers should provide input but not dominate discussions or overstep boundaries.
- Limit Access: You don’t have to invite them to every meeting or share every piece of information. Keep their involvement focused on areas where they can add value.
- Evaluate Their Contribution: If the observer isn’t adding value, it’s okay to revisit their role. Observers aren’t necessarily permanent fixtures—they’re there to help you, not the other way around.
My Take
A board observer isn’t the end of the world, and in fact, the best ones add more value than many “full” board members.
And if a VC is writing a material check, you may just need to give them observer right and not over analyze it.
But don’t feel obligated to give observer rights to every investor that asks. Ideally, 4%-5% initial ownership as a floor. Otherwise, it’s just too many.
And a related post here:
