Your First Board Seat

Observer or director

Observer rights are negotiated in the financing documents. Firms often take an observer seat on smaller positions, or where a director seat would create conflicts. As a principal, your first seat is often an observer role on a deal a partner leads, followed by a director seat on your own.

What a director owes

A director's duties run to the company. In Delaware, where most US venture-backed companies are incorporated, that means the duty of care (make informed decisions) and the duty of loyalty (put the company's interests ahead of your own). Canadian corporate law frames the core duty as acting honestly and in good faith with a view to the best interests of the corporation.

Neither version lets you vote the way your fund would prefer when that isn't what's best for the company.

The dual-fiduciary problem

An investor director owes duties to the company, and also owes duties to their own fund and its LPs. Most of the time those point the same way: everyone wants the company to be worth more. They diverge at specific moments:

• Insider-led financings and down rounds, where your fund is both setting the price and buying.
• Sales of the company, where preferred and common shareholders get very different outcomes from the same price (module 3.1 walks through the preference stack).
• Wind-downs, where the fund would rather stop funding and the company might survive with more.

In the Trados case (Delaware, 2013), a court examined VC-appointed directors who approved a sale in which the preferred holders were paid and common stockholders received nothing. The directors ultimately won, because the common stock would have been worth nothing either way, but only after years of litigation and a finding that their process fell short. The lesson investors took: in conflicted decisions, process matters. Independent directors, a special committee, a fairness analysis, counsel, and a written record of why.

What good board members do

• Prepare. Read the materials before the meeting. Well-run companies send them days in advance; if yours doesn't, ask.
• Ask few, good questions. The board's job is judgment on the big things (strategy, capital, the executive team, risk), not running the business.
• Help between meetings. Most of a board member's value lands in calls and introductions, not in the meeting itself.
• Use the executive session. Time without management, and time alone with the CEO, is where hard things get said early.
• Do the formal work properly. Approving financings, option grants, budgets and the audit. It's routine until it isn't.

The hardest calls

The decisions that define a board member are rare: raising money on bad terms to survive, selling the company, and replacing a founder CEO. Each involves the conflicts above, each needs counsel, and each goes better when the board built trust with the CEO long before it was needed.

Your board load

Every seat takes real time: meetings, preparation and the calls in between. Firms and LPs watch how many boards a partner sits on, because too many means each company gets less. Before you take your first seat, agree with your partners how many you can carry.

What this means for you

Treat your first observer seat as training for the director seat that follows. Watch how the lead director handles the CEO, the other investors and the hard votes. And when your own seat comes, remember whose interests you're legally there to serve: the company's.