I’m increasingly seeing founders struggle to get themselves out from underneath a burden of board observer rights granted to VCs from earlier investment rounds.
With the exploding number of micro-funds (sub $100m funds) out there, their desire to invest in syndicates with similar micro-funds, and their increasing propensity to prefer an observer seat over a director seat for personal time management (many micro-funds invest in 50+ companies per fund) it has become routine to see companies with 3-5 observers on top of an actual 5+ person board.
Its likely too many voices and its definitely too many VCs.
It is only a matter of time until a new capital round comes together and a new VC and the founder want to reshape (read: reduce) the number of people in the room.
What seemed like an easy give for the founder at the time to get an earlier financing round done can quickly become a hyper-emotional conversation.
Holding several observer roles myself, many of which have led to my strongest founder relationships, I’m personally a fan but think it needs to be managed closely and unemotionally.
Rather than continue the talk about whether or not observers are good for boards as it is a belabored topic and each board is so unique, here are some simple suggestions for founders if they are either considering adding observers to their board or have a big stack of them they are trying to figure out what to do with…
Doling out observer roles in early rounds
If you need or want to give out an observer right, put out some specifics on time duration of the right or that the observer right is in place until a specified future capital round. Better yet, don’t even give a right. Tell the VC they will be invited as a guest to Board meetings (also time bound or until a future raise) so that when you need to make a change down the road, you aren’t taking an actual legal right away. At a minimum, by having a conversation around limits you are inherently setting expectations up front and removing any awkwardness down the road.
The ‘managing-out’ conversation
I see founders misplay this conversation all the time. Usually prompted by a new capital round, the founder views it as an opportune time to make changes. Rather than have an honest conversation with the observers, the founder says the new VC wants to reshape the board. Some observers are cool with it, one isn’t. The upset observer calls the new VC to complain. The new VC says it was the founder’s idea. It becomes a mess. Just have the honest conversation up front. Its just not that big of deal.
Treating observers equally
If there are multiple observers from one investment round, just keep them all or remove them all. Don’t pick and choose. It just makes it too hard.
Managing the ‘let-down’
Most VCs want an observer right just to stay close to the company and understand whats going on. If you’re going to manage them out, just make some sort of give. Ensure they will still be on your financial distribution emails. Commit to a short, periodic (but less frequent) phone call with them to provide some updates so they feel in the loop. Agree to always meet them for coffee when in town, etc. There are a lot of simple things you can do to make them feel comfortable that don’t change your current workflow.