What Are the Benefits and Limitations of Board Observer Rights?

Benefits-and-Limitations-of-Board-Observer-Rights

A board observer is someone who is allowed to attend a board meeting but is not permitted to vote on matters concerning the board. The question becomes – are there any benefits to being a board observer if you don’t get to vote on matters of importance? The simplest answer is “yes.” The benefit is adding to the conversation and influencing the perceptive of those who will vote, as well as the possibility of stopping a concern before it becomes a full-blown problem. If you are planning to be a board observer, make your voice heard and hone your listening skills.

What are the Different Types of Board Positions? 

A business may have 1 to 3 different types of board positions with differing degrees of power. These can include:

The Board Member: These are the people who hold voting, legal, and corporate rights. They are the ones who vote on issues requiring board approval.

The Advisory Board Members: These are the people who acquire this tile by way of quid-pro-quo through expertise or people they know.

The Board Observers: These members can sit in on meetings as they have put in a minimal amount of money or human capital. This has earned them the right to attend board meetings, but they have not contributed enough to obtain voting rights. While they do not get voting rights, they do have access to the meeting minutes as well as most information that non-board members may not have access to.

Abilities and Restrictions of Board Observers

It is worth noting that since board observers are not voting board members, they are not bound by the majority of formal fiduciary duties that other board members may be bound to. The only exception is that of confidently. It should be notes that a board observer will likely be required to leave when legal discussions take place in order to maintain attorney-client privilege. Additionally, if you are the subject matter of the meeting and may thereby trigger of conflict of interest your rights may also be limited. It will come down to your specific arrangement.

Why Should I Demand a Seat at the Grown Ups’ Table If I can’t even Vote? 

There are several reasons for requesting the position of a board observer. These include:

  • It gives you a space to voice your concerns or give input.
  • If there is a problem, you may be able to solve it in its early stages.
  • It makes you feel as if you got something for the capital you put in.
  • It allows your voice to be heard while reducing friction by having too many ultimate decision makers.
  • Your liability is reduced
  • You make yourself seen, so down the line you may be able to move up the chain should you desire and have the right to do so.

Where Can I Find These Rights? 

As a general rule of thumb, the first place you should look for details on your rights is the stockholders’ agreement. In addition to the stockholder’s agreement, you may be able to refer to the side letter you may have received as well as the articles of incorporation.

When Should I Request these Rights?

This will most commonly be done when you first invest in the startup. That said, you might be able to ask for these rights during a restructuring, or at any other time for that matter. The key is to refer to your stockholder’s agreement.

Talk with an experienced Mountain View Corporate Lawyer Today

To determine your board observer rights or if offering a board observer position is appropriate for your contact Startup Company Counsel. Call at 408-441-755, or contact us online to schedule an appointment.

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