A Quick Thought on Value Added Board Members vs. Observers

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I had lunch with Mark Suster last week. We exchanged a bunch of war stories and ideas on early stage company building and our roles as investors/mentors.  Most of what we talked about you can find in our blogs. But the two thoughts that stuck in my mind were around the role of independent board members and board observers.

According to Mark, independent board members should invest their own money into the companies they join. I’m a huge fan of recruiting independent board members and have written about it in the past. I love this idea of having the independent put up their own money, and I plan to push that point going forward.

The idea is that independents will have a completely different mindset in engaging the company when they have their own money at stake. While stock options theoretically provide an incentive to act as a shareholder, options tend to be too “theoretical.” There’s nothing like one’s own real money being on the line. The amount of the investment doesn’t matter as much as the percentage of net worth it represents.  Put another way, the independent needs to have real skin in the game. That’s the only way to get the independent to make the hard decisions that real investors make when things don’t go to plan.

According to Mark, companies should not have board observers. His point is that observers behave as full board members regardless of their status. This is because early stage company boards often are run as operational review meetings.

The real board part of the meeting (approving options, approving minutes, etc.) is no more than a half-hour to hour of a 3-6 hour meeting. In that ops review portion, discussions tend to be dynamic and all attendees tend to have a loud voice (should they choose to be loud). So the observer status doesn’t mean much if the observer decides to be really engaged. Now if there is value in the observer being engaged (value adding person), then why not just make him/her a full-fledged board member? On the flip side, if the observer is a distracting/obstructionist (non-value adding), then why have him/her in the room at all?

For more, here’s some links to my older posts on boards and board meetings:

Happy reading…

Founding Member