Power dynamics and governance in venture capital (“VC”) and startups are evolving, with innovative mechanisms balancing influence and control. One key tool is the appointment of board observers—individuals without voting rights who serve as strategic eyes on the board, providing insight and influence without the fiduciary responsibilities of board membership. Their role exemplifies control without formal control, enabling investors to closely monitor and guide governance, strategy, and performance.
This Article is the first to explore the role of board observers in VC and startups. These observers act as intermediaries, bridging active investors and corporate boards and aligning them with shared strategic goals. This Article highlights investors’ motivations for this engagement, including enhanced governance, access to influence, risk mitigation, and compliance with complex regulations like antitrust, Committee on Foreign Investment in the U.S. (“CFIUS”), and the Employee Retirement Income Security Act of 1974 (“ERISA”).
Board observers drew attention in November 2023 when Microsoft was appointed as a non-voting observer during OpenAI’s internal discord and CEO removal, spotlighting their impact. Regulatory scrutiny followed, leading Microsoft to step down in July 2024, underscoring the role of corporate VC in governance and strategic direction.
This Article contributes new insights by tracing board observers’ emergence, revealing results from the NVCA’s Q4 2023 CFO Survey showing 82% of VC entities use observers, with all entities over $500 million in assets under management adopting this model. It examines the legal status, rights, and duties of board observers, their role in deal negotiations, and their regulatory impact. It suggests further work to define disclosure, liability, and accountability requirements for board observers, examining issues like startup boards’ consensus voting, supervision focus, and the chilling effect on traditional members.
* Nizan Geslevich Packin is a Professor of Law at the Zicklin School of Business at Baruch College, CUNY, and at the University of Haifa Faculty of Law. She is also an ECGI Academic Researcher, a Research Associate at the European Banking Institute (EBI), and an Affiliated Researcher at Tel Aviv University’s Chief Justice Meir Shamgar Center for Digital Law and Innovation, and the Information Society Law Center (ISLC) of the University of Milan.
** Anat Alon-Beck is an Associate Professor at Case Western University’s School of Law. We would like to thank the participants in the (i) Vanderbilt University Law and Entrepreneurship Conference, (ii) Corporations, Private Ordering, and Corporate Law, Columbia Law School & Goethe University, LawFin, and (iii) NYU Pollack Center for the Fall Corporate Governance Research program for their comments.
The full text of this Symposium is available to download as a PDF.