When raising capital, most founders focus on one question: “How much funding can I secure?” Unfortunately, few pause to consider an equally important question: “What level of control am I giving away?”
Investor rights, such as board seats and observer rights, are not administrative formalities; they are instruments of power. They determine how decisions are made, who has influence, and ultimately, how much autonomy a founder retains. Understanding these rights before signing any agreement is critical to protecting your vision.
What Is a Board Seat?
A board seat gives the holder formal authority as a member of the company’s board of directors. It is a front-row seat to how the business is run, and comes with voting powers on key matters such as:
- Approving the annual budget, audited financial statements, and major expenditures
- Issuing shares or convertible instruments, or altering the company’s equity structure
- Approving or amending employee stock option plans
- Changes to dividend policy, declaring or paying dividends
- Appointing or removing key executives and approving their compensation
- Incurring significant debt, liabilities, or creating charges on company assets
- Authorising mergers, acquisitions, liquidation, or any major transaction outside the ordinary course of business
- Acquisition or disposal of assets above material thresholds
- Entering into related-party transactions or non-arm’s-length deals
- Approving a change in business scope or IP-related agreements
- Approving the commencement, settlement, or defense strategy of any material litigation, arbitration, or regulatory proceeding, including the engagement of external counsel and material expenditure in connection with such matters
In short, board members influence almost every strategic, financial, and structural decision of your company.
Board members also owe fiduciary duties, legal obligations to act in the best interest of the company and its shareholders, even if it conflicts with their own interests.
What this means for you: Granting a board seat gives an investor direct influence over your company’s strategic direction. This can be beneficial when the investor brings expertise and network value. However, too many board seats too early can make decision-making slow and dilute founder control.
What Are Observer Rights?
Observer rights allow an investor (or their representative) to attend board meetings and receive board information without voting rights. Observers can watch discussions, ask questions, and, in some cases, may be allowed to offer advice, but they cannot vote on resolutions.
On the surface, observer rights seem harmless, but they come with significant soft power:
- An observer who consistently raises concerns can influence the tone of decisions
- They can escalate issues to other investors or stakeholders
- They gain access to sensitive information, which can affect negotiations later
Unlike board members, observers do not have fiduciary duties, yet they enjoy high-level access to company strategy.
What this means for you: While observer rights are lighter than board seats, they still allow the investor to shape decisions indirectly. Founders are cautioned to treat them with the same level of seriousness as board seats during negotiations.
Why Investors Ask for These Rights
Investors typically request governance rights to protect their investment. Unfortunately, these rights have expanded over time because of past governance failures like founder-led withdrawals without documentation, misuse of funds for personal expenses, and significant decisions made without investor consultation.
To address these issues, investors began demanding more control, sometimes more than is necessary for early-stage startups.
How Should Founders Respond?
The goal is not to avoid governance. The goal is to design governance that is proportional, practical, and aligned with your growth stage. Here are some legal and strategic tips:
- Tie rights to investment size: Large investors bringing significant capital or follow-on commitments may justify a board seat. Smaller investors should not automatically receive the same rights.
- Appoint an independent director early: This neutral party can help resolve conflicts and protect the founder’s vision.
- Set time limits: For observer rights, consider limiting the term to a fixed duration, which could be time-specific or tied to a milestone, like the next funding round.
- Define boundaries clearly: State whether observers can attend executive sessions and what documents they are entitled to access.
- Avoid copy-paste agreements: Customise governance terms to your startup’s stage and risk profile.
If You’ve Already Granted Too Much Control
If you are already facing governance challenges, slow board approvals, misalignment, or investor veto fatigue, you have options:
- Review your agreements: Many founders are unclear about the exact rights they’ve granted. Start there.
- Renegotiate at the next fundraising milestone: New capital is your best opportunity to reset governance terms.
- Document everything: Good reporting builds trust and limits the need for unnecessary oversight.
- Engage your board proactively: Silence creates mistrust; transparency fosters alignment.
To wrap this up, investor rights such as board seats and observer rights shape more than your boardroom; they shape your startup’s future. They determine who holds power, who influences decisions, and how fast your company can move. As a founder, your role is not to reject governance, but to negotiate governance intentionally, so that it supports your company’s growth without compromising your ability to lead.