- Private Equity
At its simplest, a board observer is someone who is allowed to attend and participate in board meetings, but unable to vote on board decisions. They’re not a full Director, or member of the board, but they do go to meetings and are able to actively engage.
From a private equity perspective, board observer roles with portfolio companies are quite common for members of the deal team. This privilege can often extend down to the associate role. This is most common if you are at a middle market or lower middle market firm.
Typically the private equity partner on the deal will have a full voting board seat. The principal or MD (terminology varies by firm) may have a voting board seat or may be an observer. The VP and associate on the team are almost always at the observer level.
Occasionally you’ll run into a deal structure where board observer rights are included in the negotiations. This can often happen if you acquire a company and the prior sponsor is rolling over, if you have minority co-investors with you in the deal (such as private equity LPs brought in alongside the main fund), or as part of a venture round.
In this case, the minority board observer will likely be the most senior person staffed on the deal. Not the junior deal team members for the majority owner of the portfolio company. Typically only one person is allowed to observe in this instance.
For example, Homie Capital acquires a chain of junk yards from Donkey Capital. As part of the transaction, Donkey Capital contributes $69 million in rollover equity (proceeds from the sale reinvested alongside Homie Capital). In exchange for agreeing to rollover, Donkey Capital requests board observer rights for the portfolio company while it is under Homie Capital’s ownership. With this negotiated, Donkey Capital’s senior partner is able to attend all future meetings.
This right is important for Donkey Capital as it lets them stay fully informed, even while they no longer control the business. They received significant liquidity in the sale, but still have enough capital invested in the deal that they need to know what’s happening at the company.
Venture capital board observers may have slightly more limitations than private equity observers. It’s more common for VC observers to refrain from participating and only attend meetings in a listening capacity. The role of the VC in relation to the founders and management may be more sensitive than private equity, thus the reduced role. Founders/management will want to maintain as much control in the business as possible. Even without voting capability, participating board observers have more sway on the direction of the business than observers who are required to remain silent.
As an associate, you’ll probably be a board observer for each of your portfolio companies. This can mean attending meetings each quarter for 2 – 4+ companies, which can become quite time consuming. This often entails traveling to the meeting with the deal team. Hopefully your firm doesn’t shove you in the back of some Spirit flight while the partners take the PJ.
At the meeting, frequently you’ll have a board dinner the night before. This is a more informal get-together of board members and fellow observers to both talk business and catch-up generally. As a younger member of the team this can really be quite interesting. There aren’t many other opportunities for a ~25 year-old to interact with C-suite executives in such an intimate setting.
At the actual board meeting you will most likely just sit there. Certain deal teams will encourage or discourage associates from speaking up and participating. This often depends on the size of the firm and company as well as your tenure with the firm. Don’t worry, there is almost always food available so you can keep yourself occupied.
Although you aren’t allowed voting rights, being a board observer can be important. It’s something you should absolutely negotiate for as a minority investor, and something that can be a cool experience as a member of the junior deal team of your portfolio company. From the company’s perspective, experienced observers can also add a lot of value. Regardless of the scenario, don’t add board observer roles to your LinkedIn or people will make fun of you.