Investor director, independent directors and board observers: roles and responsibilities

In the early stages of many startups, the founders carry out almost all the roles within the company. The founders are the directors, the employees and the owners of the company. The founder directors work hard together to promote the success of the company, and board meetings are often informal.

As the startup grows, a more formal structure for proceedings of directors including board meetings is likely to become necessary. Investors may want an active role within the company by having an ‘investor director’ nominated by them. Founders might want to consider appointment to the company of an ‘independent director’. Investors may prefer to have a ‘board observer’ who attends board meetings of the company.

Whatever directors are called, any ‘director’ has statutory duties under the Companies Act 2006:

  • duty to act within powers
  • duty to promote the success of the company
  • duty to exercise independent judgment
  • duty to exercise reasonable care
  • skill and diligence
  • duty to avoid conflicts of interest
  • duty to not to accept benefits from third parties
  • duty to declare interest in a proposed transaction or arrangement.

A board of directors with talented individuals is highly valuable to the founders by helping with a range of issues which are relevant to the company. We have outlined the various board roles to help founders consider the issues.

Investor director

An investor director is a director nominated by the investors to the board of directors, to participate as a director of the company in the same way as the founder directors. Investors often require a board position as a condition of investment.

An investor director is subject to the duties under the Companies Act 2006, and in particular, the investor director will need to act carefully to avoid getting into a situation where there is any conflict of interest as a director of the company and a representative of the investors.

An investor director will expect to be paid and be reimbursed expenses. These provisions should be contractually agreed between the company and the relevant investor before any investor director is appointed.

Independent director

Founders might consider nominating an independent director to the board of directors of the startup. An independent director is usually chosen from amongst established names within the relevant industry who have experience and contacts to help in developing the company.

The appointment of a well-respected business leader to the board of directors of the startup may reassure investors and increases the credibility of the business to stakeholders. The independent director may also act as an impartial decision-maker, who can balance the interests of the founders and the investors.

Board observer

A minority stakeholder or an investor who is looking to avoid the liabilities and risks of being a director of the startup, may require that the company appoints a board observer. Observers receive all the information provided to directors, and attend meetings of the board of directors. Observers, however, do not represent the company and do not take part in any decision making. A board observer is not a director and is not subject to the statutory duties of directors under the Companies Act 2006.

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