Investor Directors: Is it worth the hassle?

In UK venture deals, investors often negotiate the right to appoint a director to the company’s board (as a rule of thumb, an investor with 5% to 10% or more of the company might ask for board rights). On paper, it makes sense, giving a seat at the table, direct access to management, and visibility on key decisions. But before taking that seat, we often advise investors to ask themselves: is it worth the hassle?

Once appointed, an investor director takes on the same fiduciary duties as any other director (exec or non-exec) under the Companies Act 2006. These include acting in the best interests of the company (not the appointing investor), promoting the company’s success, and exercising reasonable care, skill and diligence. Other duties also apply under the Insolvency Act 1986. They are part of the statutory board and that means potential personal liability.

When things go wrong (such as insolvency, misconduct, or governance breakdowns) investor directors can, and do, find themselves pulled into the fallout, and resigning doesn’t erase potential liability for past decisions. Even where they’ve acted responsibly, they may face scrutiny from liquidators, shareholders, or regulators. Claims for wrongful trading or misfeasance are rare but stressful, costly and reputationally damaging. We have recently advised multiple investor directors whose co-directors have made questionable decisions, including potential wrongful trading with possible insolvency looming – a very uncomfortable situation to be in. Indemnification provisions and D&O insurance can help mitigate this risk, and venture documents often include them. But this only goes so far – they may not cover every situation, and they do not prevent the investigation or the anxiety that can come with being named.

Why an observer seat is often better

Having the right to appoint a director is valuable, but actually using it may not be the best bet. A non-voting observer seat often achieves the same objective – access to board discussions and papers – but without the legal duties or personal exposure of being a statutory director. Observers can attend meetings, contribute views, and stay close to the business. In early-stage companies, where founders typically hold the majority of board seats, an investor director’s vote rarely changes the outcome anyway (this is not the case in more mature companies where the board composition can become more complex and possibly be made up of a majority of non-founders). The real value lies in being informed and engaged, not necessarily in holding a formal vote. Investor director consent rights can be dealt with instead at investor shareholder level if there is no investor director, which we will explore in a later article.

The practical takeaway

For many investors, the risks of a board seat outweigh the benefits. Unless you’re the lead investor and have a specific strategic or governance reason to be on the board, or your appointment could actually influence the balance of power at board level, an observer role is usually the more sensible route. Having the right to a board seat remains useful as leverage, but you don’t always need to exercise it — in most cases, being an informed observer delivers the same results without the personal risk that can come with a directorship.