Conflict of Interest

A situation in which a person's personal or other professional interests could influence their duty to act in another party's interests.

Example

A director's fund leading a new round in the company, where the fund wants a low price.

Important

Conflicts are common in startup boards. Disclosing them and following a careful process is what matters.

Related terms

  • Fiduciary Duty — A legal obligation to act in the interests of another party - for a company director, generally the company and its shareholders as a whole.
  • Independent Director — A board member who is neither a founder, an employee nor a representative of an investor.

Lessons that explain it

  • The right expert on one call can change a diligence conclusion — An expert bench is a set of people with deep knowledge in your focus areas - operators, engineers, clinicians, lawyers - who can help check claims quickly. It is built before it is needed and treated with respect. (9 min)
  • Your reputation is built in the difficult moments — An investor's reputation is formed mostly by behaviour when companies struggle - down rounds, missed plans, founder departures. Founders and co-investors check it, and it shapes future access. (9 min)
  • References you chose tell you more than references you were given — Checking the people behind an investment means verifying claims, speaking to sources they did not nominate, and asking questions specific enough that a vague answer is itself informative. (11 min)
  • Check what a founder stands to gain, and what else competes for their time — Founder incentives shape behaviour. Diligence looks at remaining ownership, salary, secondary sales, other roles and personal financial pressure to judge whether founders are motivated for the long journey ahead. (10 min)
  • A director appointed by an investor owes duties to the company, not to that investor — Board directors generally owe fiduciary duties to the company and its shareholders as a whole. An investor-appointed director who puts their fund's interests first can breach those duties, which is the central tension in startup governance. (12 min)
  • Good board members ask the question nobody else will, then let management run the company — An effective board member prepares, focuses on the few decisions boards actually own, asks hard questions early, and resists the urge to manage the company from the boardroom. (10 min)

All 578 terms in the Investing glossary