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 read · Level 5
The uncomfortable truth of startup governance is that the people with the most influence over a sale or a financing often hold a different class of shares from the people with the most to lose. I think investor-directors who acknowledge that tension openly, disclose it and follow a careful process protect everyone, including themselves. Those who pretend it does not exist tend to discover it in a dispute.
In most jurisdictions, company directors owe duties to the company itself - often described as duties of care and loyalty, or duties to promote the success of the company. Details vary by country, but the core idea is consistent: a director must act in the interests of the company and its shareholders as a whole.
This creates a tension for investor-appointed directors:
Role Natural interest Director the company and all its shareholders Employee of a fund that fund's return on its specific shares
The interests usually align. They diverge in specific situations:
Situation Possible conflict A sale below total preferences preferred holders favour a sale that pays them; common holders receive nothing A new round led by the director's fund the fund wants a low price; existing holders want a high one A competing portfolio company confidential information could benefit another investment A decision to shut down or continue the fund's portfolio strategy may differ from other shareholders' interests
When conflicts arise, directors are generally expected to disclose them, and may need to abstain from certain decisions or seek independent advice. Courts in some jurisdictions have scrutinised board decisions where preferred-shareholder directors approved sales that disadvantaged common holders.
Because an investor who takes a board seat to protect their investment may find their legal obligations point in a different direction at exactly the moment the stakes are highest.
It also explains why independent directors and careful process matter in startups, especially around sales, down rounds and insider-led financings.
This is educational information, not legal advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: UK Government - directors' responsibilities; OECD - principles of corporate governance; U.S. SEC - Investor.gov
A sale below total preferences. Investors have 30,000,000 of preferred shares with 1x non-participating preferences. An acquirer offers 25,000,000. Preferred holders would receive all 25,000,000; founders, employees and angels holding common would receive nothing.
Two of three board members were appointed by preferred investors. Voting to accept may be reasonable if no better option exists - but the directors must consider the company and all shareholders, disclose their interests, examine alternatives such as continuing to operate or seeking other bids, and document their reasoning. A rushed approval that simply served their funds could expose them to challenge.
Assuming that a director appointed by an investor may simply vote in that investor's financial interest.
Before accepting a directorship, read official guidance on directors' duties where the company is incorporated.
Tell the board when your fund or another investment has an interest in a decision.
Consider independent directors, outside advice, market checks and written records of reasoning.
When a decision affects your fund differently from other shareholders, ask what the company's interest is and document how you considered it.
Before accepting a board seat, and in any board decision where investor and company interests could diverge.
Do not rely on this general summary as legal advice. Directors' duties vary significantly by jurisdiction and company type, and specific situations need qualified advice.
Delaware courts, which govern many U.S. venture-backed companies, have reviewed cases in which boards controlled by preferred-shareholder representatives approved sales that returned proceeds mainly to preferred holders. Decisions in cases such as In re Trados Inc. Shareholder Litigation (2013) examined directors' duties to common shareholders and the fairness of the process followed.
When a decision affects share classes differently, the fairness of the process matters as well as the outcome.
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