Startup companies often rely on advisers, investors and board observers to help guide their new businesses. This is a good thing, but it carries hidden risk.
If you are in one of these roles, in some circumstances, you can be treated as a director, even if you never formally agreed to the appointment. If this happens, it can expose you to personal liability.
Directors vs advisers: What’s the difference?
Directors are responsible for the overall governance and strategic direction of the business.
Directorship also comes with legal compliance under the Companies Act 1993. There are significant consequences for directors if things go wrong.
On the other hand, advisers and board observers typically provide strategic, non-binding guidance for the directors to take into consideration when making decisions.
In theory, this is a clear distinction. The line, however, can become blurred. What matters is what you do in practice, rather than your title.
How do people become accidental directors?
This is common in startups, where governance structures are still evolving and roles are often informal. Having said that, this is still a real risk for any company. Courts tend to focus on how you are fulfilling your role as an adviser or observer in practice. Warning signs include:
- The board of directors regularly following your instructions or directions
- Being involved in decision-making on the same level as directors, and/or
- Exercising authority normally reserved for directors.
If these patterns develop, you may be seen as a deemed director.
Personal liability
Directors’ duties are personal. If a company gets into financial trouble, the directors are exposed to personal liability, and in some instances may be required to personally contribute to company debts. This risk doesn’t just apply to those formally appointed. If you are treated as a director in substance, you may carry this risk without even realising you’ve taken it on.
A risk area
Board observers and startup advisers are particularly exposed because their role sits very close to the line. For example, an observer may:
- Attend meetings and receive board papers
- Provide input on strategy or decisions, and/or
- Represent investor interests.
That’s fine, but the risk increases where:
- You participate in decision-making on significant matters
- The board tends to follow your recommendations
- Your role is not clearly recorded as ‘observer only,’ and/or
- You (or your investor) have significant control or approval rights.
Over time, what starts as ‘advice’ can start to look like decision-making.
This is one of those areas where things can drift without anyone noticing. Everyone is acting in good faith, wanting the business to succeed, but the legal position gradually shifts. If you are involved in a startup as an adviser, investor or observer, it’s worth asking yourself:
- Am I just advising, or am I influencing decisions?
- Does the board treat my input as optional or as direction?
- Is my role clearly documented and understood?
Small changes in how you operate can make a big difference.
Be careful
Being an adviser or board observer is often valuable and rewarding, and is of great benefit to startups. However, there are real risks with these roles that are not always obvious. If your involvement crosses the line into decisionmaking or control, the law may consider you as a director, exposing you to all the responsibility and possible personal liability that comes with that title.
It pays to be clear about your role from the outset and to keep checking that your involvement hasn’t crept further than intended. If you’re not sure where that line sits in your situation, it’s a good time to get legal advice to help avoid unintended consequences.
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