Contract Drafting – Key terminologies

Observer’s right in a Share Holders Agreement

If you’re a startup seeking funding from an incubation center, you may encounter an agreement that includes an “Observer’s Rights” clause.

I firmly believe that incubation centers should reserve observer rights. Since these centers provide crucial support and seed capital, they have a legitimate interest in monitoring the startups’ business activities and fund management from an insider perspective.

An observer appointed by the incubation center would participate in board meetings, oversee key business decisions, and offer valuable insights based on their experience. Given that startup founders often have less experience, this guidance can be essential for navigating critical areas like product development, financial management, and client relations.

Importantly, these observers would not have voting rights or authority over confidential matters, ensuring that the startup’s business plans remain private and protected from outside influence.