One VC governance trend involving German seed VCs is the request for the creation of an advisory board. On its face, this sounds simple enough. But once you dig in, the implications of an advisory board can be complicated, especially under Delaware law.

German VC investors are reluctant to take formal seats on a company’s board of directors. The reason is not usually about governance but about taxes. A director role can create tax residence exposure in the United States or other jurisdictions, something most investors prefer to avoid.

The workaround is to create a parallel body: an advisory board. This lets investors nominate a representative to participate in governance without technically sitting on the board of directors. In the structures we’ve seen, members are chosen by both investors and common shareholders, similar to how board members are selected.

From the company’s perspective, it can look like a win-win: investors get a seat at the table without tax complications, and founders keep the board simple. But the moment an advisory board begins to resemble a decision-making body; the picture shifts a bit.

Germans Want Advisory Boards

The trend we are seeing now with German VC-backed companies departs from the U.S. tradition of forming advisory boards only to advise management on specific issues. German VC investors are asking for advisory boards that do more than advise. They want voting rights. They want veto power over certain corporate decisions. In effect, they want advisory boards that can constrain or limit the scope directors’ powers.

This is where Delaware law steps in. Section 141(a) of the Delaware General Corporation Law is the foundation and states that: “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” This provision is crucial, as it gives the board of directors “plenary power” (complete authority) to manage the corporation, unless the certificate of incorporation says otherwise. The shareholders themselves do not run the company. And by default, no advisory board has legal authority to act in place of the board of directors and exercise decision-making powers.

So, if an investor wants an advisory board with actual decision-making powers, the company must amend its certificate of incorporation to reflect that. Without a charter provision, the advisory board’s authority would be meaningless.

German Governance in NVCA

A common approach is for the Investors’ Rights Agreement (IRA) to provide that certain corporate actions require advisory board approval in addition to the standard board approval. For example, a company might agree not to enter into a merger, issue new shares, or sell key assets without first obtaining the advisory board’s consent.

That might sound reasonable, but it still may raise a few problems under Delaware law. If an agreement takes too much power away from the board and hands it to another group, courts may see that as conflicting with the law. Adding language in the company’s charter that recognizes the advisory board helps, but it doesn’t solve everything.

This issue came up in 2024 in a case called Moelis. The company had given its founder the right to approve or block a long list of board decisions. Delaware’s Chancery Court struck down those provisions, saying they went too far: the law requires that directors, not outside parties, manage the company’s affairs. In other words, you can’t use private agreements to create a “shadow board” with veto power over the real one.

The implications for advisory boards are significant. If an advisory board remains consultative, Delaware law poses no issue. But when contractual agreements elevate an advisory board into a decision-making role, the structure begins to mirror the invalidated Moelis arrangements. That raises the risk that the provisions could be deemed unenforceable.

The legislative response to Moelis is also important. In August 2024, Delaware amended its corporate statute to confirm that corporations may enter into contracts that restrict or condition the board’s actions. This gave comfort to investors who rely on such agreements. Still, directors must continue to act in the company’s best interests; they can’t simply do whatever an external party tells them without thinking about their legal duties.

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In practice, this means advisory boards can be structured to have real influence, but they must be designed carefully. If they look too much like a second board of directors, they risk running into the same problems seen in Moelis.

What do you call a German hiding in a Delaware startup?

Once advisory board members begin to exercise real power, they risk being treated like directors under the law. This is called “quasi-director” or “de facto director” status. Courts have found in other contexts that if someone acts like a director, even without being formally elected, they may be subject to fiduciary duties and potential liability.

Normally, advisory board members do not owe duties to stockholders. They can advise freely without worrying about being sued for a breach of fiduciary duty. But if they start voting on corporate decisions, plaintiffs or regulators could argue they should be held to the same standards as directors.

This is not just a theoretical risk, and advisory directors who blurred the line between advice and management may be pulled into lawsuits. While Delaware has not squarely imposed liability on an advisory board member, the possibility is real once decision-making is involved.

Confidentiality, Intellectual Property and Privilege

Advisory board members usually get access to sensitive company information, which makes confidentiality provisions or agreements essential to prevent leaks or conflicts with competitors. Intellectual property is another risk: unless agreements clearly assign IP created in the course of the role to the company, ownership may stay with the adviser. Attorney-client privilege also deserves care. In BSP Software v. Motio (N.D. Ill. 2013), a court held that sharing communications with advisory board members waived the privilege because they were not directors. If other courts follow this approach, including advisers in legal discussions could strip the company of protection.

Germans Indemnification and Liability

In Delaware, directors have statutory indemnification rights under Section 145 of the DGCL. These protections mean that if a director is sued for actions taken in their official capacity, the company can, and in many cases must, cover their legal costs and liabilities. Advisory board members do not enjoy this baseline protection, unless the company gives it to them in a written agreement.

That gap matters most in the very structures German investors are pushing. If advisory board members are given veto rights or treated as part of the decision-making apparatus, they begin to look like directors in practice, even if not in name. Plaintiffs will seize on that, and courts could be persuaded to treat them as de facto directors, exposing them to fiduciary duty claims and securities law obligations.

For this reason, advisory board members should consider getting indemnification protection modeled as closely as possible on what directors receive under Delaware law. In addition, founders and investors should look at whether the company’s D&O insurance policy can extend coverage to advisory board members. Many policies do not, at least not by default, and riders may be required.

In short, if investors want advisory board members to function like directors, then they must also consider that those members need director-like protections. Otherwise, the structure is lopsided: authority without protection, which is a recipe for litigation risk down the road.