Behind Closed Doors: Research Explores Inner Workings of Privately-Held Company Boards

Private company boards, especially in startups, operate behind closed doors. They only make headlines when scandals erupt—think Theranos and Elizabeth Holmes or the downfall of FTX and Sam Bankman-Fried. But what happens before these failures? New research sheds light on how board decisions shape a company’s success or downfall.

To better understand these private company directors’ roles, Foster School of Business Associate Professor Emily Cox Pahnke and her coauthors examined how various director types influence company outcomes. Cox Pahnke teaches classes on strategy and innovation in the Foster School’s Full-Time MBA, Master of Science in Entrepreneurship, and undergraduate programs. 

Cox Pahnke and her fellow researchers specifically explored how investors assess startup success. This is particularly important for founders, as venture capitalists are part-owners of the company and can significantly impact a startup’s success through their involvement, guidance, or lack of support. 

Her research provides valuable insights into the often mysterious operations of private companies and illustrates the relationships between board composition and firm outcomes. Most importantly, it offers critical information for entrepreneurs and founders to better understand diverse director perspectives and ultimately build a board that aligns with their goals. We spoke with her to learn more about her research and why entrepreneurs should pay attention.

First, let’s break down the different types of directors of private companies: 

• Founder-Directors are the pioneering visionaries and founders of the firm.
• Venture Capital (VC) Directors represent venture capital firms that prioritize financial gains and successful exits.
• Corporate Venture Capital (CVC) Directors represent corporate venture arms that align investments with their own company’s strategic goals.

Why study private boards?

Emily Cox Pahnke: Despite the research on public company boards, we know almost nothing about private boards. Recent scandals, such as the ouster at OpenAi, stem from the boards of private companies. The board’s action (or inaction) can destroy value, hurt customers, and sometimes land the CEO in hot water. This issue stems from two main factors: private boards aren’t regulated, and there isn’t a systematic understanding of them. 

What are the key differences between public and private boards?

Emily Cox Pahnke: Private and public company boards function very differently. Let me walk you through the three key differences:

1. Ownership and Incentives: In private companies, investors often serve as directors (unlike public companies with independent directors). Investors have different incentives when they are company directors. They are innately interested in the company’s long-term success but may have very different ideas about what “success” means. For example, VCs often need to earn a financial return within a few years while CVCs are scouting technologies and products for their parent companies. 

2. Legal Requirements: Public companies are required to have a board, but private firms are not. When private companies and their investors decide to form a board, it signals a shift and that the firm may be starting to scale.  This doesn’t mean the board will push the founder out, but it does mean the board isn’t always going to do what the founder wants. 

3. Investor Influence: Founders should consider the lasting influence on company direction when accepting investments from venture capitalists or corporate venture capitalists, especially when a seat on the board is part of the investment. Sometimes, founders regret giving board seats away. There are commitments founders make early on when they need resources. Those commitments have permanent, path-dependent impacts on the firm’s trajectory.

What insights can entrepreneurs gain from your research? 

Emily Cox Pahnke: For startup founders, choosing investors or a venture capital firm isn’t just about funding. It’s about long-term governance. Consider the following before allocating board seats or accepting investments.

Know what you’re giving up.

A significant power imbalance exists when you’re trying to raise funding, and a board seat is involved. It’s an irrevocable decision. Any time you take an investment that includes a board seat, you are ceding control. You’re not going to get a board seat back.

Do your homework on investors and venture capital firms.

When you’re a founder, it’s essential—even when you need that money—to be careful and upfront. Have long-term conversations to learn more about investors, and use databases like Crunchbase to see where they have invested in the past. Go to the U.S. Patent Office website and see what their other portfolio companies have been doing since they invested and what outcomes they’ve had over time.

Treat investors and venture capitalists like long-term partners.

The relationship between investors and founders is like a marriage. You can get into it pretty quickly, but getting out is messy. You need to pause, have explicit conversations upfront, and ask them about their previous investment. 

Seek legal expertise.

Get competent lawyers to help you understand the deal terms (investment terms) and what it means when you’re “giving up a board” seat versus giving up ownership of the company. Remember that investors are part owners of privately held companies.

Building a board for long-term success

According to Cox Pahnke, building a strong board isn’t just about securing funding; it’s about aligning on long-term goals. She suggests startup founders consider how to:

Be a strategic partner. Think about what it means to be a good private company director and a strong partner in achieving shared goals. Think about the best ways to manage conflict. Recognize that the issues at private companies differ from those in public companies where the directors are independent and not owners of the company. What you care about is very different when you own part of a company.

Align on goals early. Entrepreneurs can often be desperate for resources, but it’s vital to think carefully about the big picture and not just about surviving for one to two years. There are many different ways investors can help you unlock the value of your inventions, intellectual property, or products, and having those conversations early on with investors (who might become board members) is essential. ◉

For a deeper dive into how board composition impacts startups, explore the full study here: “Directors in new technology-based ventures: An empirical inquiry”—Sam Garg, Michael Howard, Emily Cox Pahnke. Published in the Journal of Business Venturing (2025).

Learn more about the Foster School of Business Master of Science in Entrepreneurship here. The one-year master’s in entrepreneurship is a launchpad for new and existing founders.