You and your co-founder have been working hard at your company for the last 10 months. Every single day you discuss and make decisions about the business. When you set up your company, you decided that both of you (together with an outside mentor) would be directors, and that was the last time you thought about what being a director means.
The business and affairs of any Delaware company must be managed by, and under the supervision of, its board of directors. The board members in turn owe the company a fiduciary duty to act prudently and to put the company’s interests ahead of their personal interests. But what does this mean in your case? One thing it means is that important actions taken by the company should be reviewed and approved by its board of directors. No doubt you would say of course the board has been reviewing and approving everything—you and your co-founder (with input from your mentor) are running the business after all.
Unfortunately, this answer isn’t going to satisfy Delaware General Corporate Law, nor the institutional investor that your company may be courting down the road. You have to be able to show documented approvals by the board (even if the board consists of just one director i.e., the single founder). If documented approvals aren’t provided, the investor may expect you to spend the money to have your counsel clean up your corporate house (money which is better spent on growing your business). Or the investor may walk away because you don’t seem to take corporate governance matters seriously.
Now that you know documenting board approvals is most likely the way to go, what needs board approval? While there isn’t a definitive list easily found in Delaware law or your incorporation documents, boards in general are expected, and often times required, to approve:
- Items that require a change to your certificate of incorporation or bylaws such as a name change, creation of a new class of stock, or an increase to the number of authorized shares
- Changes to the board itself, such as the number of directors or the appointment of a new director
- Transactions involving the equity of the company, including adoption of a stock incentive plan, granting stock options, or awarding restricted stock
- Financing activities, including selling warrants, obtaining a bank line of credit, or issuing a bridge note
- Any event that restructures the company, such as a sale or merger with another company, buying another company, or transfers of any key assets
- Key personnel changes, such as the appointment of someone to fill an officer role listed in your bylaws (e.g., President, Treasurer, or Secretary) or replacing your CTO with someone new
- Adoption of employee benefit plans, such as a health insurance plan or a 401k plan
- Annual operating budgets
- Important agreements that the company usually executes on an intermittent basis, like a joint venture agreement, office lease, or IP license
- The closure or dissolution of the company
To document its actions and approval, a board can (a) have a written consent signed by all directors or (b) hold a board meeting and record its actions in the minutes, which are essentially a summary of what happened during the meeting. Most companies will use a combination of both board consents and board meetings, with the decision to use either depending on the circumstances and board preference.
Board consents are handy when uncontroversial actions need to be taken swiftly, such as approval of equity grants or a bridge note, assuming of course you have an efficient way of getting them drafted and signed. They also make the most sense if your company has only one director (a meeting with yourself is pretty lonely). Board meetings, on the other hand, are better used when the board should be reviewing, discussing, or deliberating over a strategic decision like a sale of the company or the unfortunate decision to shut it down. These are situations where the directors should have the opportunity to voice their views in the context of making an important decision for the company.
Some early-stage companies also like to use their board meetings to cover a laundry list of routine matters that need approval. This way you don’t need to prepare any written consents in advance, and you don’t need to wait for signatures before acting on the board approval. Just be sure that you have an efficient way of completing your meeting minutes—you don’t want to be stuck trying to draft minutes and struggling to remember what happened weeks after the meeting was held.
If you haven’t been paying attention to documenting or getting board approvals, Delaware has a specific ratification process that can be document intensive—board resolution, stockholder resolution, and a filing with Delaware—so you should get some outside help with it. Going forward, find an efficient way to incorporate board approvals into the actions you take. Try setting up a regular schedule for board meetings, have periodic check-ins with your counsel, and/or use a corporate governance tool or service provider.
Learn more about how Fidelity can help you manage your board activities.
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.