86. BoD vs. Shareholder ⚖️ Startup Corporate Governance
Founders are often confused about startup corporate governance. What can you do as a startup CEO, what requires approval by the Board of Directors, and what needs a shareholder vote? How do those meetings work, and how do you make them official?
First, a quick disclaimer: I am not a lawyer, and this is not legal advice. All this information is based on my understanding of US corporate law. Many other countries are similar, but there are differences. Make sure you talk to a lawyer admitted to practice where your company is incorporated.
Minutes or it Didn't Happen
Meeting minutes are the official record of all debates, actions, and votes. From a legal perspective, if you did not capture a decision in the minutes, it never happened.
Most investors will check your BoD and Shareholder minutes to ensure that every entry on your cap table is supported by an appropriate approval and that all significant business decisions are properly documented.
There is nothing complicated about keeping minutes. You just need to capture the following:
Who was at the meeting, time, and place
Agenda Items and points of discussion
Votes Taken in the meeting
Why you made the decision and any significant points of discussion
Exactly what you decided (this needs to be clear and unambiguous, you can attach exhibits for reference)
The outcome of the vote
In each meeting, you will vote to accept the minutes of the previous meeting.
In addition to your electronic version, I suggest printing out all the minutes, signing them, and keeping them in a binder. It is much harder for hackers to get to that hard copy to make nefarious changes.
Meetings
You need to have a quorum for meetings of the Board or the Shareholders. A quorum means you have a majority of potential votes represented.
At the BoD, you usually have one vote per member, so you need a majority of members.
Shareholders get one vote per share, so if you have majority control, there would be a quorum with just you in the room. Early on, most of your meetings will probably be just you or you and your co-founders.
You generally need to let people know about meetings in advance. You typically need to give 10-30 days' notice, but this can vary with jurisdiction and your articles of incorporation or bylaws.
Don't worry about formality or Robert's Rules of Order. They can help in large meetings or where passions are running high, but I never came close to needing any kind of formality in mine. If you think a decision is controversial or might get litigated later, capture more details of the discussion and debate that led to the decision.
Written Consent
Your Articles and Bylaws may allow you to skip meetings and make decisions by written consent. If they don't, call a meeting to fix that!
With written consent, you send out the proposed decision, usually along with an agreement to waive notice of the meeting. The decision is settled once you have positive responses from a majority of votes.
Include the decision and results of the written consent in the minutes of your next meeting, and include all the written responses in your book of minutes.
Board of Directors AND Shareholder Decisions
Most of the company's significant decisions must be approved by the Board and ratified by the Shareholders. These decisions fundamentally alter the nature of the business or the rights of the owners.
Some examples of issues needing votes by both groups are:
Amending the Articles of Incorporation or Bylaws
Merging with another company or being acquired
Acquiring another company
Changes to shareholder rights
Creation or modification of an incentive stock option plan
Salary and benefits for the CEO and any other senior executives appointed by the Board
Authorizing new shares or classes of shares
Dissolution of the company (shutting down)
The Shareholders
The shareholders own the company, and each share represents one slice of the pie. Unless there has been some adjustment, all shares denote the same amount of ownership. Typically they all also have the same voting power.
In many cases, all shareholders will vote together. However, in some cases, only a single class will vote, or specific series must approve in a general vote on the issue. Voting by class usually happens when the rights of that class are changed, or existing investors have certain approval rights concerning issuing new classes of stock.
The shareholders elect the Board of directors. You must hold at least one shareholder meeting each year to conduct that election. Most jurisdictions require annual shareholder meetings to maintain the company's good standing. Make sure you do it, even if it is just you alone in a room nominating and electing yourself as the sole Board member.
Beyond that, most shareholder votes are to authorize decisions already approved by the Board.
The Board of Directors
The BoD holds corporate power and is responsible for running the business.
They are responsible for setting business strategy, making key decisions, and hiring the CEO. They generally delegate all of the day-to-day operational decisions to that CEO.
If the CEO deviates too far from their approved direction, they can replace them, but that is usually a last resort.
The BoD has a fiduciary duty to the shareholders whom they represent. As a board member, you need to keep their interests in mind. If you have any shareholders, you are responsible to them whenever you act in your BoD capacity. Taking actions in your self-interest that could harm your investors will open you up to severe liability.
The laws in your jurisdiction, your bylaws, and articles of incorporation require BoD approval on several things, such as:
Opening bank accounts
Conducting audits
Major purchases and leases
Litigation
Issuing dividends
Generally, you are required to hold at least one BoD meeting per year, but I suggest meeting at least quarterly.
The CEO
As CEO, you are responsible for all decisions not reserved to the Board or Shareholders.
That typically includes hiring and firing everyone other than people appointed by the Board, sales, marketing, advertising, product direction, development, etc.
You should consider getting Board approval on decisions that significantly impact the company. For example, important partnerships or licensing deals. However, they should not get involved in basic software purchases, SaaS licenses, etc.
In the early days, you are likely to be CEO, chair of the BoD, and controlling shareholder all at once. Just remember to take the time to formally switch into each of these roles and document all the decisions made.
Until next time, ciao!
