As the founder of an emerging growth company you are likely an expert in what makes your company and idea valuable, but actually managing the corporate governance can at times feel like learning a new language. Obeying corporate governance formalities is important if you want to receive the benefit of the limited liability protection afforded by the corporate entity, and when your startup goes to raise a round of capital, such as a Series A round, your investors will want to kick the tires and ensure you’ve been following the rules.
With this as a backdrop, here are a few basics we encourage all founders to consider post incorporation of a Delaware Corporation. This list is not exhaustive and we encourage you to work with an experienced attorney to ensure proper compliance. Additionally, this discussion is limited to a DE Corporation (the most popular entity structure for an emerging growth startup), so if you’re operating a different entity you are encouraged to contact an attorney in your state to properly advise how state law impacts the list below.
Board Approval Required To:
Amend the Certificate of Incorporation.
Enter into fundamental corporate transactions (sale of company, merger, sale of substantially all assets of corporation, dissolution, etc.).
Appoint officers, such as CEO, CFO, and Secretary.
Issue securities that will affect the capitalization of the corporation (issuing shares, issuing stock options, etc.) – remember “securities” includes instruments such as convertible notes, SAFEs, and KISS Agreements.
Enter into material agreements (agreements that have a disproportionate impact on your business, such as IP licenses, customer contracts, vendor contracts, etc.).
Compensation arrangements with officers and high level executives (not all employees, who can be handled by the officers or executives hired by the Board).
Other “material” actions, which vary from company to company. For example, an expenditure of $10,000 may be material for an early-stage company, but immaterial for an established company with high revenues. Examples include, but are not limited to: (i) changing the business plan or course of business the company has historically taken; (ii) expanding the business to other states or counties; (iii) creating a subsidiary, (iv) a transaction between the Board and a Board member or officer (“Interest Party Transaction”); (v) distributions to shareholders; (vi) borrowing or lending money; (vii) adopting an annual budget; (viii) hiring or terminating members of senior management; and (ix) adopting employment benefit, profit-sharing, and equity incentive plans.
Day-to-day matters typically do not require Board approval, such as purchasing office supplies, making purchases covered by a budget previously approved by the Board, signing NDAs, and hiring non-senior level employees.
Shareholder Approval Required To (may be in addition to Board approval):
Amend the Certificate of Incorporation.
Enter into fundamental corporate transactions (e.g. sale or merger of company, dissolution).
Elect Board of Directors.
Establish stock option plans and any amendments to the same.
Permit interested director transactions (i.e. transactions in which a member of the board has a direct financial interest).
Shareholder votes may occur by written consent if the matter is approved by the holders of outstanding stock having not less than the minimum number of votes required if the vote was at an in-person meeting. Prompt notice of actions taking without a meeting by less than unanimous consent must be given to the shareholders who did not consent in writing.
At Archetype Legal we work to find convenient and efficient ways to assist and keep your corporation healthy as you focus on growing your business. If you have any questions please don’t hesitate to reach out to us at hello@archetypelegal.com.
Disclaimer: This post discusses general legal issues and developments, is intended to serve as informational only, and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Archetype Legal PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.
