If your startup is set up as a Corporation, you should familiarize yourself with how to run it. This is called Corporate Governance.
Let’s be honest here: Corporate Governance is one of the least sexy things about startups. It’s not building awesome products, closing monster funding or sales deals, or marketing to your ideal customer. It’s about running your corporation how the law wants you to, and being diligent in keeping records of everything you’re doing.
“Shotty” corporate governance can lead to prolonged due diligence during funding rounds, high lawyer fees to fix things (no one but your lawyer wants that), and delayed exits into IPO or acquisition. Don’t let that happen to you – get it right from the start.
This post will give you a high level overview of Corporate Governance for Startups.
Who is involved?
Corporate governance involves 4 main groups of people.
The Board of Directors
The Board of Directors are the ‘big picture’ people running the company. They make informed decisions, while the Company Officer’s (below) execute the day to day operations. As an early stage startup, your Board likely consists of founders, who are also Officers of the company.
The Board makes decisions like who is senior management, how much dividends to give to stockholders, what the annual budget should be, who gets equity in the company, whether the company should accept a bid to sell, amongst many other things.
The Board is elected by the another group of people – the Stockholders – and are bound by specific fiduciary duties: Duty of Care, and Duty of Loyalty.
- Duty of Care means the Board must perform their responsibilities in a manner that is in line with the care, diligence, and skill of an ordinarily prudent person who would find themselves in a similar situation in a corresponding position.
- Duty of Loyalty means the Board and officers have to behave in a manner that is in good faith and believed to put the interest of the institution before any personal interests or those of another person or organization.
The Board is generally made up of at least one founder, along with several third parties. The Board should consist of people that are experienced, well connected, and offer unique views when presented with decisions.
The company Officers are those who run the company on a day to day basis – your President, Secretary, Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, Chief People Officer, etc. As a Delaware Corporation, you technically only need to have a President and Secretary as officers. The Officer’s are generally chosen by the Board of Directors.
Stockholders are the people that own equity in the company. Stockholders typically have the power to vote various different aspects as to how a company is run. Each company has different stock plans, and count how votes are run. The more voting stock you own, the more say you have in how the company is run.
The workhorses of the company. The employees may or may not have voting rights, or own stock – but they are integral to how your company is run. The employees are the ones who have to follow the rules of the company, ensure they comply with your Human Resources regulations, and create/protect the intellectual property of the company.
What do we do?
The tasks of Corporate Governance are simple, but tedious. It all boils down to holding meetings, voting, diligent record keeping, and following laws and regulations. Some tasks of Corporate Governance are listed below.
When you set up your corporation (whether through an attorney or an online service) – you should have been set up with Bylaws as well. The Bylaws will outline how often meetings should take place, what can be discussed during meetings, etc.
When you’re a fresh startup, you might be tempted to just ‘skip’ the meetings and get general approval on big decisions. Don’t.
Get in the habit of holding meetings and taking diligent ‘minutes’. There are tons of resources available through a Google search as to how meeting minutes look – follow those templates, and keep them in a safe place for future use. When due diligence comes for funding, these will be crucial.
Along with information on meetings, information on Voting should also be written out in your bylaws. A corporation is (technically) a democracy – and as such, votes are needed to get things done.
Voting is generally done by the Board and your Stockholders. When these votes are taking place, you are to write up a document commemorating the board approval itself – and get it signed by those involved.
The Board can vote on events like amending the Certificate of Incorporation to issue more stock to the company, approve funding, appointing Officers, issuing stock/securities, and entering into agreements with other companies that might fundamentally change how the business is run.
Stockholders can vote on events like approving large transactions, electing directors, approving stock option plans, and amending company key company documents.
Complying with Laws and Regulations
Now that you have a Corporation, there’s a separate set of laws and regulations that you must comply with
- Finances – You’ve got a bunch of financial regulations you need to comply with, including but not limited to getting an EIN number for your corporation, opening separate bank accounts, making sure you’re not intermingling personal and business funds, and filing the appropriate elections with the IRS. Don’t do any of this blindly. Get an accountant – ideally one that is familiar with how startups work.
- Securities – Stocks are securities, whether they are public or not. With Startups, you want to make sure the stock you’re giving out to other Founders, Advisors, or Employees fall under an exception with the Securities Exchange Commission (SEC). If you’re raising funds for stock, make sure you file a Form D with the SEC and the state you’re in. Get an experienced Securities Attorney to help you through.
- Employment – If your corporation is employing people, there’s a whole host of regulations you’ll need to follow to make sure you’re not violating any of their rights, providing them with the appropriate benefits, and don’t subject yourself to a lawsuit. Get in touch with an experienced Human Resources professional to make sure you’re set up correctly.
- Data Privacy – This is a big issue now – whether it is the data of your employees and contractors, or the data of your customers or partners – chances are you are subject to data privacy regulations and should do your due diligence to make sure you have your bases covered.
Let us Help.
This was by no means a comprehensive list on all the things you have to do for proper corporate governance.
Kader Law can help you understand what you need to do, guide you to appropriate channels, and simplify the maze of corporate governance through our Outside General Counsel offering.
This post is not legal advice, and does not establish any attorney client privilege between Law Office of K.S. Kader, PLLC and you, the reader.