Startups need bylaws to establish clear guidelines and protocols for key decision-making processes. Bylaws serve as a roadmap that outlines the company’s vision, mission and values, which helps ensure everyone is on the same page regarding goals, operations and decision-making processes. They provide clarity on how the company should operate, how decisions should be made and how potential conflicts should be resolved.
Bylaws also help to minimize confusion and misunderstandings among team members, investors and other stakeholders. This is particularly important in the early stages of a startup when roles and responsibilities are still being defined.
Moreover, bylaws offer legal protection for the company and its founders. They can help ensure compliance with relevant laws and regulations and limit liability in case of disputes or legal issues.
This article will explain how bylaws are a key component of corporate governance as well as how they practically work. Every situation is unique, so it’s essential to work with legal counsel to understand what’s best for you. If you’re looking for counsel, feel free to reach out to us here.
Bylaws are the operating system of a startup. It gives clarity and guidance to stockholders, directors and officers about their governance rights and obligations. They are informed by the statutes in the state of incorporation, yet give a more detailed set of governance instructions.
In general, there are three documents that guide startup governance:
- Statutes. Corporate law statutes are the laws and regulations that govern the operation and management of corporations. These statutes vary by state and often cover topics such as the formation and dissolution of corporations, the rights and responsibilities of directors and officers, and the management of corporate assets. Corporate law statutes also cover issues such as corporate governance, shareholder rights and securities regulation. It is important for startups to ensure that their bylaws comply with the relevant corporate law statutes in their state of incorporation. You can think of the statutes as setting the bounds of what a corporation can and can’t do in a state. But within those bounds, most statutes allow for a great deal of flexibility. So, each corporation can set up its own governance standards in its certificate of incorporation and bylaws.
- Certificate of Incorporation. A certificate of incorporation is a legal document that creates a corporation. It may also be called a corporate charter or articles of incorporation. The certificate is filed with the Secretary of State or a similar agency in the state where the corporation is being formed. The certificate contains basic information about the corporation, including its name, purpose and structure. It also establishes the rights and responsibilities of the corporation’s owners (shareholders), directors and officers. The statute may require certain governance provisions to be set forth in the certificate of incorporation. To learn more about the certificate of incorporation, click here.
- Bylaws. Bylaws are a set of rules and procedures that govern the operations corporation. The bylaws typically outline the roles and responsibilities of the board of directors and officers, as well as establish guidelines for holding meetings, voting procedures and record-keeping requirements. Bylaws serve as a roadmap that outlines the company’s vision, mission and values, which helps ensure everyone is on the same page regarding goals, operations and decision-making processes. They provide clarity on how the company should operate, how decisions should be made, and how potential conflicts should be resolved. Bylaws must be constant with both the statutes and the certificate of incorporation.
Note that in addition to the above, certain classes of preferred shares may include governance. This is less relevant at incorporation but very relevant at funding. To understand that better, check out our Founder’s Guide to Series Seed and Founder’s Guide to Series A.
Key Components of Startup Bylaws
Bylaws provide a framework for how a startup operates. While there is no one-size-fits-all approach to creating bylaws, certain key components should be included. These include:
- Corporate Offices. The official office of the corporation.
- Stockholders. This section describes where, when and how stockholders meet, as well as how they conduct business and vote.
- Board of Directors. This section describes the number of directors; how they are elected; where, when and how the board meets; as well as how they conduct business and vote.
- Committees. The Board of Directors may create committees. This section defines how they are appointed; where, when and how the committee meets; as well as how they conduct business and vote.
- Officers. The officers are empowered by the Board of Directors to run the business. This section defines how they are appointed, as well as their roles and responsibilities.
- Indemnification. This section describes how the corporation will indemnify directors, officers, employees and agents.
- Records and Reports. This section describes how the corporation will create and maintain corporate records, as well as who has access to them.
- General Matters. This miscellaneous section describes the authority and administrative details of the corporation.
- Amendment. This section describes the process for amending the bylaws.
The above are common provisions in startup bylaws, but bylaws can be customized to meet specific needs of the startup. For example, if you’re running a public benefit corporation, then the bylaws would definitely include a section on social and environmental governance.
The Legal Implications of Not Having or Following Bylaws
Startups can face potential legal issues and disputes if they do not have clear bylaws in place or fail to follow them. These guidelines for decision-making can prevent conflicts among team members, investors and stakeholders. If an action is taken in violation of the bylaws, that action may be deemed an invalid corporate action.
Not following established bylaws can result in negative legal repercussions, with affected parties seeking damages or other remedies. To avoid these risks and liabilities, startups must prioritize developing and regularly reviewing well-crafted bylaws that adapt to the company’s growth and evolution.
Ensuring Bylaws Align with Company Mission and Values
Well-crafted bylaws that align with a company’s mission and values are crucial. Bylaws should reflect the organization’s culture and embody its core principles.
To ensure that your bylaws align with your company’s values, involve all relevant stakeholders in their development. This includes board members, officers, shareholders and legal counsel. Discuss the company’s mission and values and how they can be reflected in the bylaws.
Consider including language in the bylaws that explicitly states the company’s commitment to its mission and values. For example, if your startup prioritizes environmental sustainability, you could include provisions in your bylaws that require the company to consider environmental impacts when making business decisions.
Regularly review your bylaws to ensure they continue to align with your evolving mission and values. Conduct periodic audits of your bylaws to ensure they remain relevant and effective at guiding decision-making processes.
The Role of Shareholders in Approving and Amending the Bylaws
Shareholders play a crucial role in approving and modifying bylaws due to their financial interest in the company. It’s important to involve them in decisions that could affect their investments.
When creating or amending bylaws, follow the procedures outlined in the original document.
To inform shareholders about proposed changes, provide clear and concise information via meetings or written materials. Address dissenting shareholders’ concerns through open communication and find mutually acceptable solutions.
Involving shareholders in decision-making processes builds investor trust and ensures a clear understanding of how decisions affect the company’s operations.
In conclusion, bylaws are an essential component of any startup’s governance structure. They lay out clear guidelines for decision-making processes and help to minimize confusion and misunderstandings among team members, investors and other stakeholders. Bylaws provide legal protection for the company and its founders, ensuring compliance with relevant laws and regulations, protecting intellectual property rights, and limiting liability in case of disputes or legal issues. While there is no one-size-fits-all approach to creating bylaws, certain key components should be included in order to provide a framework for how a startup operates. Startups should prioritize developing and regularly reviewing well-crafted bylaws that are aligned with the company’s growth and evolution. By carefully observing a corporation’s bylaws, startups can ensure good corporate governance, build investor trust and establish a clear understanding of how decisions affect the company’s operations.
As you’re creating your bylaws, make sure to work with legal counsel to understand what’s best for you. If you’re looking for counsel, feel free to reach out to us here.