A founder who serves as a director or officer of a Delaware corporation owes the company fiduciary duties: the duty of care (make informed decisions) and the duty of loyalty (put the company ahead of yourself), with good faith treated as part of loyalty. Care is rarely what gets founders in trouble, because the business judgment rule and the charter usually protect informed, good-faith decisions. Loyalty is where the risk is, especially in any deal between the company and a founder, and Delaware’s 2025 amendments to Section 144 now spell out how to approve those deals safely.
Key takeaways
- Directors and officers owe the same core duties. A founder who is neither owes only what their contracts say.
- The business judgment rule protects informed, disinterested, good-faith decisions, even ones that turn out badly.
- Any deal between the company and a founder (a loan, a lease, a contract with the founder’s other company, a grant to a sole director) is a loyalty issue. Disclose it and get it approved the right way.
- A founder with a majority of the vote, or at least one-third plus control of management, may be a “controlling stockholder,” which brings stricter approval rules.
- Directors must also make a good-faith effort to know about the company’s most serious legal and compliance risks.
Who owes fiduciary duties in a startup?
In a Delaware corporation, directors and officers owe fiduciary duties to the corporation and its stockholders. Most founders are both, so the duties apply to almost everything they decide. An employee who is neither a director nor an officer doesn’t owe these duties, though their employment agreement and confidentiality and invention assignment agreement still bind them. Stockholders generally don’t owe fiduciary duties, with one important exception: a controlling stockholder, discussed below.
What is the duty of care?
The duty of care requires directors and officers to inform themselves of the material information reasonably available before making a decision. It’s about process, not outcome. A board that reviews the numbers, asks questions and considers alternatives before accepting an acquisition offer has met its duty, even if the deal later looks like a mistake. A board that signs the first offer without reading it may not have.
Courts apply the business judgment rule to protect decisions made by informed, disinterested directors acting in good faith. On top of that, Delaware lets a company’s charter eliminate directors’ personal monetary liability for breaches of the duty of care. Since 2022, a charter can also exculpate officers for direct stockholder claims, though not for claims brought by or on behalf of the company. Many startup charters were drafted before officer exculpation existed. See Certificate of Incorporation.
What is the duty of loyalty?
The duty of loyalty requires you to act in the best interests of the company and its stockholders, not your own. Exculpation never covers it. The common ways founders breach it are self-dealing (a deal between the company and you or your other business on terms that favor you), taking a corporate opportunity (a deal or technology the company could use, which you take for yourself), and using company information or IP for your own benefit.
Good faith is part of loyalty. A director who knowingly ignores a duty, or acts for a purpose other than the company’s interest, isn’t acting in good faith, and that can’t be exculpated either.
Good faith also includes oversight, often called the Caremark duty after the case that set it out. Directors must make a good-faith effort to put in place a system for learning about the company’s central legal and compliance risks, and must respond when red flags appear. Delaware courts have applied the same duty to officers within their areas of responsibility. Liability requires bad faith, so it’s rare, but for a startup in a regulated area such as health, finance or food safety, “we never discussed compliance” is not a defense.
What should directors do in practice to meet these duties?
Meeting your duties mostly comes down to process. Before a big decision, get the materials to every director early enough to read them, ask questions and weigh the alternatives, and hold a real discussion rather than a quick sign-off. Meet regularly, so the board knows the business well enough to spot problems early. Bring in counsel or other advisors on a financing, a sale or anything unusual. If you have a personal stake in a decision, say so before the discussion starts and step out of the vote. Then make sure the minutes show what the board reviewed, what it considered and why it decided. See How Do I Take Startup Board Meeting Minutes?
How do we approve a deal between the company and a founder?
Under Delaware law as amended in 2025 (a change upheld by the Delaware Supreme Court in 2026), a transaction between the company and a director or officer is protected from a fiduciary challenge if the material facts are disclosed and it is approved in one of three ways:
- By the disinterested directors. A majority of the disinterested directors approves it in good faith. If disinterested directors aren’t a majority of the board, a committee of at least two disinterested directors has to approve it.
- By the disinterested stockholders. It’s approved by an informed, uncoerced vote of a majority of the votes cast by disinterested stockholders.
- On fairness. It’s fair to the company and its stockholders, which you would have to prove if challenged.
That middle step matters for small boards. On a two-founder board, if one founder is on both sides of a deal, the other founder alone isn’t a majority of the board and can’t form a two-person committee. In practice, a startup with a small board usually relies on informed approval by the disinterested stockholders, or documents why the deal is fair. Put the disclosure and the approval in writing before the deal happens.
A few common examples:
A sole director grants themselves options. There is no disinterested director, so get approval from the disinterested stockholders if there are any, and set the exercise price at fair market value based on a current 409A valuation so the fairness record is clean.
A founder lends money to the company. Disclose the terms, have the disinterested directors or stockholders approve them, and keep the terms at or better than what the company could get elsewhere. Repaying founder loans ahead of other creditors when cash is short is a common source of claims.
The company buys from a founder’s other business. Disclose the relationship, get approval before the first purchase, and document that the pricing is market.
What changes if a founder is a controlling stockholder?
Delaware law now defines a controlling stockholder as someone who holds a majority of the voting power, has the right to elect a majority of the board, or holds at least one-third of the voting power and has managerial authority over the business. Many founder-CEOs meet that test. A controlling stockholder owes fiduciary duties when dealing with the company.
A transaction with a controller (other than taking the company private) is protected if it’s approved by a committee of at least two disinterested directors with power to negotiate and say no, or if it’s conditioned on and approved by a majority of the votes cast by the disinterested stockholders, or if it’s fair. Repricing a founder’s SAFE or issuing new stock to a majority founder are examples where this matters. The statute also limits a controller’s personal monetary liability to loyalty breaches, bad faith and improper personal benefit.
What are the board’s duties when selling the company?
When the board decides to sell the company for cash, or in a deal that hands control to someone else, Delaware expects directors to seek the best value reasonably available for the stockholders. That isn’t always the highest headline price. An offer with more financing risk, regulatory risk or a large earnout can be worth less than a lower offer that will actually close.
The harder question in a venture-backed sale is who gets the value. When the preferred stock’s liquidation preference takes most of the proceeds, the board has to think about the common stockholders separately, because Delaware courts treat the common as the residual owners whose interests directors must weigh. Where the preferred’s contract rights dictate the split, follow them, but be ready to explain why the deal is fair to the common.
Conflicts drive how closely a court looks at the decision. A director designated by a venture fund that gets its liquidation preference, and a founder who gets a new employment package, a retention bonus or rollover equity, each has an interest the other stockholders don’t share. Disclose those interests to the board, and to the stockholders when they vote. If most of the board is conflicted, have a committee of disinterested directors negotiate and approve the deal, or condition it on approval by the disinterested stockholders. Then build the record: meet more than once, consider the alternatives (other buyers, a financing, staying independent), get advice from counsel and, where the deal justifies it, a banker, and make sure the minutes show the alternatives considered and the board’s view of fairness to the common. See Startup Acquisitions and Drag-Along Rights.
What changes when the company is running out of money?
Under Delaware law, directors’ duties run to the corporation at all times, not to creditors. Once a company is actually insolvent, creditors can bring claims on the company’s behalf, but there is no duty to stop operating or to wind down at any particular moment. Liability in a shutdown usually comes from self-dealing: paying founders’ loans or salaries ahead of vendors, or moving assets to a new company. See How Do I Wind Down My Startup Gracefully?.
What actually gets startup founders sued?
The claims we see against startup directors are rarely about poor business decisions. They come from a sale where the preferred stockholders and the common get very different outcomes and the board didn’t think separately about the common, an insider-led down round priced without a real market check, a founder selling shares or taking side payments in a deal without telling the board, and a founder leaving to start a competing business with the company’s IP or customers.
The 2025 amendments also narrowed what stockholders can demand under Delaware’s books-and-records statute. A stockholder now gets a defined set of documents (the charter, bylaws, board and stockholder minutes and consents, materials given to the board, and three years of annual financial statements), and must show good faith and a proper purpose described with reasonable particularity. Clean board minutes and consents are your best evidence if a decision is ever challenged.
Since 2024, Delaware also allows stockholder agreements that limit what the board can do on specified matters. That’s useful for founder agreements, but it doesn’t remove the directors’ duties when they act.
For what the board approves, see What Does My Startup’s Board of Directors Need to Approve? and What Do Stockholders in My Startup Need to Approve?. For board structure, see How Do I Build an Early-stage Startup Board?. If you’d like help approving a deal with a founder or thinking through your duties in a sale or wind-down, contact us.
